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Contract LawProvides a mechanism to deal with othersLaw of contracts has evolved in commerce over the centuriesFreedom of contractPeople who create legally binding relationships have responsibilitiesCommon LawJudge-madeDiffers by stateThere is uniformity to general contact principles that run throughout most states’ lawsLex mercatoria- the law merchantRoman law of Contracts was sophisticatedIt covered the Roman EmpireUniform Commercial Code (UCC)All states have entirely adopted it, except for LouisianaCovers contracts regarding the sale of goodsMany countries rely on Code Law for their basic legal frameworkDefinition of a ContractContract: “an agreement upon sufficient consideration, to do or not to do a particular thing” –William Blackstone“a promise or set of promises for the breach of which the law gives some remedy or the performance of which the law in some way recognizes a duty” MODERN DEFINITIONcenters on promisethe promise itself creates a manifest of intent (meeting of the minds)Contracts form legal relationships and duties between partiesNot all promises are enforceable contractsThe promise must meet the requirements of a contract to create an enforceable promiseExpress Contract: Direct statement made by the parties regarding the promises madeOral or writtenAll terms are expressly stated between the partiesImplied Contract: Actions and circumstances infer and define the terms of the contractWords, conduct, or gesturesContracts are implied at lawElements of a contract Offer and acceptanceThe OfferOffer: Promise to do or refrain from doing something specificOfferor: party making the offerOfferee: the party that the offer is being made toManifest of intent (meeting of the minds)Preliminary negotiationsInvitations to negotiate or make an offerEx) talking about price of a car with a sales personIntent to offerWhether what the person said is actually considered an offerEx) “I want to sell my car for $5,000Definite terms and conditionsNot every detail needs to be present for an offer to still be validCommunicationThe Offeror:CommunicationTime EffectiveLegal EffectMakes an offerWhen the offeree receives itWhen the offeree accepts itRevokes an offerWhen the offeree receives itThe offeree no longer has the power to acceptThe offeree:CommunicationTime EffectiveLegal EffectRejects to offerWhen the offeror receives itWhen they terminate the offerMakes a counterofferWhen the offeror receives itWhen they terminate the offerAccepts an offerWhen it is sent by the offereeWhen a contract is formedTerminating an offerTermination: either the offeror withdraws the offer of the oferree rejects itCan occur from the parties actions or the law or through lapse of timeOption contract: a binding promise to keep an offer open for a specified period of timeMust have been formed though an offer and acceptanceThe offer may not be withdrawn during the specified timeRevocation: withdrawing the offer by the offerorMust be done before the offeree has accepted itRejection: withdrawing the offer by the offereeCounteroffer: a proposal by the offeree to change the original offerKeeps the negotiation but has new conditionsA contract may terminate over a lapse of timeIf there isn’t a specific time for acceptance, after a reasonable amount of time since the offer has been made passes, the offer will be terminatedWhat is reasonable depends on the circumstancesOperation of the lawWhen an offer is terminated due to a conflicting lawEx) making a bet on the internet over college football teams. The bet is terminated because it is illegal to gamble onlineWhen the subject matter is destroyedEx) you offer to sell me your old car, I accept, and then you total it. The offer is terminatedIf you had told me you would sell me a specific type and brand of car the offer would still stand though because you can get another one of that car madeIf the offeror or offerree dies or has a mental/physical incapacityThe AcceptanceAcceptance: an offeree’s expression of assent or agreement to the terms of an offerTo be effective an offer must be:UnconditionalThe acceptance must be the mirror image of the offerKey parts of the offer must be in the acceptanceIf conditions are added, it is considered to be a counter offerBy changing these terms there is no longer an unconditional acceptanceUnequivocal“I accept” or any other clear acceptance of an offersilence is not an acceptance unless past business dealings allow silence by the offeree to be an acceptanceProperly (legally) communicatedFactors that are important in whether or not the acceptance was properly communicated:Method of acceptanceTimeliness of acceptancePerformance of an acceptanceCourts created a general rule that if the method of acceptance is reasonable under the circumstances, the acceptance is effective when it is sent.Bilateral contracts: an exchange of promisesUnilateral contracts: when an offer is accepted by performanceEx) you say I’ll pay you to mow my lawn, I don’t say anything but you mow my lawn anywaysThe offer has been considered accepted and the contract is validCASE- Certified fire protection v. Precision constructionPrecision construction is a general contractor that bid on the jobThey got bids from subcontractors for the design and installation of a sprinkler system for fire preventionCertified fire protection submitted a bid for $480,000 and wonPrecision began constructionDec 5- Precision sent CFP a copy of the contract along with construction plans and sprinkler requirementsCFP had to have preliminary design draws within 2 weeks and prove an insurance certificateJan 19- No signed contract or insurance certificateCFP billed Precision for $33,575, although the plans were not readyJan 26- Precision told CFP that they were holding up the project so Precision was going to move ahead without CFPFeb 1- CFP submitted drawings but objected to the terms in the contractMaking this a counter offer!!Feb 8- Precision was informed of mistakes in the sprinkler system drawingsFeb 16- Precision told CFP that they were ending their relationshipThe contract wasn’t signedThere was no insurance certificateThe drawings were incorrectCFP sued for breach of contractThey said they should be given payment for the sprinkler system drawingsTrial court- HELD for PrecisionSaid no contract ever existedCFP appealedA contract requires an offer and an acceptanceMeeting of the minds: when parties have agreed upon contract’s essential termsEssential depends on the agreement and its contextCFP said the progress bill they sent precision established the price term and that Precision urging certified to get started on designs established the scope of work for an express contractDesign drawings are tailored for the company so they are not useful for another installerThe price and the scope of work terms was missingThe parties never agreed to performance timeCFP said this was an implied contractMust be manifested by conductShow intentThis was not true in this caseHELD: no contract was ever madePrecision never agreed to a contract for only design related workThey wanted a design and install contact for a sprinkler systemThere was no agreed upon priceDisputes included time of performanceThe designs are installer-specificConsideration: something of value or something bargained for in exchange for a promiseDistinguished a contract from a giftIf consideration is absent, neither party can enforce the promise or agreementThe traditional rule is that an exchange is a consideration if either of the following is created:Legal detriment: an act, promise to act, or promise to refrain from acting to the promiseeLegal benefit: promisor acquires some legal right through the promisee’s act, promise to act, or promise to refrain from doing an act^^ usually both of these things occur at onceAdequacy of considerationCourts don’t look much into the adequacy of considerationIf a party bargains poorly, creating an unequal exchange, the courts usually wont interfereThose who choose to bargain take on the risk of their own errorsExceptions:Fraud, duress, etc.The courts main concern is that there was an exchange of mutual promises and obligations by the partiesCASE- Caley v. Gulfstream Aerospace Corp.Gulfstream adopted a dispute resolution policy as a procedure to resolve disputes between Gulfstream and the employeesThey mailed the policy to the employeesThe policy said that the policy would begin in 2 weeksIt would be “a condition of continued employment”If the employee continued work, they accepted the policyA group of employees sued saying there was no contract and the policy could not be enforcedDistrict court HELD for GulfstreamEmployees appealedHELD: AFFIRMEDThe policy is an offer and states it’s a contractThe terms of acceptance are continued employment by employeesAcceptance can be through a promise or an actIn this case, the action of continuing employment means that the employee is accepting the offer and contractEmployees could either:Continue working and accept the policyTerminate their employmentThere is bargained for consideration by mutual promises and obligationsEnforceable promises without considerationPromissory Estoppel (Detrimental Reliance): avoids injustice due to the promisee’s reasonable reliance on the promisor’s promiseThe promisor is prevented from denying a promiseThis is not enforced lightly by the courtsEx) if a museum is relying on $50 million worth of donations to do a construction project, they get the money promised to them by donators, so they start the construction, and then a big donator backs out, the court may rule promissory estoppel and force the donor to make the gift because the building contract was entered with the reliance of the donation being madeCASE- Hinson v. N&W Construction Company, IncN&W Construction Company, Inc prepared a bid to submit to MJCC to build a kitchen.They received oral bids from plumbing subcontractorsHinson quoted $92,000N&W used this bid in preparing their bid to MJCCN&W got the contract from MJCCN&W contacted Hinson to get the work to beginHinson didn’t sign and returned the plumbing subcontractHinson refused to do the jobN&W hired the next lowest bidder at $139,000 (had to pay an additional $47,000)N&W sued Hinson based on promissory estoppelTrial court: HELD for N&WAwarded them $47,000Hinson appealedCourt of Appeals: HELDHinson provided a verbal quote and was satisfied with itHinson refused to do the job because he “had a lot of other jobs going on”N&W was relying on Hinson’s proposalCapacity to contractContractual capacity: legal ability to create a contractSome have limited capacity to contract:MinorsIntoxicated personsInsane personsIf someone has NO CAPACITY the contract is VOIDIf someone has PARTICAL CAPACITY the contract is VOIDABLEThe person with partial capacity had the right to disaffirm itUntil the mid 19th century, married women didn’t have capacity to make contract independent of their husbandsVoid & Voidable contractsVoid contracts: contract does not exist at law, so it cannot be enforcedExamples:Illegal subject matterLegally insane personVoidable contracts: one party to the contract has the right to avoid legal obligationThe contract is valid, but it is capable of being voided by a circumstanceExamples:MinorsOne party was under the influence of drugs or alcoholFraudMinorsPerson under the legal age of majorityTraditionally this was 21Now it is 18Minors have partial capabilityContract is voidableLegally- to protect the young from the “results of their own folly”General rules:Minors may disaffirm contract at their optionIf a minor disaffirms a contract after receiving benefits, restitution must be paid for the benefitSome contracts may not be disaffirmed:Enlistment into the armyMarriageEducational loansInsurance loansMedical careAfter reaching majority, the minor may ratify the contractLegalityIf a contract is lacking legality, the courts will not enforce itSubject matter must be lawfulExamples of unlawful subject matter that lack legality therefor the court will not enforce it:Criminal activitiesSale of prohibited drugsGambling activities in some statesUsury: when interest rates are above the maximum that is allowedThe court can strike an entire bargain as unenforceable or only the part that concerns an illegal subject matterUnenforceable contracts: the contract was legal and enforceable when it was made, but a change in the law no longer makes it legal therefor it is no longer enforceableEx) Company ships wheat to Iran, but once its at sea, the US government declares no US firm can trade with Iran. The contract is no longer enforceable under US law even if it is still enforceable under Iranian law Contracts contrary to public policyExculpatory agreement: releases one party from the consequences brought about by wrongful acts or negligenceex) an employment contract says an employee wont hold the employer liable for any harm caused while on the job, including intentional tortsthis violates public policy so it is not enforceableUnconscionable contracts: when one party takes advantage of another party and makes the contract unfair to the innocent partyEx) a furniture store sold a lot of items to a low-income man. In the contract they said none of the goods were paid for until every item had been paid for. When the man didn’t pay for the last item, the store tried to reclaim all of their furniture.This was considered unconscionableContracts in restraint of tradeContracts that either restrain trade or unreasonably restrict competitionCovenant not to compete: an agreement not to compete in a given market, employment lawLimited by time, territory, and ancillary to the contractDifferent states vary on this matterOften used in the sale of business or employment contractsEx) I buy your restaurant, in the contract I state that you will not open up a new restaurant within 5 miles of the one I just boughtCase- Arthur J Gallagher & Co v. BabcockArthur J Gallagher & Co. buys a Louisiana broker, BabcockPart of the deal was that Babcock and several employees would work for themAdded a restrictive covenant:If any of the employees left they would not compete with him in Louisiana for 2 yearsA few years later Babcock and others quit to work for a competitorThis drew 13 clients to their new employerGallagher sued Babcock for violating an agreement that had a non-solicitation agreement and a non-competition agreementSaid Babcock and other employees solicited his clients in competition with their former employerTrial court limited the geographic region to 9 parishes where Babcock couldn’t compete with GallagherJury awarded Gallagher $1.2 million in damages and attorney feesBabcock and other employees appealedSaid non-competition provisions weren’t valid because:Their languageTheir geographic scopeAgreement prohibited defendants from competing against Gallagher or soliciting its clients for 2 years after employment was terminatedProvisions in the agreement were less restrictive than what is allowed under state lawGallagher allowed his former employees to work in similar business, just not on accounts they worked on with GallagherCourt relied on contractual severability clause to excise the geographic areas where an employer could not conduct such businessDistrict court agreed and eliminated 55 parishes where Gallagher did not provide insurance service HELD: District court decision was AFFIRMEDReality and Genuineness of ConsentThe right in individuals to freely enter bargains of their choiceReality of consent (genuine consent): if misrepresentation or fraud was present when the contract was made, there is no contractIf reality is missing, there is no meeting of the minds (manifest of intent)Unilateral mistake: when one party to a contract enters with false information or accidentally makes an error in a significant matterIf this happens the contract can be avoidedEx) typing $20,000 instead of $200,000Without this element the contract is void of voidableExamples:Fraud: one party tries to get another party to enter a contract based on false informationMisrepresentation: intentional, based on negligence, or innocently made in innocenceDuress: when someone is forced to sign a contract because of a threat that is made with no sensible way outUndue influence: a person enters a contract because they have so much trust in the person that is persuading themEx) elderly and their caretakersStatutory exceptions: pressure by sales peopleex) federal trade commission’s cooling off ruledoor to door sales contracts can be cancelled if they’re more than $25 within 2 business daysContracts in writing and the statute of fraudsContracts do not always have to be in writing to be enforceableBetter because they are difficult to deny and good evidence of the agreementStatute of Frauds: prevents parties from claiming a contract existed when it did not forcing some contracts to be in writing for them to be enforced in court:Sale of landContracts that cannot be performed within 1 yearPromises to pay someone else’s debt, including debt of an estatePromises made in the consideration of marriageSufficiency of the writingFor the writing to be sufficient under the statute of frauds, it must set out the material terms of the contractNames of the partiesConsideration offeredSubjects matter of the contractEtcInvoices, emails, sales orders, checks, confirmations all may satisfy this requirementThe parole evidence rule: restricts the use of oral evidence when that evidence is contrary to the terms of a written contractEvidence cannot contradict, change, or add terms to written contractsIf a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, then oral evidence may explain the problemsCase- Deschamps v. Treasure State Trailer Court2003- Rasmussen agreed to sell Deschamps a mobile home trailer park with 96 spaces for $1,445,000contract explained how Rasmussen would be paid over timeafter the sale was complete, Rasmussen diedhis estate inherited the assetDeschamps found problems with the water system which required $400,000 in repairs2006- Deschamps stopped making paymentssaid the cost of water system repairs made it impossibleRasmussens estate suedDeschamps counter sued for contract breach/fraudDeschamps contendedRasmussen said that the water system was in good condition and that the occupancy rate was higher than in fact it wasThe trial court held for estateSaid Deschamps claims were precluded by the parol evidence ruleHELD: AFFIRMEDWhen the language of a contract is clear and unambiguous you have to look at the substance of the contract itselfContract said deschamps didn’t rely on any oral assurances of presentations by RasmussenDeschamps can now not claim otherwiseDeschamps signed a contract prepared by his real estate agent saying that he had not relied upon assurances by RasmussenBOTTOM LINE: GET EVERYTHING IN WRITINGPerformance, Discharge, and Breach of ContractPerformanceMost contracts come to an end by performanceSubstantial performance: the contract has basically been fulfilled and payments have been madeParties are expected to act in good faithUsual remedy is contract price minus damages that have resulted from a lack of a complete performanceMaterial breach: performance is substantially less than what was requiredDamages are now due to a non-breaching partyExecuted contractFully completed contract, nothing was left undoneIf you have fully performed, damages for the price of performance may be sought as a remedyExecutory ContractNot fully performedIf a partial delivery of the products occurred, buyers don’t need to pay the total contact priceAssignment and delegationAssignment: transferring contract rights to another personEx) a dentist asking to put your new crowns on someone else’s teethDelegation: transferring duties to someoneEx) Kobe Bryant asking someone else to play for himMany contracts can be assigned or delegated, but there can be exception in contracts for servicesThird party beneficiary: a party who is not part of the original contract who acquires rights under the contractUsually occurs in credit contractsBreachBreach of contract: when a party to a contract doesn’t perform as requiredThe party injured may be entitled to a remedy.To determine the remedy, the court looks at the extent of the breachMaterial breach: performance is significantly less than the contract providesAnticipatory breach (repudiation): a party shows a lack of desire or an inability to performDischarge by agreements of the partiesRescission: when both parties agree to terminate the contract without performanceNovation: all parties agree to discharge one party from the contract and create a new contract with another party.The new party becomes responsible for the discharged parties performanceAccord & SatisfactionsAccord: an agreement by the parties to offer and accept performance that differs from the original agreementSatisfaction: the actual performance of the new obligationDischarge by impossibilityImpossibility of performance: used to end the obligations to a contract when an event occurs that makes performance impossibleThe impossibility doctrine has been extended to commercial impracticability or frustrationRemediesDamagesMonetary Damages:Compensatory damagesActual damagesExpectancy damagesLiquidated damages: an amount specified in the contract to be paid in a breechPenalty: if the liquidated damages are too excessiveNominal damages: plaintiff suffers a breach of contract but not a measurable economic lossPunitive damages: when the wrong doers conduct has been willful or malicious and fraud was involvedIf there’s a tort related to contractSpecial damagesEquitable damages:Specific performance: requires the party who did the wrong to do the obligations that were promised in the contractInjunction: requires a party to refrain from performing certain actsRestitution: if one party has received a benefit but hasn’t paid for it, the court can order payment to be made or for the goods to be returnedMitigation of damagesMitigate: to lessen the losses that may have been incurredThe injured party is required to make an effort to mitigate or lessen the lossesEconomic Loss Rule: in a breach of contract case, if there is no tort involved, damages are only those related to the economic losses suffered by the breachThis is applied based on 3 policies:Maintain fundamental distinction between tort law and contract lawProtect commercial parties’ freedom to allocate risks by contractEncourage the party best situated to asses the risk of economic lossDamages are only related to the lost profits and costs due to the breachAccounting evidence and specific calculations are necessary evidence that needs to be provided(no punitive damages or mental distress awards)parties will try to assert a tort along with a breach of contract to get these damagesCase- DeRosier v. Utility Systems of America, IncDeRosier owned land on a hillsideBefore he could build a house on it, a lot of it needed to be filled with dirtUSoA was doing nearby construction and it would dump excel dirt on his lotIt saved them money than to haul the dirt awayDeRosier got a permit from the city for 1,500 cubic yds of fill to be dumped on his propertyGave permit to USoAUsoA dumped 6,500 cubic yds and 5,000 cubic yds had to be removed bc the permit was violatedUSoA denied responsibility and offered to remove the excess for $9,500DeRosier suedTrial court granted DeRosier $22,829 damages for the other company he had to pay to remove the dirt and awarded him $8,000 for delay of time in constructing a new homeUsoA appealedDeRosier failed to mitigate damages by having USoA remove the dirt for $9,500 rather than $22,829 that he paid to another companyConsequential damages has to do with the damages that can be distinguished from general damages. They are not recoverable unless they are reasonably foreseeable by the parties at the time of breachDistrict court:HELD $8,000 in consequential damagesHELD: calculating and granting $22,829 in general damagesHELD: DeRosier could decline the offer from UsoA to remove dirt for $9,500Did not unreasonable reject the offer or fail to mitigate his general damagesReversed in part affirmed in part?Quasi Contracts: gives relief to innocent parties even though no contract existsQuasi = almostQuantum meruit recoveryLegal concept that is used by the courts to prevent injusticeCourts apply this in equity to give relief to innocent partiesEx) people come and pave your driveway in good faith, do you pay them when the bill is sent?Under quasi contract, yesCase- Scheerer v. FisherScheerer is a real estate agentSeller &Fisher greed to pay sheerer 2% commissionThe deal fell apartFisher formed a new companyHe had a 3rd party- Antonio- buy the property and then sell it to fishers new companySheerer learned of the deal and hadn’t made any commission from itSheerer sued for breach of contract on quantum meruit compensationTrial court said he had no contract or basis of paymentSheerer appealedREVERSEDDefendants took action to deny sheerer compensation for services renderedAlthough the original contract failed, the law implies a promise to pay some reasonable compensation for services renderedThe allegations made for a valid quantum meruit claimIntroduction to the UCCHistory of Commercial lawEnglish courts began to use lex mercatoria (“law merchant”)Rules developed by merchants in medieval Europe governing trade issuesSalesPaymentsInsuranceShippingTraditionally merchants who disregarded the rulings under the law would be shunned by other merchantsThe Roman law of contracts was surprisingly sophisticated covering countries that were governed by the Roman EmpireIn the early 20th century, each state had a different set of commercial laws that made it difficult to expand business into states with different lawsAll states have accepted the Uniform Commercial CodeCOVERS CONTRACTS FOR THE SALE OF GOODSMost countries rely on code law for their basic legal frameworkApplication of the Uniform Commercial CodeApplies instead of the common law of contracts when: It governs contracts for the sale of movable items that aren’t money or an investment securityNo services, real estate, or professional servicesIf a contract is a mix of goods AND services:Court determines whether the common law or the UCC should governUsually this depends on whether the contract primarily involves goods or primarily involves servicesParties can agree that the UCC will apply in courtPrimarily up to the state, not the federal governmentEach state has adopted some version of the UCC statueThe purpose of the UCC is to “simplify, clarify, and modernize the law governing commercial contracts”CASE- Paramount Contracting v. DPS IndustriesParamount needed dirt for a construction projectDPS offered to sell dirt and bring it to the construction siteDPS says Paramount accepted their offerParamount denied that they accepted the offerThey hired another company to bring them the dirtWAS THIS CASE GOVERNED BY ARTICLE 2 OF THE UCC OR BY THE COMMON LAW?When a transaction involves both goods and services, article 2 applies depending on the “predominant purpose” of the transactionDPS said the contract was for the sale and delivery of dirt, so article 2 would applyParamount said DPS was to perform services by placing and compacting the dirt at the site, so the common law would applyDPS sued for breach of contractThe jury found for DPSAwarded DPS damages for sale of goods under the UCCParamount appealedSaid no contract had ever been madeThis was a service contractParamount said they had a contract for construction at the Atlanta airportThey used a quote that was given to them by DPS in their bidThis led DPS to believe that there was an agreement to sell and deliver dirtDPS sent Paramount a letter: “holding the dirt ready to be hauled. Once they receive the 10 day notice”Paramount did not respond in writingThey later decided to buy dirt elsewhereHELD: Evidence shows that the predominant purpose of the transaction was the sale of dirtThe UCC appliedThe trial decision was affirmedGoods, Merchants, Sales, and Titles under the UCCGoods: something that is movable and tangibleSomething in a sales contract is not considered a good under article 2 unless it can be carried from one location to another and has a physical existence (can be seen and touched)Good faith: honesty that a transaction occurredAll parties are bound to this in an UCC article 2 sales contractSale: the passing of a title from the seller to the buyer for a priceTitle: represents the legal rights of ownershipA party may hold this if:The good existsThe good has been identified to the contractThe seller has specified which goods are being sold to the buyerThe UCC allows the title to pass when any of the following occur:Goods arrive for shipment at a portGoods arrive at the buyer’s warehouseGoods leave the sellers warehouseGoods are halfway between the seller’s factory and the buyer’s warehouseIf its not specified when the title passes, article 2 says the title passes when the seller completes all obligations regarding delivery of goodsIf the goods didn’t need to be moved, then it passes when the seller delivers title documentsIf the seller sells stolen property, the title doesn’t pass to the buyerForming a Sales ContractCommon law usually governs contracts unless the UCC changes, or modifies, the rule,If parties don’t specify which law governs a contract, the courts look to see whether its under common law or the UCCThe UCC tends to reduce the formality of contract lawOffer and acceptanceUnder common law:Offer:Terms and conditions need to be detailedAcceptance:Needs to be unconditional, definite, and legally communicatedUnder the UCC:Offer:If the party intends to enter a binding agreement, a contract existsEven if some of the offer’s terms are left open or omittedAcceptance:The accepting party can add or change termsCan be communicated in any reasonable wayMust intend to create a binding agreementIntent to ContractUnder the UCC a sales contract can be made in any way that is sufficient enough to show agreementIt doesn’t matter if the moment of contract is uncertainIndefinite offerIt’s ok if some major terms (price, delivery, or payment terms) are left outUsually need quantity unless it’s a(n):Output contractRequirement contractCourts require good faith dealingThey don’t allow for one party to profit from bad fortune of the other party due to unexpected large changes in circumstancesMerchants firm offersA merchant needs to sign in writing how long the offer will remain open forThis is a firm offer an it is irrevocableIf this is not stated in the offer, the offer stays open for a “reasonable time”CASE- Crest Ridge Construction v. Newcourt, IncJohn & Joe set up their own construction company- Crest RidgeThey are awarded a subcontract to provide wall panelsThey want to use panels made by NewcourtPrice was $760,000 subject to credit approvalThis was because crest ridge was a new company, there wasn’t much credit infoOver the next 6 months, detailed discussions about the panels and shipments were setRight before delivery Newcourt demanded money in fullThe industry practice is 45 days after shipmentThis is so the subcontractor has time to give the goods to the general contractor, who will pay the billCrest ridge could not make an advance paymentThey had to find another supplier at a higher priceCrest ridge sued NewcourtThe jury awarded Crest Ridge $70,214 in damagesNewcourt appealedAFFIRMED: Breach of contract by Newcourt“subject to credit approval”didn’t say that there was not a contractUCC looks to see if there was any manner that showed agreement recognizing that a contract was madeThey exchanged price quote and a purchase orderDocuments are usually binding in the construction industryThey spent 6 months clarifying the projectNewcourt sent samples, drawings, detailsThey left the terms of payment blankSo payment was either due upon deliver or whatever the general usage in the industry wasSO TO ASK FOR PAYMENT IN ADVANCE WAS A BREACH OF CONTRACTAcceptanceThe UCC is different from the common law because it provides greater flexibility in the way an acceptance can be communicatedIf the offeror doesn’t demand a clear method of acceptance, a contract is formed when the offer is accepted in any reasonable mannerAn acceptance is valid even if the offeree includes additional terms or changes terms in the original offer (this is not considered a counteroffer)Conflicting termsIf an offeree’s form (terms) doesn’t match the offeror’s form (terms), there is an acceptanceBut use the offeror’s terms unless special action is takenWhen terms in contracts conflict = battle of the formsContract modificationTo make a contract modification, under the UCC, parties don’t need to provide new consideration, they just must pass the UCC’s test of good faith dealingModification must be in writingCASE- Orkal Industries v. Array Connector Corp.Orkal- NY companyArray- FL companyOrkal bought products from ArrayOkral would send purchase order formsArray would confirm the orders with a “customer order acknowledgement form”These contained a “forum selection clause” stating that in case of disputes, they would need to be brought to suit in FloridaOrkal did not object to the clauseOrkal later sued Array in NY for breach of contractArray gave a motion to dismiss due to their forum selection clauseThe trial court agreedCase was dismissedSaid Orkal would have to sue in FloridaOkral appealedAdditional terms become a part of the contract UNLESS:Specifically objected to within a reasonable time ORAdditional terms materially alter the contractThe party opposing the inclusion of the additional terms must prove that the additional terms are material changesInclusion of the forum selection clause constitutes a material alteration to the initial contractsArray could have made it binding if they had had Orkal sign their forum selection clause, but they didn’t so they lost.Statue of Frauds: the sale of goods for more than $500 is not enforceable unless it is in writing and it has been signed by the party against whom enforcement is soughtCompared to the common law, the sufficiency of writing under the UCC is relaxedNot every material term needs to be specifiedFailure to respond to a writingSection 2-201(2)If writing in confirmation of the contract is received it satisfies the writing requirement unless “written notice of objection” is within 10 days after the writing was receivedParol EvidenceMore relaxed under the UCC than the common lawSection 2-202Parol evidence (oral testimony) can not be used against written documentsHowever, it can be used to explain customary trade dealings or the meaning of certain termsIf the original document is intended to also be a complete and exclusive statement of the terms of the agreement than oral testimony cannot be used to change the termsFilling the GapsThe UCC instructs the courts to fill in the parts of contracts that are left either open and unclearTrade Usage: The regular practice and methods of dealings in a given tradeThe UCC looks at this as well as past business dealings between the parties to help resolve the current situation and determine the outcome of unclear termsThe UCC will also apply the reasonableness standardPriceIf the price isn’t specified, 2-305 tells the courts to determine a “reasonable price”Fair market value or past dealings may be usedQuantity2-306- when quantities aren’t clearRequirements contract: when the seller agrees to provide all of a certain good that the buyer needsEx) Michelin may agree to provide Ford with all their tires on a certain model of cars, but Michelin doesn’t know how many tires that will beOutput contract: buyer agrees to take all of the output of a certain sellerEx) Foot locker agrees to take all of the LeBron James shoes made by Nike, they don’t know how many of those Nike will produceDelivery terms2-309Delivery must be within “a reasonable time”2-311Seller has option for arrangements for shipment2-308Presumes that delivery is to be at the seller’s place of businessCASE- Griffith v. Clear Lakes Trout Co.Griffith was a trout growerClear Lakes was a fish hatcheryClear Lakes had a 6 year contract with Griffith that he would buy small trout from them, grow the trout, and sell them back to Clear Lakes when they were “market size”After 3 years, Clear Lake’s customers began to demand larger fish than the 12 oz ones Griffith was deliveringClear Lakes was beginning to take fewer fishGriffith was left with too many fishHe became deeply in depthGriffith couldn’t easily change his operationsGriffith sued Clear Lakes for breach of contractThey weren’t accepting trout that Griffith had grown to “market size”Clear Lakes claimed no contract ever existed because the parties differed as to what “market size” wasDistrict court ruled for GriffithCourt held that both parties knew that “market size” was 12-16 oz when the contract was formedClear Lakes appealedHELD: affirmedBoth parties understood the market priceThe parties intended to make a contract and the contract will not fail for indefinitenessThe course of performance between Griffith and Clear Lakes over the course of 3 years indicated that they had an understanding of “market size”The parties had a TRADE USAGE predating their contractPerformance and ObligationsSeller’s Rights and obligationsTender: a valid and sufficient performance according to the contract2-601Deals with the seller’s delivery matching the terms of the agreementIf the goods don’t match the contract, the buyer may:Reject the wholeAccept the wholeAccept some units and reject the restThe seller is obligated to tender goods at the buyer’s place of businessWHERE THE BUYER REJECTS, ACCEPTS, OR A COMBINATION OF BOTH ^^ (2-601)Perfect Tender rule: the seller must tender the quality, quantity, and delivery method as specified in the contract If there’s no perfect tender the buyer can reject the foods and revoke the contractRight to cure by the seller2-508If there was an improper tender of goods, and the goods have been rejected by the buyer, the seller may cure the defective tender/delivery if all of the following are true:The time for the sellers performance has not passedThe seller properly repairs/replaces the defective goods before the performance time has passedThe seller notifies the buyer in a timely manner that they intend to cure the defectBuyer’s rights and obligations2-507The buyer has a duty to accept conforming goods and pay for them according to the contract2-513 Buyer’s right of inspectionThe buyer has the right to inspect goods before accepting them2-601 & 2-602 Buyer’s right of rejectionThe buyer can reject any non-conforming goods as a breach of contract and withhold payments2-606 & 2-607 & 2-608 Buyer’s duty of acceptance2-606 & 2-607when the seller delivers conforming goods, the buyer has the duty to accept it and become to owner of the goods2-608If the goods have been accepted but are found to be nonconforming, the buyer can later revoke their acceptance if the nonconformity “substantially impairs” the value of the goodsIf the buyer is willing to accept the nonconforming goods they still must be paid for, but the parties may be able to negotiate a lower price2-507 Obligation of paymentThe buyer needs to pay for the goods when they are receivedHe is given the right to inspect them before payingSales WarrantiesWarranty: statement or representation made by a seller that the goods will meet a certain standard of quality, safety, performance, and title.If they don’t, they may be held liable for damages, breach of warrantyWarranty of Title: the good title will be transferred to the buyer free of any claims against it unless they have been revealed to the buyer2-312Express Warranty: created by a seller’s promise or guarantee to the quality, safety, performance, and durability of goods being soldMay be created by:Showing a sample model so the buyer gets a feel for what the goods will be likeDescribing attributes about the goods to the buyerMaking specific oral or written statements (promises) to the buyerWarranties may be disclaimed, but disclaimers need to be specific to the type of warranty and must be conspicuousAn express warranty can be created if:Claims are specific, statements are made about the goods that are not obvious, if it’s a case where the buyer has a good reason to rely on the seller’s expertise, or the statement is in writingImplied Warranties: quality and safety standardAutomatically imposed on sellers unless they specifically disclaim themImplied warranty of merchantabilityMerchantability: the good must be at the same quality that is comparable to what would be generally acceptable in that line or tradeThe good must be able to do what is expected of itEx) an umbrella must keep water off youImplied warranty of fitness for a particular purposeFitness for a particular purpose: when the buyer relies on the sellers expertise and the seller knows thatEx) you ask a painter for recommendations on what paint wont chip on your new product. If the brand he recommends chips, you can sue for breach of implied warranty of fitness for a particular purposeWarranty DisclaimersSellers can make disclaimers but the language used needs to be specific and the disclaimer needs to be conspicuous (no wishy washy language)CASE- Lee v. R&K Marine Inc.Lee bought a new boat from R&K MarineAgreement had a disclaimer for all warranties, express or implied This included implied warranty of merchantability or implied warranty of fitness for a particular purpose3 years later, cracks and deterioration was discoveredan appraiser determined this was due to manufacturing defectsthe boat was a total lossThe manufacturer was bankrupt, so Lee sued R&K claiming breach of warranties of merchantability and fitness for a particular purposeSummery Judgement for R&KLee appealedHELD: AffirmedThe UCC 2-316(2) says that to exclude warranties of merchantability and fitness for particular purpose, writing must be conspicuousThe writing was in capital lettersA reasonable person would have noticed itRemedies and DamagesSellers RemediesIf the buyer breaches the contracts before receiving the goods, the seller may:Cancel the contractIdentify the goodsMinimize losses by stopping/completing production and salvaging the goodsWithhold or stop deliveryResell the goods in a commercially reasonable mannerSue the buyer for lossesIf the buyer breaches the contract after receiving goods, the seller may:If the buyer doesn’t pay- sue for payment and damagesIf the buyer wrongfully rejects-If the seller reclaims the goodsRemedies are the same as if the buyer had breached before receiving the goodsIf the seller doesn’t reclaim the goodsSue for payment and associated damagesBuyer’s remediesIf the seller breaches the contract before delivery,The buyer may:Cancel the contractGet the goods from a different supplierSue the sellerIf the seller doesn’t deliverThe buyer may:Cancel the contractGet goods from another sellerCover: when a seller fails to deliver goods, the buyer is entitle to buy substitute goods and recover the price difference from the sellerSue the sellerIf the seller delivers nonconforming goods and the buyer rejects, The buyer may:Cancel the contractGet goods from another supplierSue the sellerSell the rejected goods to recover their advance paymentsIf no advance payments were made they can store or reship the goodsIf the seller delivers nonconforming goods and the buyer accepts,The buyer may:Deduct damages from the priceSue the seller for damagesSue the seller for breach of warrantyBuyers damagesCoverIncidental damages: Reasonable costs of inspecting, receiving, transporting, and taking care of goodsConsequential damages: foreseeable damages that result from the seller’s breachMay be a third partyMay not necessarily be the sellerCASE- QVC, Inc. v. MJC America, LTDQVC is a shopping networkOffered soleus electric heatersSoleus had them made in ChinaQVC sold 19,100 heaters in 2007-2008The customers reported safety problemsQVC stopped sales and had their project evaluatedThe conclusion was that there was problems with the qualityQVC ordered a recallThey refunded their customersQVC’s contract with Soleus had strong warranty termsHeld the seller responsible for all costs related to defectsIncluding recall costsSoleus disputed QVC suedDistrict court awarded QVCSaid Soleus breached warrantyThe purchase order said Soleus would indemnify (to stand in the place of/defend) QVC from any damages and losses … based upon or resulting from … any alleged or actual defectQVC sought damages for:Cost price of heatersLost profitsRefunded customer shipping costsShipping costsCenter processing & recall costsHELD: QVC was awarded damagesInternational SalesThe convention on contracts for the international sale of goodsCISG = Contracts for the International Sale of GoodsSales covered by the CISGThe CISG applies to contracts for the commercial sale of goods that are made by parties who have places of business in different countries and have ratified the CISGParties can specify whether they want to exclude the application of the CISG and choose another law to govern the contract insteadCISG only convers sales between merchantsDoesn’t cover sales to the publicSales that are excluded from the CISGAuction salesConsumer goods that are bought for personal or household useContracts that are primarily for labor or other servicesElectricityShips and aircraftSecuritiesStockNegotiable instrumentsMoneySimilarities between CISG and the UCCFormalityCISG doesn’t need to be formal or in writingJudges are told to look at the circumstances of past dealings to see if there is a contractOffersCISG doesn’t consider advertisements to be offersLike the UCC, the court can fill in missing termsAcceptanceMust be made within the time stated or within a reasonable timeLike the UCC and common law, silence is not an optionBy sending the good, that is reasonable means of acceptingBattle of the formsAccording to the CISG, if there are differences within the forms that are material, the second form is considered a counter offer, not an acceptanceSo there was no contractDuties of partiesLike the UCC, CISG requires a seller to deliver goods with good title.Like the UCC, CISG requires the buyer to notify the seller of defects within a reasonable timeRemediesIf there is a breach, parties are expected to behave in a reasonable manner and give the breaching party an opportunity to cure the defectSimilar to common lawNachfrist notice (period of grace)Like the UCC, if there is a failure to perform, there is an obligation to try and minimize the damages (duty to mitigate damages) so that the waste is minimizedCASE- Dingxi Longhai Dairy v. Becwood Technology GroupDingxi was in ChinaBecwood was in MinnesotaDingxi agreed to ship 612 tons of inulin to Becwood4 shipments went from Tianjin, China to Londonderry, NHBecwood received shipment 1 & 2They paid for 1They refused to pay for 2 because there was mold on the packagingDingxi recalled shipments 3 & 4 before reaching their final destinationBecwood sued for breach of contractDistrict court held for Dingxi on the second shipment and dismissed Dingxi’s claims for damages that were related to shipments 3 & 4The decision was appealedThe contract was governed by CISGCISG elements of breach of contract:FormationPerformanceBreachDamagesDingxi said it delivered all 4 shipments and Becwood didn’t pay for 2, 3, or 4They wanted money to pay for them plus costs and feesBecwood wanted the courts to dismiss Dingxi’s claims on shipments 3 & 4 because they recalled them before they reached the buyer and they said you cant recover damages for goods that never reached the buyerThe seller can recall their goods before they reach the buyer if the seller has breached the contractDingxi said there was a breach of contract due to performance of contractual duty and Becwood refused to payDingxi recalled the shipments before they reached the buyer, but Dingxi also proved that there was a breach of contract because Becwood didn’t payCourt REVERSED dismissing Dingxi’s breach of contract claims regarding shipments 3 & 4International Sales Disputes: The dominance of arbitrationThe UN encourages arbitration dealings through convention on the recognition and enforcement of foreign arbitrable awardsMost countries have adopted the conventionIf they have then the courts are bound to recognize and enforce arbitration decisions, as long as proper procedure was followedThere is an exception if the procedure conflicts with one of parties nations’ laws or if they have gone beyond the scope of matter that is covered by arbitrationIn the US, parties that have a contract written under CISG who require arbitration have little reason to be in courtIt’s the duty of the arbitrators to resolve the dispute under CISG rulesSole ProprietorshipsSole Proprietor: someone who is doing business for themselvesThe business is called a sole proprietorshipUsually owns all of the business propertyResponsible forControlLiabilitiesManagementThey may hire people, but they are responsible for their liabilities and debts as wellCapital comes from the owners own resources and is borrowed with the owner as a debtorThe owner is personally taxed for profits of the businessHow records are kept is up to the owners discretionPartnershipsPartnership: an association of two or more people to carry on a business as co-owners for a profitGeneral partners: share control over the business’ operations as well as the business’ profitsThey have equal control unless they agreed upon otherwiseUnder most state laws, a partnership may be sued as an entityMost states have adopted two act’s to govern partnership lawUniform partnership act (UPA)Revised Uniform partnership act (RUPA)Forming a partnershipIt is not required for the partners to enter a formal agreement in order for a partnership to existOral or implied agreements may suggest that a partnership has been createdThe courts prefer formal agreements, especially regarding finances, management, and dissolution issuesIf the partnership does not have a specific agreement, the UPA governs the relationship“default rules”Duty of partnersFiduciary duty: partners need to act in good faith of their relationship for the benefit of the partnershipsPartners must place their personal interests below that of the partnershipLatta v. KilbornOne party could not use the partnerships assets for their own benefitControl by partiesUnless stated otherwise, the profits of partnerships are divided equallyCASE- Zhou v. BickleyBickley worked at a Yamaha shopZhou & Zhang were Chinese immigrants who worked at a Chinese restaurantBickley would eat lunch at the Chinese restaurantBickley told Zhou and Zhang that the Yamaha shop was going out of businessHe suggested that they help him open a new motorcycle repair shopBickley, Zhou, and Zhang signed a 2-yeat lease on a building for a motorcycle shopZhou & Zhang paid the security deposit, first months rent, and helped pay for inventory. They also helped get the shop readyThey also gave Bickley more money when he asked for itZhou & Zhang asked for keys to the buildingBickley refusedZhou & Zhang asked to see invoices and receiptsBickley refusedZhou & Zhang asked to work at the shopBickley refusedZhou & Zhang demanded a written agreementBickley refusedAn attorney sent a demanded letter on Zhou & Zhang’s behalfBickley ignored itZhou & Zhang filed a lawsuit and demanded the return of their fundsBickley counterclaimed for breach on contract by his partnersTrial court: there was never a partnership, only a vague agreement to open a motorcycle repair shopSaid Bickley operated as a sole proprietor who borrowed money that he owed to Zhou & ZhangBickley appealedJust calling yourselves partners and referring to a business as a partnership doesn’t make you partners or make a partnershipZhou, Zhang, and Bickley contributed money for expenses and signed a leaseNo binding contractNo partnershipA reasonable person could conclude that Zhou & Zhang intended to enter a partnership IN THE FUTUREBy Bickley denying Zhou & Zhang access to the building, access to financial records, and refusing to let them participate in the business, his actions WERE NOT CONSISTENT WITH A PARTNERSHIPAn intent to do things which constitute a partnership determine whether or not the parties are partnersAFFIRMED the parties did not do things that would constitute a partnershipTermination of the partnershipA complete termination only happens after the partnership has been dissolved and its affairs have been wound upDissolution: when an event takes place that makes it impossible for the partners to engage in any more business Winding up: completing any unfinished business and then collecting & distributing the partnership’s assetsWays a dissolution can come about:Change in the composition of the partnersResults in a new partnershipWithdrawal of a partnerDeath of a partnerBankruptchy of a partnerIf a partnership is terminated, the partnership must be reformedThus, why many partnerships purchase life insurance on partnersThey used the proceeds to buy back the interest of the deceased partner from their estateLimited PartnershipLimited partnership: 2 or more people enter into an agreement to carry on a business venture for a profitUnlike a general partnership, not all partners have the right to participate in the management of the enterprise and not all are liable for partnership debtsForming a limited partnershipPartners MUST have a written agreement that is filed with the state, called a certificate of limited partnershipPuts third parties on notice that the limited partners assets aren’t available to satisfy claims against the limited partnershipRelationship of the partiesGeneral partners:Manage the businessPersonally liable to creditorsHave the duty to account to the limited partnersLimited partners: INVESTORS ONLYDon’t manage the businessAren’t liable for debts beyond their contributionsLimited partners become general partners at law if the participate in or manage the businessMost states use some use one of these act’s to govern limited partnerships:The Uniform Limited Partnership Act (ULPA)Revised uniform limited partnership act (RULPA)CASE- Eagles Landing development LLC v. Eagles Landing Apartments, LPEagles landing Development contracts to build apartments for eagles landing apartments for $1.4 millionApartment’s partners:General- Bluff cityLimited- PNCLimited- Columbia (a corporation)Development completed the work, but was still owed $931,000The agreement stated that Bluff City’s contribution wouldn’t exceed the net case flow from rental of the apartmentThe cash flow was not good, so there was no money thereAll of the cash that had been invested by Apartment’s was goneDevelopment sued for Contribution by PNC and ColumbiaTrial court HELD for developmentSaid Apartment’s owed $931,000Apartment’s appealedColumbia and PNC said that if the full developer’s fee is due under the Development Agreement, they weren’t parties to it, they were only limited partnersSaid they couldn’t be charged for any liability of the partnership under the Development AgreementTHE COURT AGREEDUnlike general partners, a LP protects partners registered as limited liability partnerships.These partners are not liableColumbia and PNC were limited partners so they cannot be held liable for partnership debtsAFFIRMED the trial court’s judgment of the amount Apartment’s owedREVERSED the assessment of judgment to PNC and ColumbiaREMAND to trial court for purpose of entering judgment only against the partnership, Apartment’sTerminating a limited partnershipDeathInsanityWithdrawalIn a GENERAL partnership bankruptcy = termination, in a LIMITED partnership bankruptcy DOES NOT = terminationThe organization must wind up the businessThe limited partners get their share of the profit and their capital contributions before the general partners receive anything unless the agreement says otherwiseCorporationsCorporation: an artificial person, or legal entity, that is created under state lawCan sue and be suedHas liabilityHas constitutional rightExcept for the privilege against self-incriminationOnly officers & employees have the privilege against self-incriminationCorporate charters: issued by the state and often grand special privileges, so there is intense competition to receive themCorporations must meet formal requirements according to state statuesLiable for agents actions and contractsEach state has its own corporation lawsThe federal government has a very limited roleCreating a corporationA corporation must send Articles of Incorporation and an application to the appropriate state officeThis includes:Name and address of the corporationName and address of the corporation’s registered agentPurpose of the businessThe class(es) of stock that are to be issued and their par valueNames and addresses of the incorporatorsThe state then issues a certificate of incorporationThe incorporators then hold their first organizational meetingAt the meeting they:Elect a board of directorsEnact the corporations bylaws (:rules that regulate and govern the internal operations of the corporations)Bylaws cannot contradict the Articles of IncorporationsIssue the corporations stockRelationship of the partiesThere’s an important legal separation of ownership and control in a corporationOwnership (the shareholders)Control (the management & the board of directors)3 major groups:1. Shareholders: own the corporationNot responsible for managing the corporationNot allowed to exercise day-to-day controlElect the board of directorsVote on matters that change the corporation’s structure or existenceThis happens at shareholder meetingsQuorum (:more than half of total shares) must be representedMany shareholders give their proxy (: written authorization to cast their vote so that they do not need to attend) to third parties to represent themHave no legal relationship with the creditors2. Board of Directors: the governing committee of a corporationHave management power over large decisionsCan be removed by the shareholders for a causeUsually for breach of duty or misconductThey are the Principal (:on behalf of the corporation, setting corporate policy and deciding on corporate business)Business judgment rule: a rule that makes directors and managers immune from liability when problems result from honest mistakes in judgment as long as there is a reasonable basis for their decisions and they act in good faithThey have a fiduciary duty of loyalty (: directors need to place the interests of the corporation before their own interests) to the shareholders3. Managers: appointed by the directors to manage the day-to-day business decisionsHave the same broad duties of care and loyalty as the directors doThere are also employees who may be referred to as stakeholders but generally they are not a part of the basic legal structure of entityCASE- , Inc v. GurlandGurland founded An internet-based commercial real estate listing service in Maryland in 1998This was incorporated as a Delaware corporation in 1999Gurland agreed for a group of investors to buy majority shareHe became the president and a member of the Board of DirectorsGurland’s contract said he had a year’s worth of pay incase he was fired2 years later he was removed as president, but remained on the board for another yearGurland requested severance payHe was deniedGurland suedBoard said he was not due severance pay because his job duties, title, and salary changedThey also said that as a board member, Gurland was breaching a fiduciary duty by suing the companyLower court: HELD for GurlandStoretrax appealedAFFIRMEDThere is a fiduciary duty of directors to the corporation, but sometimes there are situations when a corporate director may have an individual interest that conflicts with those of the corporation of the Board that hes onWhen conflicting issued arise, the court looks to see if the directors dealings are in “good faith and fair dealing”If a conflict arises a director can find a “safe harbor” by disclosing to the corporation the conflict and important facts to the remaining shareholders or directorsGurland had a conflict as an aggrieved former employee and his duty as the director of the corporationGurland seeking severance pay was NOT in the corporations best interest BUT Gurland notified storetrax sufficiently of imminence of lawsuitHis notification gave him the protections of “safe harbor”HELD: Gurland received severance payTerminating the corporationTwo parts:1. DissolutionVoluntaryInvolved approval of the shareholders and the board of directorsArticles of dissolution are filed with the stateInvoluntaryDissolved by the stateCan be done through bankruptcy2. Winding-up phaseAfter the affairs have been completed, the assets are liquidatedBusinesses need to pay the creditors first then the rest is distributed to the shareholdersClose corporationAllowed by 20 statesSometimes called a “statutory close corporation” to distinguish it from a “closely held corporation” NOT THE SAME THINGThere are a limited number of shareholders30-50Shares are not openly soldSo there is a limited market for themShareholder have to have an agreement that governs the affairs of the corporationThese corporations are not subject to formal rules regarding shareholder and director meetingsThis is different from regular corporationsS CorporationRegular corporations (C corporations) can elect with the IRS to be a S corporationCan only have 1 class of stockCannot have more than 100 shareholdersOnly natural persons (US citizens or legal residents) can be shareholdersOther corporations or partnerships cannot be shareholdersPrimarily used for tax considerationsDon’t pay taxesProfits and losses must be allocated to the shareholders who pay income taxesPopular among smaller businessesProfessional corporationsCreated by state lawsOwners of a professional corporation can only be professionals involved in the firm itselfEx) MD’s whose practices are tied togetherCreated so members have limited liabilityEx) Dr’s join together to reduce liability risk for malpractice of a member-DRStock isn’t usually sold to outside investorsGets special tax treatment with the IRSBenefit corporationthis is a new class of corporationit voluntarily meets high standards of purpose, accountability, and transparencyCharacteristics:The corporate purpose is to create a material positive impact on society and the environmentIs required to consider the impact of their decisions on shareholders, workers, the community, and the environmentIs required to make an annual benefit report that assesses their overall social and environmental performance against a third-party standard available to the publicThis type of corporation allows its leadership greater leeway in making decisions that may not comport with the traditional standard of maximizing financial interests of the firmLimited Liability CompaniesLimited Liability company: a business organization that is treated like a corporation for liability purposes, but like a partnership for federal tax purposesMethod of creationsState laws have procedures to create LLCFile an Articles of OrganizationThen the state will issue a certificate that will allow for the business to operate as a LLCRelationship to the partiesUsually formed by 2 or more membersThe members have a membership interest in the companyThe owners have limited liability (like a corporation)The members enter into an operating agreement (: provides rules about the operation of the company and the relationship of the members. It establishes the company’s method of management, allocation of profits/losses among members, restrictions on the transfer of membership interests, and the process to be followed in dissolving the company)This is similar to the bylaws that a corporation createsThe continuity-of-life factorAn LLC does not have a perpetual lifeA member’s membership is terminated if death, bankruptcy, retirement, resignation, and expulsion of the member occursBut if the rest of the members give their consent, the LLC can continueTerminationWinding up periodPay the creditorsDistribut the profitsCASE- In Re 1545 Ocean Avenue, LLC1545 Ocean Avenue LLC was formed for a real estate projectIt was owned 50-50 by 2 companies:Ocean SuffolkCrown royalEach company had membership certificate in 1545The operating agreement had no dissolution provisionsTwo managers were appointed to operate 1545:Crown Royal- KingOcean Suffolk- Van HoutenKing & Van Houten arguedKing announced that Crown Royal would pull outKing sued for the work to stop and for the LLC to be dissolvedTrial court granted King’s requestsOcean Suffolk (and Van Houten) appealedNY’s LLC law states that a court must examine the LLC’s operating agreementOne sided (unilateral) action of one manager was permitted in an article of 1545’s operating agreementLets each manager act independently to bind LLC in furtherance of business of the LLCThe operating agreement didn’t say anything about manager conflicts1545 can only be dissolved if it cannot further purpose the LLCLower court ruling was REVERSEDThe dissolution was NOT grantedKey Organizational featuresFactors that influence the choice of business organizationLimited liabilityControlCapital considerationsTaxationTransferability of ownership interestsMethod of creationEntity as a distinct status separate from its ownerEach owner must make his/her own choiceLimited LiabilityAllows a person to invest in a business without placing their personal wealth at riskAllows investors to be passive towards the internal management of the businessSole proprietors and general partners have unlimited personal liability for debts of the businessThe liability of a limited partner is limited to the capital that they contribute to the limited partnershipShareholders and members only risk their capital investment if the corporation failsGeneral they are not personally liable for the business debts or torts“piercing the corporate veil”When the court finds that the corporation is a shamThe owners intend to operate the business as a proprietorship or partnershipThe court can impose liabilities on the shareholders (owners) when there is fraud, undercapitalization, or failure to follow corporate formalities.The shareholders can become personally liable for all corporate liabilitiesTortsContractsDebtsCASE- KC Roofing Center v. On top Roofing, IncThe Nugent’s owned a series of roofing companies.Russell & his wife were the only shareholders, directors, and officers1977- Russell Nugent Roofing, Inc1985- On Top Roofing1987 ceased doing business1987- Nugent started new corporation- RNR, Inc1988- RLN Construction, Inc1989- Russell Nugent, IncThe business was run out of Nugent’s homeIn 1986 the Nugent’s were paying themselves over $100,000 eachThey were charging the corporation $99,290 for office rental space, which was in their own homeKC roofing was owed $45,000 for roofing supplies they sold to On Top RoofingKC asked the court to pierce the corporate veil and hold the Nugent’s personally liableDistrict: HELD for KCNugents appealedHELD: AFFIRMEDWhen a corporation is used for improper purpose, to perpetuate injustice, and avoid its legal obligations, the corporate veil is piercedNugents had control of ALL ASPECTS of the businessControl was used to commit wrong legal duty/fraudA breach of duty caused an unjust loss to the plaintiffThe Nugent’s were avoiding debts to plaintiffThey reused On Top’s obligations to creditorsThis was unfair, unjust, and inequitable of Nugent to hide behind the corporate shield and avoid legal obligations to plaintiffsTransferability of Ownership interestsThe ability of an owner in a business to sell or pass interest to othersNon traded entitiesSole proprietorshipSelling the business ends the existing proprietorship and initiates the creation of a new oneHard to pricePrice is future market value to be determinedPartnershipsIf a partner sells or assigns their interest in the partnership, the partnership continues, but the new person does not automatically become a partnerThey just receive the share of the profits that the partner would have receivedThey cannot participate in management of the partnership or gain right to any partnership information without permission of other partnersDurationRefers to the ability of a business to continue to operate in the event of a death, retirement, or other incapacity of an owner of the businessSole proprietorshipTerminates with the death or incapacity of the proprietorPartnershipThe partnership is dissolved by death, retirement, or incapacity of a partner, but this does not mean that the partnership is necessarily terminatedCorporationUnless its articles of incorporation specify a period of duration, a corporation has the potential of perpetual existenceDeath or retirement of a shareholder doesn’t bring termination to a corporationIn fact, it usually has no impact on the corporationFranchisesFranchise: whenever a franchisee is granted the right to sell goods or services by a franchisor according to a marketing plan in return of the payment of a franchise feeUniform product or services and the use of a trademark help the franchisee quickly establish themselves in the marketTypes of franchisesProduct distributorshipsFranchisee has the right to sell the product of the parent companyEx) car dealershipTrademark/trade-name licensingFranchisee has a license to market the company’s brandsEx) Coca-ColaBusiness format franchisingFranchisee follows the business model set out by the parent companyEx) McDonaldsThe Law of FranchisingFederal and state laws are intended to protect investors from crooked or unethical operationsThe FTC Franchise RuleFederal Trade Commission Franchise RuleThe Franchisor is required to give an offering circular (a detailed disclosure document) to potential franchiseesFTC v. Wealth Systems, IncFTC alleged that 3 entities violated section 5 in selling home-based internet business opportunity by misrepresented purchases will earn substantial incomeWhen violations occur, the result is usually that the activity is closed downState RegulationSome states have laws to regulate franchises as wellMany states have business opportunity disclosure filing requirementsMost states use the Uniform Franchise Offering Circular (UFOC) as the basis for reportingState agencies have the authority to investigate franchise fraud among other bad business practicesSome franchises are given extra protection by state lawsEx) auto dealers and gas stationsThe Franchise AgreementThe Franchise agreement: sets forth the rights and obligations of the franchisor and the franchiseeTerritorial rightsArea where the franchise can be set upFeesAdvertising feesUpfront feesRoyaltiesA percentage of annual sales that the franchisor will takeTerminationFranchise agreements usually are explicit about events that could cause the franchise’s terminationThe franchise could have a fixed expiration timeThe franchisor usually has the right to terminate upon the occurrence of eventsPossibly inspection problems, violation of franchisee, bankruptcyCASE- Dunkin Donuts Franchised Restaurants v. Sanlip3 individuals owned Sanlip, Inc (which was a DD franchise)they operated 2 shops in Norcross, GADD said the defendants breached franchise agreementsFailed to remodel their shopsFailed to participate in mandatory system-wide programsFailed to attend required trainingFailed to prepare immigration forms for new employeesDD said the defendant transferred significant parts of the franchise without DD’s knowledgeThis was in violation of the franchise agreementSanlip didn’t dispute the claimsSaid DD wasn’t allowing the owners a reasonable chance to sell the franchiseDD entered a settlement agreement to allow Sanlip time to find a buyerSanlip submitted a proposed sale agreementDD wouldn’t accept the buyerDD asked courts to order Sanlip to return the shop to DDSanlip counterclaimed that DD had rejected a reasonable proposal for someone else to take the shopHELD in favor of DDDD cannot “unreasonably” reject the proposed sale agreementDD said if the store will lose money, DD will reject the proposed sale agreementDD looks at the financial condition of the buyer^^this is a firmly-established policy by DD and it is REASONABLEDD has the right to terminate the agreementThe lease agreements say DD may terminate the lease if the franchise agreement for the shop is terminatedNegotiable InstrumentsNegotiable instrument: a written promise or order to pay a certain sum of moneyFunctions of negotiable instrumentsCan be a substitute for cashex) checksProvides a way for credit to be extended to debtorsEx) promissory noteTypes of negotiable instruments:3rd party instruments used instead of cash and as a credit deviceorders to pay- draftsorders to pay- checks2nd party instruments used as a credit devicepromises to pay- notespromises to pay- certificates of depositThe concept of negotiabilityOnce issued, a negotiable instrument can be transferred to another partyInstrument has been ASSIGNEDAssignee has the same rights and responsibilities as the assignorInstrument has been TRANSFERRED BY NEGOTIATIONTransferee takes the instrument free of any of the transferor’s contract obligations (responsibilities)Transfer order instruments pay:Payee endorses and delivers instrument to third partyBearer instruments: the party in possession is only required to deliver the instrument in order to transfer itThe drawer (maker) could create it “to bearer”, “to the order of bearer”, “payable to bearer”, “to cash”, “pay to the order of cash”This is risk if its lost, anyone who finds it can cash itThe transfer of a bearer instrument is by deliveryRequirements for negotiable instrumentsOnly negotiable instruments fall under the UCCIf an instrument is nonnegotiable, the common law of contracts appliesFor an item to be negotiable it must:Be writtenBe an unconditional order or promise to payBe signed by the maker/drawerBe payable on demand or at a specific timeBe made out “payable to the order” (order paper) or “to bearer” (bearer paper)State a certain sum of moneyRequirements for Holders in due courseA person in possession of a negotiable instrument may:An ordinary holderSame contract responsibilities as an assignee under a nonnegotiable instrumentHolder in due course: the transferee must:Give value for the negotiable instrumentTake the instrument without the knowledge that it is overdue or defectiveTake the instrument in good faithA transferee could be an ordinary holder who transforms into a holder in due courseEx) Pam buys a car wash franchise from Tammy. Pam writes Tammy a check. After Pam owns it she learns its going bankrupt. Pam goes to cancel her check but Tammy has already transferred it to Andy. The bank pays Andy when he presents the check and even though Tammy defrauded Pam, Andy has no obligation to repay Pam.Major Types of Negotiable instrumentsOrders to pay- 3 party instruments used instead of cash as credit devices Drawer: issues/creates the document that requests paymentDrawee: the one who makes the payment, owes payment to the drawerPayee (beneficiary): the party who receives the paymentEx) You buy furniture from a Thai companyYou are the drawer because you need to get money out to make the paymentThe bank is the drawee because they are the ones you have instructed to make the paymentThe Thai company is the payee because they are receiving a payment1. DraftsDrafts: a binding order to pay a fixed sum of moneyUnconditional written promises to payThe drawer orders the drawee to pay money to the payeeTime draft: says a specified time usually in the futureOften used to ensure goods are deliveredSight draft: draft that requires immediate payment by the drawee to the payeeSales draft: for the sale of goodsBill of exchange: when a draft guarantees payments for goods in international tradeBankers acceptance: a guarantee by the bank that a draft is legitimate and the drawee has sufficient funds to cover it2. ChecksCheck: a draft drawn on a bank and payable on demandMost common form of a draft, but unlike a draft a check must be paid on demandUsed to be the major method of paymentNow credit cards and debts have replaced them because it reduced the problems that businesses would go to cash checks and the consumer would not have sufficient funds in their accountCashiers check: a form of check where the bank is both the drawer and draweePromises to pay- 2 party instruments that are used as credit devicesMaker: person who promises to pay someonePayee: person who should receive the money3. NotesNote: a commercial paper that is a promise by the maker to pay money to the payeeUsually called a promissory noteThere are also:Collateral notes: when personal property is used as collateral to back up a loanReal estate mortgage note: when real estate is used as collateral to secure the loanInstallment note: when the maker promises to repay the note in specific installmentsBalloon note: installment payments that are often only on the interest owed4. Certificates of depositCertificates of deposit: an acknowledgement by the bank that it has received money from the customer with a promise that they will repay the money received at a date specified or, in some cases, on demandThe bank is the makerThe customer is the payeeMost large CD’s are negotiableThis allows them to be sold, used to pay debts, or used as collateralCASE- Associated home and RV sales v. Bank of BelenAssociated home and RV sales sells vehicles under the trade name “enchantment”They hired Ramos to assist with their book keepingIn 20 months, Ramos forged 211 checks payable to either herself of “to cash” equaling $283,547 that was stolen from EnchantmentEnchantment found out and notified the bank of BelenThe bank refused to cover the lossesThey said they had been sending enchantment monthly statements, including photocopies of cancelled checksEnchantment sued the bank for common law fraud and negligence and negligence under the UCCThe trial court granted summary judgment to the bankEnchantment appealedThe UCC states that usually common law principles are not upheld in an area that is covered by the UCCUCC says that a forged or altered check is not properly payableThe bank is strictly liable for the losses to its customerUCC also says that a bank may seek “safe harbor” from strict liability if it makes bank statements available to the customerThe customer can identify the forgeryThe customer must be reasonably prompt in notifying the bankWithin 30 days of receiving the statementIf this occurs the bank IS strictly liableAfter a 30 day period the bank is only liable if the customer was able to prove that the bank failed to exercise “ordinary care” in passing the forged item and the bank “substantially contributed to the lossLoss is then divided between the customer and the bank based on comparative negligenceRegardless, if a year or more has passed since the customer has received the statement, the customer cannot bring the claim under the UCC, they just must bear the costsIn this case the UCC provides scheme for liability and defensesHELDEnchantment was, however, entitled to try and prove a lack of ordinary care by the bank within 1 year of them alerting the bank of the forged checksIf the bank sent statements to Ramos, who was an employee, this is a “reasonable manner” of notification to EnchantmentHELD: summary judge reversed the UCC negligence issueSaid Enchantment did the minimum necessary to raise issues of fact that jury may view.The jury can then determine whether the bank breached its duty of ordinary care to enchantmentBOTTOM LINE: Enchantment doesn’t get their money backCreditCreditor: the person who lends the money or allows goods/services to be purchased on creditDebtor: the one who the money is lent toPrincipal: the sum of the debt that is owedEquity financing: the sale of stock in the company or the sale of negotiable instruments that are subject to securities regulationDebt financing: borrowing money according to a contractCredit policyFocuses on the following characteristics:CapacityThe debtors ability to payCapitalThe debtors financial conditionCharacterThe debtors reputationCollateralThe debtors assets to secure the debtConditionsThe economic situation affecting the debtors businessThis information can be found from consumer reports and credit ratingsCredit reports are not always accurateCredit accountsOpen account: when payment is expected within a fixed time periodInstallment account: repaying through regular (usually monthly) paymentsRevolving account: making a minimum payment and more debt can be added to the account overtimeCollections policyThis is needed for debtors who fail to make timely paymentsFirst- send a past due letter/emailNext- follow up with a telephone call or second letterFinally- a personal visit may occurAdditional action may be necessary depending whether the customer is secured or unsecuredUnsecured creditor: a party who owes money but has no security to secure the debtSecured creditor: a party who has the ability to take some of the nonpaying customers’ property to satisfy the debtIf a person in debt (debtor) proves to be insolvent (unable to pay), the creditor will receive nothingCredit with securityCollateral: debtors property that is taken away by a creditor to satisfy debtCan happen by:Agreement with the debtorOperation of the lawBy agreementDepends whether the property is real (immovable, i.e. a house) or personal (movable, i.e. a bracelet)Suretyship: a promise by a third party to pay the debt if the debtor doesn’tGuarantor: provides a guarantee of payment to the creditor if the principal debtor pails to payDefenses of suretiesSurety: the third party who promises to be responsible for the borrowers payment obligations or performance to a creditorDebt falls under contract lawSo it has the same defenses that the principal (debtor) hasImpossibilityIllegalityDuressFraudSurety’s rights against the principalExoneration: when the court orders for the principal to paySurety is entitled to this when the borrower could pay the creditor but refuses toSurety is also entitled to Subrogation: the rights of the creditor against the debtorCASE- Business Financial Services v. SilvermanWarren park partners, LTD borrowed $34.8 million from GE financialThey used this to buy land in TexasWhen the loan was made, Silverman and his partners signed a guarantee, guaranteeing full paymentWarren park defaulted and went into bankruptcyGE demanded payment from SilvermanSilverman didn’t payGE suedSilverman claimed affirmative defenses of:FraudExtortionTheftEconomic duressHours before signing the documents, GE notified Silverman of changes in the terms of the agreementThey had no time to contest because the loan was needed immediatelySilverman signed because he felt trappedSilverman claimed GS told him the new terms would not be enforcedGE moved for summary judgmentHELD summary judgment for GEGE offered evidence of both claims that defendants did not contestGE argued that even if the affirmative defenses Silverman was claiming are true, the allegations are barred by the credit agreement act (ICAA)The ICAA bars all actions of defenses by a debtor based on oral argumentsThe defendants didn’t dispute that they made “credit agreements”Defendants said that ICAA does not bar thir affirmative defensesArgue “unclean hands” of GEThe court was not swayed because oral promises y GE contradict the terms of counts I and IIThe ICAA bars the defendant’s affirmative defensesSilverman losesSecured transactionsWhen goods are sold the UCC provides that the goods may secure the debtor’s obligation to payGoverns the commercial sale of goods (but not real estate)To make a security interest more easily enforceable, the seller must create the interest, or legal right, and make sure that the interest is attached and perfected. Be sure it is:Attached (attachment)Must be:Signed by the customerSeller must have provided valueCustomer must have legal, transferrable rights in the collateralPerfected (perfection)Filed with the proper officialInterests in inventoryTangible property: goods that are movable at the time the security interest attaches Purchase money security: the security interest that the lender extending credit to a business obtainsAs collateral, equipment, inventory, raw materials (all tangible property) are used as securityA “Floating Lien” for inventoryUnder the UCC, inventory includes goods that are being held for sale as well as raw materialsInventory is constantly changingFloating lien: a security interest that is retained in collateral, even when the collateral changes in character, classification, or location. An inventory loan in which the lender receives a security interest or general claim on a company’s inventory. Under the UCC, such security is not only in inventory or accounts of the debtor at the time of the original loan, but also in inventory or accounts acquired after the loanDefault by debtorSome property may be exemptEx) homestead exemption: when personal assets have been placed as collateralHomestead law: an exemption that allows the debtor to retain the family home up to a specified amount free from creditors claimsDefault: when the buyer doesn’t repayA creditor make take the goods and keep them or they can resell them.But if the product is resold it must be done in a “commercially reasonable manner”Any excess from a sale of repossessed property over debt owed must be returned to the debtorCASE- Fordyce bank & Trust v. Bean Timerland, IncFordyce bank made loans to Bean Timberland so it could buy timber from land ownersBean would cut the timber and sell logs to P&IThe proceeds Bean’s made would repay its loansThe bank perfected its interest by filing UCC financing statements with the Secretary of State’s office in AKBean sold the timber, but failed to pay the loansBean went bankruptBank sued P&I because it had priority interest in the timber sale proceedsBank said P&I was negligent in its dealings for failing to do a lien search and did not “exercise good faith” required under the UCCTrial court held for P&ISaid they were not negligentSaid they were not required to perform a security interest search in the “ordinary course of business”The bank appealedAK UCC- a buyer in the ordinary course of business takes free of a security interest created by the buyer’s seller, even if the security interest is perfected by the bank and the buyer knows of its existenceSince P&I were buyers in “ordinary course of business” they had no duty to perform a lien search even if they knew of the bank’s security interestAFFIRMEDNot doing a lien search is standard timber industry practiceP&I were just buyers in the “ordinary course of business”Real Estate FinancingMortgage: real estate is used to secure a debt obligation evidence by a mortgageMortgager: debtorMortgagee: creditorMortgage is a lien in most statesIn the case of a default, the mortgagee has the right to foreclose a propertydeficiency judgment: if proceeds from a foreclosure are not sufficient, a separate legal action against the debtor is maintainedNon-recourse debt: a lender can seize the collateral (property) but not seek a deficiency judgment for money owned that is not covered by the sale of propertyMost mortgages are thisStatutory redemption: the period of time that the mortgagor has the right to redeem the property by paying the debtNormally within 6 months after defaultMost states have this procedureLiensLien: a security obtained by a creditor through the lawNonconsensual lien: seller may get it without a specific agreement with the customerObtained by operation of law no need for debtor’s consentThe procedures for liens are mostly determined by state statuesMechanic’s lien: the party that furnished material, labor, or series for construction or repair of building or other real property can place the lien on the property for unpaid billsPossessory lien (artisan’s lien): a party can add value to cared for personal propertyCourt-decreed liens:Attachment lien: a court ordered seizure of goods from a customer to prevent them from disposing of the goodsThis is done through a writ of attachmentJudgment lien: occurs when a creditor has successful action against a debtorWrit of execution: what the creditor asks the court for if the debtor doesn’t pay judgmentBankruptcyBankruptcy: when someone’s assets gets distributed to creditors and they reorganize their debt structurePurpose:Orderly resolution where debtors owe more than what can be paidFederal bankruptcy code has been rewrittenMost recent- The bankruptcy abuse prevention and consumer protection act of 2005Most bankruptcies involve individualA person must take credit counseling before filing bankruptcyAfter filing bankruptcy there must be a debtor education about budgeting, use of credit, etcKEY FEATURE: Fair treatment of creditorsPersonal bankruptcyCreditors do not usually get paidThe department of justice’s US trustee program approves organizations to provide mandatory credit counseling & debtor educationCREDIT COUNSELING->beforeDEBTOR EDUCATION->afterIncome and means testingIncome test determines if a person should file under chapter 7 (liquidation) or chapter 13 (reorganization of debts)People with a higher income are less likely to have their debts extinguishedThere is a test of income against expendituresThis is to see if a person is living above average for a given income levelChapter 7Most bankruptcies are voluntary, but creditors may force an involuntary proceedingVoluntary bankruptcy: filed by either an individual or business debtorInvoluntary bankruptcy: creditors file a petition with the court to force a declaration of bankruptcy and the beginning of proceedingsSome assets are exemptCarsClothingAppliancesSome home equity and pensionUpon filing, there is a freeze on actions against the debtor and their propertyA trustee is appointed to administer the debtor’s estateAssets are liquidated and the proceeds are distributed to creditorsAfter discharge, the debtor is not liable for debts covered by proceedingsLiquidation and fair distribution of debtor’s non-exempt assets to creditorsChapter 13Available only to individualsOnly available as a voluntary optionSole proprietorship owned by an individual may file under chapter 13Debtor files plan for payment of creditors over time (usually 4 years)Debtor keeps property and shares administration of the bankrupt estate with court-appointed trusteeTrustee makes sure that the payments are made and that creditors don’t try to get around their fixed payment scheduleCourt protected debt repayment planThe confirmation plan that was approved makes these paymentsThe debts of those bankrupt are not dischargedLong-term secured debt is treated differentlyEx) house mortgageIf this plan fails than possibly shift to chapter 7 for hardship dischargeThe Bankruptcy proceedingPriority classes of creditorsCertain creditors take priority over others in receiving shares of the debtors assets to pay for debts owed to themSecured creditorsCosts of preserving and administering the debtor’s estateUnpaid wage claimsCertain claims of farmers and fishermenRefund of security depositsAlimony and child supportTaxesGeneral (unsecured) creditors who can file a proof of claimAll creditors of a particular class must be paid before the next lowest priority creditors can be paid anythingChapter 11Allowing a business to keep operating without liquidation of assets“prepackaged” bankruptcy filingsdebtor & creditors settle issues before the debtor filesthe court then approvesreorganizationsthis filing automatically stays further financial action by the creditorsdebtor in possession: the debtor acts as the trustee to run business for benefit of all partiesthe creditors are satisfied by class in order of priority of claims ................
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