Business Law: Text & Exercises (MindTap Course List)

SOLUTION MANUAL
Business Law: Text & Exercises (MindTap Course List)
10th Edition by Roger LeRoy Miller, William E. Hollowell
Verified Chapters 1 - 43, Complete

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 Business Law: Text & Exercises (MindTap Course List)

Chapter 1

Table of Contents
Purpose and Perspective of the Chapter ....................................................................................................................... 2
Cengage Supplements....................................................................................................................................................... 2
List of Student Downloads ............................................................................................................................................ 2
Chapter Objectives ............................................................................................................................................................ 2
Key Terms ............................................................................................................................................................................. 2
What's New in This Chapter ............................................................................................................................................. 3
Chapter Outline .................................................................................................................................................................. 4
Discussion Questions ........................................................................................................................................................... 8
Additional Resources ....................................................................................................................................................... 10
Cengage Video Resources ........................................................................................................................................ 10
Appendix........................................................................................................................................................................... 10
Generic Rubrics............................................................................................................................................................ 10
Standard Writing Rubric ........................................................................................................................................... 10
Standard Discussion Rubric ........................................................................................................................................ 12

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the relationship between law and ethics. The chapter presents
issues involved to determining the ethical responsibilities of businesses and provides students a
framework for analyzing and making ethical decisions.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

1. Discuss how business can discourage unethical behavior

2. Explain the relationship between law and ethics

3. Compare duty-based ethics and utilitarian ethics

4. Identify ethical problems in the global context

Key Terms
business ethics: Ethics in a business context; a consensus of what constitutes right or wrong behavior in the
world of business and the application of moral principles to situations that arise in a business setting.
categorical imperative: A concept developed by the philosopher Immanuel Kant as an ethicalguideline
for behavior. In deciding whether an action is right or wrong, or desirable or undesirable, a person
should evaluate the action in terms of what would happen if everybody else in the same situation, or
category, acted the same way.
corporate social responsibility (CSR): The concept that corporations can and should act ethically
and be accountable to society for their actions.
cost-benefit analysis: A decision-making technique that involves weighing the costs of a given action
against the benefits of the action.
duty-based ethics: An ethical philosophy rooted in the idea that every person has certain duties to others,
including both humans and the planet. Those duties may be derived from religious principles or from other
philosophical reasoning.
ethical reasoning: A reasoning process in which an individual links his or her moral convictions or ethical
standards to the particular situation at hand.

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ethics: Moral principles and values applied to social behavior.

moral minimum: The minimum degree of ethical behavior expected of a business firm, which is usually
defined as compliance with the law.
outcome-based ethics: An ethical philosophy that focuses on the impacts of a decision on society or
on key stakeholders.
outsourcing: The practice by which a company hires an outside firm or individual to perform work
rather than hiring employees.
principle of rights: The principle that human beings have certain fundamental rights (to life, freedom,
and the pursuit of happiness, for example). A key factor in determining whether a business decision is
ethical under this theory is how that decision affects the rights of others, such as employees, consumers,
suppliers, and the community.
stakeholders: Groups, other than the company’s shareholders, that are affected by corporate decisions.
Stakeholders include employees, customers, creditors, suppliers, and the community in which the
corporation operates.
triple bottom line: The idea that investors and others should consider not only corporate
profits, but also the corporation’s impact on people and on the planet in assessing the firm. (The bottom line
is people, planet, and profits.)
utilitarianism: An approach to ethical reasoning in which ethically correct behavior is related toan
evaluation of the consequences of a given action on those who will be affected by it. In
utilitarian reasoning, a ―good‖ decision is one that results in the greatest good for the greatest number of
people affected by the decision.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 New chapter title and chapter-opening introduction scenario discussing recent
technology scandal involving finger-prick blood test kits
 New chapter organization and subheads throughout (including new headings for
―outsourcing‖ and ―corruption‖)
 New section on Making Ethical Business Decisions and new materials on Systematic
Approach: IDDR (―I desire to do right‖) that will be used throughout the text to analyze ethics,
including in all of the new ―A Question of Ethics‖ problems in the remaining chapters.
o New ―Application of the IDDR Approach‖ subsection with step-by-step discussionand
sample scenario.
 1 New Exhibit 3–1: An Analysis of Ethical Approaches to the Sample
Dilemma (for new IDDR Approach)
o 1 New Term & Concept
 outsourcing
 1 New Ethics Today feature—

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o Applying the IDDR Framework

 Retained and Updated Digital Update feature—
o Should Employees Have a Right of Disconnecting? (Discussing overtime rules and digital
connectivity of employees through smartphones and other devices.)
 1 New Case:
o Case 3.1: Al-Dabagh v. Case Western Reserve University (2015)—on a university’s
discharge of a student for failure to meet professionalism standards because he sexually
harassed other students, was late for classes, and convicted of a DUI
o New Case 3.2: Watson Laboratories, Inc. v. State of Mississippi (2018)—on short-term
profit maximization when drug manufacturer lied to Medicaid to obtain overpayment
for its drugs.
 5 New Case in Points
o 2014 case on the moral minimum
o 2017 case on Volkswagen diesel-gate
o 2015 Morgan Stanley case on sales contests
o 2015 case on Gandhi furniture on unethical conduct with customer
o 2015 case on defective Takata Corp. airbags in cars
 7 New Examples
o On Fraud Reduction and Data Analytics Act.
o On Dodd-Frank Wall Street Reform and Consumer Protection Act.
o On Google’s code of conduct.
o On Costco’s Code of Ethics.
o On Google’s popular corporation social responsibility policies
o On a garment worker who claimed that Nike abused workers in Thai factory by
withholding wages and forcing them to work 16 hours a day.
o On Chinese factory supplier making Apples products violated environment
standards.
 Reworked material on Corporate Social Responsibility, including expanded discussion on the social
and corporate aspects of CSR.
 1 New Business Scenario
 3 New Case Problems (based on 2012 and 2017 cases)
 1 New ―A Question of Ethics‖ applying all-new IDDR Approach (based on 2016 case)
 1 New Time-Limited Group Assignment on corporate social responsibility
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Chapter Outline
I. The Importance of Business Ethics

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a. The Relationship of Law and Ethics – The law does not codify all ethical
requirements.
i. Ethics can be subjective and changeable. In the law, too, there are many
―gray areas‖ in which it is difficult to predict how a court will rule. A company is
more likely to succeed in a legal dispute if it can show that itacted ethically,
responsibly, and in good faith.
II. Setting the Right Ethical Tone
a. Ethical Leadership: Having ethical leadership is likely to lead to employeesacting
ethically themselves.
b. Ethical Codes of Conduct: one of the most effective ways of setting the tone ofethical
behavior is to create an ethical code of conduct.
c. Corporate Compliance Programs: in large corporations other components of an ethics
program include an ethics committee, ethical training programs, and internal audits.
d. Conflicts and Trade-offs: The duties of many groups (shareholders and
employees) may conflict causing management to face ethical issues.
III. Sarbanes-Oxley Act
a. Public Company Accounting Oversight Board-
i. Oversees the audit of companies, or issuers, whose securities are sold to public
investors in order to protect the interest of investors and the public
ii. To register public accounting firms that prepare audit reports for issuers
b. Enforcement and Penalties-
i. Board can inspect registered public accounting firms
ii. Investigate firms that violate the act
iii. Discipline those firms by imposing sanctions ranging from temporary or
permanent suspensions to civil penalties up to $15 million.
iv. The Act also prohibits falsifying or destroying records with the intent to obstruct or
influence a federal investigation- violations may result in a fine and imprisonment
for up to 20 years
IV. Business Ethics and the Law
a. Moral minimum- minimum acceptable standard for ethical business behavior (simply
obeying the law).
b. Laws Regulating Business- most business firms are subject to extensive government
regulation- from hiring and firing personnel to selling products in the marketplace.
c. Gray Areas in the Law- while legality of a decision is usually relatively clear, the ethical
position is somewhat grayer. Business should be prepared to defend their actions.
V. Approaches to Ethical Reasoning
a. Duty-Based Ethics - Duty-based ethics are derived from religious authorities or
philosophical reasoning. These standards are focused on concepts of right and wrong, of
duties owed and rights to be protected.

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i. Religious Ethical Principles - Religious standards dictate how one shouldtreat

others (―Do unto others as you would have them do unto you‖) and are generally
absolute. For businesses, religious principles can—
(1) Unify employees and increase employee motivation.
(2) Alienate those with different religious backgrounds or social or
political beliefs.
(3) Cause negative publicity and even protests or boycotts.
ii. The Principle of Rights - According to the principle that persons have rights (to
life and liberty, for example), a key factor in determining whether a business
decision is ethical is how that decision affects the rights of others, including
employees, consumers, suppliers, the community, and society.
(1) Conflicting Rights- Which takes priority?
(2) Resolving Conflicts- Should whichever right is stronger take
priority?
iii. Kantian Ethical Principles - Immanuel Kant believed that people should be
respected because they are qualitatively different from other physical objects.
(1) People are not a means to an end - Treating human beings as a means
to an end (profit, for example) denies their basic humanity. Empowered
employees share solutions and are more productive.
(2) Categorical imperative- Kant’s categorical imperative is that individuals
should evaluate their actions in light of the consequences that would
follow if everyone acted the same way.
b. Outcome-Based Ethics - Utilitarianism focuses on the consequences of an action, not
its nature or a set of moral values or religious beliefs.
i. Cost-Benefit Analysis - An action is morally correct, or ―right,‖ when it
produces the greatest amount of good for the greatest number of individuals.
Applying this theory requires—
(1) A determination of who will be affected.
(2) A cost-benefit analysis—an assessment of the negative and
positive effects on those affected.
(3) A choice among alternatives that will produce the maximum
societal utility (the greatest positive benefits for the greatest
number of individuals).
ii. Problems with the Utilitarian Approach - An act that produces the greatest
good for the most may not seem to be the most ethical.
c. Poll Activity: 1 minute total. Asks students about their own ethical philosophy.
d. Corporate Social Responsibility - Corporate social responsibility (CSR) involves
incorporating a commitment to good citizenship, with a commitment to making ethical
decisions, improving society and minimizing environmental impact.
i. The Corporate Aspects of CSR- Any socially responsible activity—relevant,
significant, and related to a corporation’s business—can benefit the firm

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in terms of increasing goodwill and sales, decreasing operating costs, andmore

impressive, committed, and long-term employees.
ii. The Social Aspects of CSR- Corporations can actively promote social goals and
move toward solving social problems. Some companies publish annual corporate
social responsibility—or sustainability, or citizenship— reports to highlight their
activities.
iii. Stakeholders and CSR- Stakeholders include employees, customers, creditors,
suppliers, advocacy groups, and the community in which a business operates. It is
sometimes said that duties to these groups shouldbe weighed against the duty to
a firm’s owners.
e. Think Pair Share Activity (2) PPT Slide: 10 minute(s) total. Have students break into pairs or
small groups and consider the following: Alexander, the CEO of Westwind Baby Furnishings,
received a report from one of his quality inspectors about a possible defect in the Baby
Sleeptime Crib Westwind had just started to market. The report said the bed was not safe for
older babies, because there was a chance it would collapse if the baby climbed up onto the
railing. Westwind had manufactured 20,000 Baby Sleeptime Cribs and would lose a great
deal of money ifit could not market the cribs.
Who are all the stakeholders in the decision whether or not to recall the cribs? (Answer: The
students should identify at minimum: customers, shareholders (if any) or owners, employees of
the company such as officers, quality inspectors, etc.
Students may also identify government agencies such as Consumer Protection Agencies
(state or federal).
VI. Social Media
a. The use of social media in hiring decisions- Some employers review job
candidates’ Facebook pages, blogs, and tweets. Some may reject candidates who do
not participate in social media. Judging a job candidate based on what she or he does
outside of the workplace can be seen as unethical
b. The use of social media to discuss work-related issues
i. The responsibility of employers- Companies that fire employees for
criticizing other employees or managers in social media outlets may
violate federal labor law.
ii. The responsibility of employees- Is it ethical for an employee to post
negatively about his or her employer in social media?

V. Business Ethics on a Global Level

a. World Religions, Cultural Norms, and Ethics – Global businesses need to be conscious
of the impact of different religious principles and cultural norms on ethics. For instance, in
certain countries the consumption of alcohol is forbidden for religious reasons. It would be
considered unethical for a U.S. business to produce alcohol in those countries and employ
local workers to assist in alcohol production.
b. Monitoring the Employment Practices of Foreign Suppliers - Concernsinclude the
rights and the treatment of foreign workers who make goods

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imported and sold in the United States by U.S. businesses. U.S. firms usually refuse to
deal with certain suppliers or arrange to monitor their workplaces to make sure that
the workers are not being mistreated.
a. Wages and Working Conditions - Allegations that a U.S. business allows its
foreign suppliers to engage in unethical practices with employees and working
environments hurt that firm’s reputation and goodwill.
b. Corporate Watch Groups - Today, few companies can assume that their actions
overseas and in other nations will go unnoticed by ―corporate
watchdogs‖ that uncover and then publicize unethical corporate behavior.Thus,
U.S. businesses take steps to avoid such publicity.
c. Avoiding Corruption - Under the Foreign Corrupt Practices Act, U.S. businesses are
prohibited from making payments to (bribing) foreign official to secure favorable
business contracts. Corruption is widespread in some nations, however,and it can be the
norm to make so-called side payments in private business in certain locations. Companies
must take care when doing business in countries where corruption is common.
d. Discussion Activity: 5-10 minutes total.
As a class, discuss the following: Corporate Officers and Directors for a large company are
aware that the company is producing harmful discharges into a waterway, in violation of
environmental laws. They have calculated that paying themaximum daily fine for the violation
is more economical that the cost it would take to install equipment needed to remedy the
pollution plus the production downtime and lost profits.
What are the legal obligations and ethical obligations of these parties? (Answer: Students
should be able to identify responsibilities to various stakeholders and determine whether profit
maximization should be the ultimate right to be protectedover other ethical obligations. A
follow up question for the class may be whether laws like this (which allow a wrongdoer to
continue to do wrong so long as they have the financial means to cover their fines, should be
permitted?)

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. In negotiating a business deal, is ―strategic misrepresentation‖ permissible? From a duty-
based ethics viewpoint, in an absolute sense, it would unethical not to disclose information on which the
negotiator knows the other side might hinge its decisions. In contrast, a negotiator owes an ethical duty to
negotiate in the best interests of whomever he or she is negotiating for. When one ethical duty conflicts
with another, a decision has to be made as to which duty is more fundamental. Frequently, questions faced
by businesspersons do not have clear-cut answers, but involve choices between arguably equally good
alternatives. A thoughtful

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consideration of an ethical issue and the choices for resolving it, the decision to act on one of those choices,
and a careful review of its results can lead to more effective—and profitable— practices by any
businessperson.
It has been suggested that business is a game and deception is an important element of negotiation,
just as poker is a game in which bluffing plays an important part. The better an individual is at deception,
the more successful he or she will be at negotiation. Those who do not anticipate deceit are fooling
themselves. One of the problems with this suggestion is that there is no stated point at which deception is no
longer acceptable. By comparison, in poker, it is acceptable to attempt to confuse other players as to the
cards you have been dealt but it is not acceptable to bribe the dealer to deal you better cards. Also, if
deception were widely practiced, the expense of protecting against it would increase for business and
society.

2. How does a corporation’s investment in a political or social agenda affect its duty to its
shareholders? People invest in business to make a profit, and a company’s shareholders may have such a
variety of political and social views that the company’s pursuing a particular political or social goal may
be divisive. Diverting corporate funds reduces the amount available for dividend payments. Diverting
other resources reduces what is available to produce goods and services for sale. Investors may also be
less likely to invest in a company that engages in behavior seen as unethical out of fear of consumer
hostility toward the company.

3. To whom might a corporation owe a duty? A corporation may owe a duty to its shareholders, its
employees and their families, its customers, and society as a whole. What must a corporation do if it
finds itself subject to conflicting duties? There is no law that says which of these duties comes first or how
much weight should be given to each in the balance. When there is no conflict between duties, the question
of how best to fulfill a single duty involves trade-offs. When these duties overlap, a balance must be
struck. Determining which duty takes precedence involves difficult trade-offs.

4. Because business controls so much wealth and power, what duty does it arguably have to
society? It has been argued that business owes a duty to society to use its wealth and power in beneficial
ways—promoting human rights, striving for equal treatment of minorities in the workplace, acting to
safeguard the environment, and eschewing profits from activities that society deems unethical. Generally,
business has been responsive to social needs, donating to programs that benefit society.
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Ethical Reasoning
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not

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ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includesan
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not
related and consistent. conclusions are mostly logically related and
10 points logically related and consistent.
consistent. 0 points
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023; Chapter 03: Courts
and Our Legal System

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 14
Cengage Supplements.................................................................................................................................................... 14
List of Student Downloads ......................................................................................................................................... 14
Chapter Objectives ......................................................................................................................................................... 14
Key Terms .......................................................................................................................................................................... 14
What's New in This Chapter .......................................................................................................................................... 16
Chapter Outline ............................................................................................................................................................... 16
Discussion Questions ........................................................................................................................................................ 22
Additional Activities and Assignments ......................................................................................................................... 22
Additional Resources ....................................................................................................................................................... 24
Cengage Video Resources ........................................................................................................................................ 24

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Appendix........................................................................................................................................................................... 24
Generic Rubrics............................................................................................................................................................ 24
Standard Writing Rubric ........................................................................................................................................... 24
Standard Discussion Rubric ........................................................................................................................................ 25

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Purpose and Perspective of the Chapter

The purpose of this chapter is to provide students with the structural framework for the United States
Government including examining the powers given to each branch via the U.S. Constitution. This chapter
further explores alternative dispute resolution.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:
5. Outline the organization of a state court system
6. Define federal court jurisdiction
7. Discuss trial procedure
8. Summarize the steps in a lawsuit
9. Identify methods for resolving disputes outside of litigation.

Key Terms
alternative dispute resolution (ADR): The resolution of disputes in ways other than those involved in the
traditional judicial process. Negotiation, mediation, and arbitration are forms of ADR.
arbitration: The settling of a dispute by submitting it to a disinterested third party (other than a court), who
renders a decision. The decision may or may not be legally binding.
concurrent jurisdiction: Jurisdiction that exists when two different courts have the power to hear a
case. For example, some cases can be heard in either a federal or a state court. exclusive
jurisdiction: Jurisdiction that exists when a case can be heard only in a particular court or type of
court, such as a federal court or a state court.
in personam jurisdiction: Court jurisdiction over the ―person‖ involved in a legal action; personal
jurisdiction.
in rem jurisdiction: Court jurisdiction over a defendant’s property.
judicial review: The process by which courts decide on the constitutionality of legislative
enactments and actions of the executive branch.

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jurisdiction: The authority of a court to hear a case and decide a specific action.
long arm statute: A state statute that permits a state to obtain personal jurisdiction over
nonresident defendants. A defendant must have ―minimum contacts‖ with that state for the statute to
apply.
mediation: A method of settling disputes outside of court by using the services of a neutral third party,
called a mediator. The mediator acts as a communicating agent between the parties and suggests ways in
which the parties can resolve their dispute.
negotiation: In regard to dispute settlement, a process in which parties attempt to settle their dispute
without going to court, with or without attorneys to represent them. In regard to negotiable instruments,
the transfer of an instrument in such a way that the transferee (the person to whom the instrument is
transferred) becomes a holder.
online dispute resolution (ODR): The resolution of disputes with the assistance of
organizations that offer dispute- resolution services via the Internet.
standing to sue: The requirement that an individual must have a sufficient stake in a controversy before
he or she can bring a lawsuit. The plaintiff must demonstrate that he or she has been either injured or
threatened with injury.
answer: Procedurally, a defendant’s response to the plaintiff’s complaint.
closing argument: An argument made at a trial after the plaintiff and defendant have rested their
cases. Closing arguments are made prior to the jury charges.
complaint: The pleading made by a plaintiff alleging wrong- doing on the part of the
defendant; the document that, when filed with a court, initiates a lawsuit.
cross-examination: The questioning of an opposing witness during a trial.
deposition: The testimony of a party to a lawsuit or of a wit- ness taken under oath before atrial.
direct examination: The examination of a witness by the attorney who calls the witness to the stand at
trial to testify on behalf of the attorney’s client.
discovery: A phase in the litigation process during which the opposing parties may obtain
information from each other and from third parties prior to trial.
e-e vidence: A type of evidence that consists of computer- generated or electronically recorded
information, including e-mail, voice mail, spreadsheets, word-processing documents, and otherdata.
Interrogatories: A series of written questions for which written answers are prepared and then signed
under oath by a party to a lawsuit, usually with the assistance of the party’s attorney.
Motion: A procedural request or application presented by an attorney to the court on behalf of a client.
motion for a directed verdict: In a state court, a party’s request that the judge enter a judgment in her or
his favor before the case is submitted to a jury because the other party has not presented sufficient
evidence to support the claim. The federal courts refer to this request as a motion for judgment as a matter
of law.
motion for a new trial: A motion asserting that the trial was so fundamentally flawed (because of error,
newly discovered evidence, prejudice, or other reason) that a new trial is necessary to prevent a
miscarriage of justice.

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motion for summary judgment: A motion requesting the court to enter a judgment without proceeding
to trial. The motion can be based on evidence outside the pleadings and will be granted only if no facts
are in dispute.
motion to dismiss: A pleading in which a defendant asserts that the plaintiff’s claim fails to state a
cause of action (that is, has no basis in law) or that there are other grounds on which asuit should be
dismissed.
opening statement: A statement made to the jury at the beginning of a trial by a party’s attorney,
prior to the presentation of evidence. The attorney briefly outlines the evidence that will be offered and
the legal theory that will be pursued.
pleadings: Formal statements made by the plaintiff and the defendant in a lawsuit that detail the facts,
allegations, and defenses involved in the litigation; the complaint and answer are part of the pleadings.
pretrial motion: A written or oral application to a court for a ruling or order, made before trial.
summons: A document informing a defendant that a legal action has been commenced against him or her
and that the defendant must appear in court on a certain date to answer the
plaintiff’s complaint. The document is delivered by a sheriff or any other person so authorized.
verdict: A formal decision made by a jury.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 New chapter-opening scenario to introduce why anyone in business should be aware of lawsuits,
courts, and alternative dispute resolution.
 3 New Case in Points
o 2014 case on a railroad’s minimum contact requirement in a state
o 2016 case on the ―sliding scale‖ standard
o 2016 case on the Federal Arbitration Act
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on arbitration (based on2018
case)
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Chapter Outline
I. Basic Judicial Requirements
a. Jurisdiction - Jurisdiction is the power to hear and decide a case. Before a court can
hear a case, it must have jurisdiction over both the person against whom the suit is brought
or the property involved in the suit and the subject matter of the case.
i. Over Persons or Property – Power over the person is referred to as in
personam jurisdiction; power over property is referred to as in rem jurisdiction.

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1. Long Arm Statutes and Minimum Contacts- Generally, a court’s power is

limited to the territorial boundaries of the state in whichit is located, but
in some cases, a state’s long arm statute gives a court jurisdiction over a
nonresident.
2. Corporate Contacts - A corporation is subject to the jurisdiction ofthe
courts in any state in which it is incorporated, in which it has its main
office, or in which it does business.
ii. Jurisdiction in Cyberspace- The Sliding-Scale Standard - One approachis the
sliding scale, according to which—
1. Doing substantial business online is a sufficient basis for
jurisdiction.
2. Some Internet interactivity may support jurisdiction.
3. A passive ad is not enough on which to base jurisdiction.

II. The State Court System

a. Trial Courts
i. General Jurisdiction - Trial courts with general jurisdiction include county, district,
and superior courts.
ii. Limited Jurisdiction - Trial courts with limited jurisdiction include local municipal
courts (which handle mainly traffic cases), small claims courts, and domestic
relations courts.
iii. Appellate, or Reviewing Courts - In most states, after a case is tried, there is a
right to at least one appeal. Few cases are retried on appeal. An appellate
court examines the record of a case, looking at questions of law and procedure
for errors by the court below. In about half of the states, there is an intermediate
level of appellate courts.
iv. Highest State Courts- In all states, there is a higher court, usually called the state
supreme court. The decisions of this highest court on all questions of state law are
final. If a federal constitutional issue is involved in the state supreme court’s
decision, the decision may be appealed to the United States Supreme Court.
b. The Federal Court System - The federal court system is also three-tiered with a
level of trial courts and two levels of appellate courts, including the United States
Supreme Court.
i. U.S. District Courts- Federal trial courts of general jurisdiction are district courts.
Federal trial courts of limited jurisdiction include U.S. Tax Courts and U.S.
Bankruptcy Courts. Federal district courts have original jurisdiction in federal
matters. Some administrative agencies with judicial power also have original
jurisdiction.
ii. U.S. Courts of Appeal - U.S. courts of appeal, or circuit courts of appeal, hear
appeals from the decisions of the district courts located within their respective
circuits. The decision of a court of appeals is binding on federal courts only in that
circuit.

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iii. The United States Supreme Court- The court at the top of the three federal tiers
is the United States Supreme Court to which further appeal isnot mandatory but
may be possible.
i. Appeals to the Supreme Court- A party may ask the Court to issue a
writ of certiorari, but the Court may deny the petition. A denial is not a
decision on the merits of the case. Most petitions are denied.
ii. Petitions Granted by the Court- Typically, the Court grants
petitions only in cases that at least four of the justices view as
involving important constitutional questions.
iii. Knowledge Check: 1-5 minutes total. Tests students’ recollectionof how
many circuits into which the federal appeals system is divided. (Answer:
13)
c. Federal Court Jurisdiction
i. Federal Questions - A suit can be brought in a federal court whenever it
involves a question arising under the Constitution, a treaty, or a federal law
ii. Diversity of Citizenship - A suit can be brought in a federal court
whenever the amount in controversy is more than $75,000 and the suit
involves—
 Citizens of different states
 A foreign country and an American citizen, or
 A foreign citizen and an American citizen. For diversity-of-
citizenship purposes, a corporation is a citizen of the state in
which it is incorporated and of the state in which it has its
principal place of business.
iii. Exclusive versus Concurrent Jurisdiction - When a case can be heard only in
federal courts or only in state courts, exclusive jurisdiction exists.
 Federal courts have exclusive jurisdiction in—
i. Cases involving federal crimes, bankruptcy, patents,
copyrights, and trademarks.
ii. Suits against the United States.
iii. Some areas of admiralty law.
 States have exclusive jurisdiction in—
i. Divorces.
ii. Adoptions
 When both state and federal courts have the power to hear a
case, concurrent jurisdiction exists. In such a case, factors for
choosing one forum over another include—
i. Availability of different remedies.
ii. Distance to the courthouse.
iii. Experience or reputation of the judge.
iv. The court’s bias for or against the law, the parties, or
the facts in the case.

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III. The State Court Process

a. Standing to Sue - Before a person can bring a lawsuit before a court, the party
must have standing, which has three elements—
i. Harm—The party must have suffered a harm, or been threatened a harm,
by the action about which he or she is complaining. The controversy at issue
must also be real and substantial, as opposed tohypothetical or academic.
ii. Causal connection—There must be a causal connection between the injury
and the conduct complained of.
iii. Likelihood of remedy—It must be likely, as opposed to speculative, that a
favorable court decision will remedy, or make up for, the injury
b. The Pleadings - In a civil case, the pleadings inform each party of the other’s claims
and specify the issues. The pleadings consist of a complaint and an answer.
i. The Plaintiff’s Complaint- The complaint (or petition or declaration) is filed with
the clerk of the trial court. It contains a statement alleging jurisdictional facts; a
statement of facts entitling the complainant to relief;and a statement asking for a
specific remedy.
1. The Defendant’s Response- The defendant’s answer admits ordenies
the allegations in the complaint.
ii. Summons- notifies the defendant that they are required to prepare an
answer to the complaint
iii. Motion to Dismiss- A defendant’s motion to dismiss may be based on any of
several grounds. A motion to dismiss for failure to state a claim onwhich relief
can be granted alleges that according to the law, even if the facts in the
complaint are true, the defendant is not liable.
c. Pretrial Motions
i. Motion for Summary Judgment- Like a motion for judgment on the pleadings,
after the pleadings are filed, if no facts are in dispute and only questions of law
are at issue, either party can file a motion for summary judgment. A trial might
be avoided if no facts are in dispute and only questions of law are at issue. In
ruling on a motion for summary judgment, a court can consider evidence outside
the pleadings.
d. Discovery- To prepare for trial, parties obtain information from each other and from
witnesses through the process of discovery. These devices save time by preserving
evidence, narrowing the issues, preventing surprises at trial, and avoiding a trial
altogether in some cases.
i. Discovery Rules- Generally, discovery is allowed regarding any
information that is relevant to any party’s claim or defense. Of course, parties
are protected from undue harassment, and privileged or confidential
information is protected from disclosure.
ii. Depositions- A deposition is a record of the answers of a party or witness to
questions asked by the attorneys of both plaintiff and defendant.

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iii. Interrogatories- A deposition is a record of the answers of a party or witness

to questions asked by the attorneys of both plaintiff and defendant.
Interrogatories are written questions asked of a party, who responds in
writing.
iv. Requests for Admissions- A request for an admission is a request that a party
admit the truth of a matter.
v. Requests for Documents, Objects, and Entry upon Land- A request for
documents, objects, and entry on land is a request to inspect these items.
vi. Requests for Examination- A request for a physical or mental examination will
be granted only if the court decides that the need for the information outweighs
the examinee’s right of privacy.
vii. Electronic Discovery- Information stored electronically, such as e-mailand
other computer data, can be the object of a discovery request. This may include
data that was not intentionally saved by a user, such as concealed notes and
earlier versions.
1. E-Discovery Procedures- The Federal Rules of Civil Procedure deal
specifically with the preservation, retrieval, and production of electronic
data.
2. Advantages and Disadvantages- E-mail can provide useful, and
sometimes damaging, information. But preserving, providing, and
reviewing e-evidence can be time-consuming and expensive.
e. The Trial
iv. Procedures:
i. Opening statements
ii. Direct examination
iii. Cross examination
iv. Closing statements
v. Jury instructions and verdict
v. Motions at Trial
i. Motion for a directed verdict
ii. Motion to dismiss
iii. Motion for summary judgment
vi. Posttrial Motions
i. Motion for a new trial based on legal misstep such as jury
misconduct, irregularity in court proceedings, or jury finding against
the weight of the evidence.
f. The Appeal
a. Filing the Appeal - To appeal, the appellant files the record on appeal—the
pleadings, a trial transcript, copies of the exhibits, the judge’s rulings, arguments of
counsel, jury instructions, the verdict, posttrial motions, and the judgment order from
the case below. The appellant files a brief, which contains statements of facts, issues,
applicable law, and grounds for reversal. The appellee files an answering brief.

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b. Appellate Review The court reviews these records, the attorneys present oral
arguments, and the court can—
 Affirm the lower court’s judgment.
 Reverse the judgment.
 Remand the case to the lower court for proceedings consistent with the
appellate opinion.
 Affirm or reverse the lower court’s judgment in part.
 Modify the lower court’s decision.
c. Higher Appellate Courts- If this court is an intermediate appellate court, the losing
party can file a petition for leave to appeal to a higher court. If the petition is
granted, the appeal process is repeated.
IV. Alternative Dispute Resolution - The advantage of alternative dispute resolution (ADR) is its
flexibility. Normally, the parties themselves can control how the dispute will be settled, what
procedures will be used, and whether the decision reached (either by themselves or by a
neutral third party) will be legally binding or nonbinding. Approximately 95 percent of cases
are settled before trial through some form of ADR.
b. Negotiation - One form of ADR is negotiation, in which the parties attempt to settle
their dispute informally, with or without attorneys. They try to reach a resolution
without the involvement of a third party.
c. Mediation - In mediation, the parties attempt to negotiate an agreement with the
assistance of a neutral third party, a mediator. Mediation is essentially a form of
―assisted negotiation.‖ The mediator takes an active role in resolving the dispute but does
not make a decision on the matter being disputed.
d. Arbitration - A more formal method of ADR is arbitration, in which a neutral third party
or a panel of experts hears a dispute and renders a decision. The decision can be
legally binding. Formal arbitration resembles a trial. The partiesmay appeal, but a
court’s review of an arbitration proceeding is more restricted than a review of a lower
court’s proceeding.
a. The Arbitrator’s Decision - An arbitrator’s award will be set aside only if
i. The arbitrator’s conduct or ―bad faith‖ substantially prejudiced therights
of a party
ii. The award violates public policy.
iii. The arbitrator exceeded his or her powers
b. Arbitration Clauses - Virtually any commercial matter can be submitted to
arbitration. Often, parties include an arbitration clause in a contract. Parties can
also agree to arbitrate a dispute after it arises.
c. Arbitration Statutes – Most states have statutes (often based on the Uniform
Arbitration Act of 1955) under which arbitration clauses are enforced, and some
state statutes compel arbitration of certain types of disputes. At the federal level,
the Federal Arbitration Act (FAA), enacted in 1925, enforces arbitration clauses in
contracts involving maritime activity and interstate commerce.

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d. The Issues of Arbitrability- A court can consider whether the parties to an

arbitration clause agreed to submit a particular dispute to arbitration. The court
may also consider whether the rules and procedures that the parties agreed to
are fair.
e. Mandatory Arbitration in the Employment Context - Generally, mandatory
arbitration clauses in employment contracts are enforceable.
e. Online Dispute Resolution- There are websites that offer online dispute resolution (ODR).
ODR may be best for resolving small to medium business claims, which may not be worth
the expense of litigation or traditional ADR. Mostonline forums do not automatically
apply the law of any jurisdiction. Any party may appeal a dispute to a court at any time.
f. Knowledge Check: 1-5 minutes total. Tests a student’s understanding of the roleof a
mediator. (Answer: Assist parties in a dispute in resolving their differences out of court.)

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Why might a defendant prefer to be sued in one state rather than in another? The law, and the
circumstances in which the law is applied, vary from state to state. These factors might favor a particular
defendant’s position in one state over another.

2. When can a court exercise jurisdiction over a party whose only connection to the jurisdiction is via
the Internet? One way to phrase the issue is when, under a set of circumstances, there are sufficient
minimum contacts to give a court jurisdiction over a remote party. If the only contact is an ad on the Web
originating from a remote location, the outcome to date has generally been that a court cannot exercise
jurisdiction. Doing considerable business online, however, generally supports jurisdiction. The ―hard‖ cases
are those in which the contact is more than an ad but less than a lot of activity.

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Additional Activities and Assignments

1. Business Case: Courts and Alternative Dispute Resolution
a. Students can find the full fact pattern for the scenario in their MindTap.

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b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. If a company develops an app for sale, should they be subject to the
jurisdiction of every court across the country? Why or Why not?
ii. If the small print at the bottom of the first screen stated, ―By continuing to use this
app, user agrees to abide by the terms of service provided at
www.CD8765lkapp.com‖ (a website not easily found through an internetsearch
and which contains nothing other than the terms) should Mark or other users be
held to those terms?
iii. What benefits are there for a company that requires its customers to submit to
arbitration agreements as opposed to litigation? What are the disadvantages?
iv. Should the bank or the app store be required to do more due diligence on
companies using their services to sell a product, limiting the offerings of
companies who do not pass their screening, or should they only provide a
platform for commerce to take place and allow the market to monitor
companies?
d. Role Play: Break into groups of 3 or more, with one person acting as a judge. The
remaining group members should be equally divided into two sides: one representing the
company and one representing users such as Mark. Using the information presented in the
scenario, present arguments for why your side should prevail in a lawsuit brought by the
company to compel arbitration. The judge should make a final ruling based on the
arguments.
e. Writing Assignment: Mark, a resident of Vermont, decides to sue the maker of CalmDown
in a Vermont state court. He is permitted by the court to serve the company by email, as
he cannot find an address for the company and convinces the judge that email would be
the best way to accomplish service. The maker of CalmDown responds to the service
claiming that Vermont courts have no jurisdiction over the business, because it is an out-of-
state defendant with their principal place of business in Alaska. Moreover, they have
never marketed their product in Vermont and only sold a few subscriptions before it
removed the app from the app store. Is it appropriate for a Vermont court to exercise
jurisdiction inthis case? Why or why not?
f. Ethics Question: The maker of the CalmDown app, 15-year-old Nuvua Adams, created it
for a school entrepreneurship project and never expected that people would actually buy
it. She didn’t know anything about the law and looked at the project as more of a 21st
century lemonade stand, where she might be able to earn a few dollars in addition to
getting school credit. She wrote the terms of use, which seemed reasonable in her mind, but
spent the majority of her time writing the code for the app. Is it reasonable to hold Nuvua
to the same legal standards as a large company with millions of dollars in resources and
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departments committed to protecting the company? Has Nuvua met ethical and legal
standards for the development and sale of a product to the public?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Subject Matter Jurisdiction
o Alternative Dispute Resolution (ADR)
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other include peer reviewed
other scholarly work. scholarly work. journals and other

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5 points 3 points scholarly work.0

points
Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 04:
Constitutional Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 27
Cengage Supplements.................................................................................................................................................... 27
List of Student Downloads ......................................................................................................................................... 27

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Chapter Objectives ......................................................................................................................................................... 27

Key Terms .......................................................................................................................................................................... 27
What's New in This Chapter .......................................................................................................................................... 28
Chapter Outline ............................................................................................................................................................... 29
Discussion Questions ........................................................................................................................................................ 34
Additional Activities and Assignments ......................................................................................................................... 35
Appendix........................................................................................................................................................................... 36
Generic Rubrics............................................................................................................................................................ 36
Standard Writing Rubric ........................................................................................................................................... 37
Standard Discussion Rubric ........................................................................................................................................ 38

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Purpose and Perspective of the Chapter

The purpose of this chapter is to introduce students to constitutional law and develop a rudimentary
understanding about what rights the government has to establish laws and rules, when and how actions by
the government can violate the rights of citizens, and what if, anything is unique to businesses.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

10. Explain Congress’s power to regulate commerce

11. Discuss federal priority over state laws

12. Describe the Bill of Rights

13. Identify due process protections

14. Outline privacy rights

Key Terms
Bill of Rights: The first ten amendments to the U.S. Constitution.
checks and balances: The system by which each of the three branches of the U.S. national
government (executive, legislative, and judicial) exercises checks on the powers of the other branches.
commerce clause: The provision in Article I, Section 8, of the
U.S. Constitution that gives Congress the power to regulate interstate commerce. compelling
government interest: A test of constitutionality that requires the government to have compelling reasons
for passing any law that restricts fundamental rights, such as free speech, or distinguishes between
people based on a suspect trait.
due process clause: The provisions of the Fifth and Fourteenth Amendments to the U.S. Constitution
that guarantee that no per- son shall be deprived of life, liberty, or property without due process
of law. Similar clauses are found in most state constitutions.

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equal protection clause: The provision in the Fourteenth Amendment to the U.S. Constitution
that guarantees that no state will ―deny to any person within its jurisdiction the equal protection of the
laws.‖ This clause mandates that state governments treat similarly situated individuals in asimilar manner.
establishment clause: The provision in the First Amendment to the U.S. Constitution thatprohibits
Congress from creating any law ―respecting an establishment of religion.‖
federal form of government: A system of government in which the states form a union and the
sovereign power is divided between a central government and the member states. filtering software:
A computer program that screens incoming data according to rules built into the software and blocks
access to websites with content not consistent with these rules. free exercise clause: The provision in the
First Amendment to the U.S. Constitution that
prohibits Congress from making any law ―prohibiting the free exercise‖ of religion.
full faith and credit clause: A clause in Article IV, Section 1, of the U.S. Constitution that
provides that ―Full Faith and Credit shall be given in each State to the public Acts, Records, and Judicial
Proceedings of every other State.‖ The clause ensures that rights established under deeds, wills, contracts,
and the like in one state will be honored by the other states and that any judicial decision with respect to
such property rights will be honored and enforced in all states. police powers: Powers possessed by
states as part of their inherent sovereignty. These powers may be exercised to protect or pro- mote the
public order, health, safety, morals, and general welfare.
preemption: A doctrine under which certain federal laws preempt, or take precedence over,
conflicting state or local laws.
privileges and immunities clause: A clause in Article IV, Section 2, of the U.S. Constitution thatrequires
states not to discriminate against one another’s citizens. A resident of one state cannot be treated as an
alien when in another state; he or she may not be denied such privileges and immunities as legal
protection, access to courts, travel rights, and property rights.
symbolic speech: Nonverbal conduct that expresses opinions or thoughts about a subject. Symbolic speech is
protected under the First Amendment’s guarantee of freedom of speech.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New chapter-opening scenario to introduce how disputes over constitutional rights frequently
come before the courts.
 1 New Case:
o Classic Case 2.1: Heart of Atlanta Motel v. United States (1964)—On a challenge tothe
scope of the national government’s constitutional authority to regulate local activities
o New Case 2.2: Animal Legal Defense Fund v. Wasden (2018)—on whether a statute
restricting the making of audio and video recordings of an agricultural production
facility could meet the narrow tailoring requirement.

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oSpotlight Case 2.3: Bad Frog Brewery, Inc. v. New York State Liquor Authority
(1998)—on whether a government agency had unconstitutionally restricted
commercial speech when it prohibited the use of a certain illustration on beer labels.
 1 New Digital Update feature—
o Does Everyone Have a Constitutional Right to Use Social Media?
 1 New Numbered Example
o On a classic case from 1942 regarding interstate commerce.
 1 New Issue Spotter Question
 1 New Case Problem (based on 2018 case)
 1 New ―A Question of Ethics‖ on free speech (based on 2017 case).
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Chapter Outline
I. The Constitutional Powers of Government
a. Federal Form of Government- Before 1789, the Articles of Confederation defined the
central federal government, which was perceived as too weak when state laws
interfered with commerce. A national convention was called to amend the Articles, but
instead the delegates drafted the U.S. Constitution. The U.S. Constitution established a
federal form of government, through which the states and the national government share
sovereign powers.
i. Federal Powers- The national government has specific powers and the implied
power to act to carry out these enumerated powers. All other powers are
reserved to the states under the Tenth Amendment.
ii. Regulatory Powers of the States- The states regulate affairs within their borders
through their police powers, which derive in part from the Tenth Amendment.
These powers are exercised to protect or promote the public order, health, safety,
morals, and general welfare.
iii. Poll Activity PPT Slide: 1 minute(s) total. Asks students to guess as to the number of
enumerated powers Congress has in the constitution. (Answer: 30….or 35
depending on how you count!)
iv. Discussion Activity PPT Slide: 2 minute(s) total. Asks students to recallor investigate
the enumerated powers as provided by Article I, Section 8 of the Constitution.
Answers are provided in the Notes section of the slide deck.
b. Separation of Powers- Deriving power from the Constitution, each of the governmental
branches (the executive, the legislative, and the judicial) performs a separate function. No
branch may exercise the authority of another, but each hassome power to limit the actions
of the others. This is the system of checks and balances. For example:
 Congress can enact a law, but the president can veto it.

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 The executive branch is responsible for foreign affairs, but treaties with foreign
governments require the advice and consent of the members of the Senate.
 Congress determines the jurisdiction of the federal courts, but the courts have the
power to hold acts of the other branches of the government unconstitutional.
c. Commerce Clause
i. National Powers - The Constitution expressly provides that Congress can regulate
commerce with foreign nations, interstate commerce, and commerce that affects
interstate commerce. This provision—the commerce clause—has had a greater
impact on business than any other provision in the Constitution. At one time the
clause was interpreted to allow Congress to regulate even intrastate commerce
that affected interstate commerce.
ii. Regulatory Powers of the State- State governments have the authorityto
regulate affairs within their borders stemming from the Tenth Amendment. These
are often referred to as police powers.
iii. The Dormant Commerce Clause- States do not have the authority to regulate
interstate commerce. When state regulations affect interstate commerce, the
state’s interest in the merits and purposes of the regulation must be balanced
against the burden placed on interstate commerce. It is difficult to predict the
outcome in a particular case, butstate laws enacted pursuant to a state’s police
powers carry a strong presumption of validity.
iv. Think Pair Share PPT Slide: 10 minute(s) total. Have students breakinto pairs or
small groups and consider the following: Imagine a state creates a law that says
all vehicles traveling on state roads may not be longer than 10 feet in length due
to safety concerns. What constitutionalissues would this law create?
(1) Answer: Students should be able to identify a Commerce Clause issue
because the law impacts interstate travel for both personal and business
needs.
d. The Supremacy Clause and Federal Preemption- The Constitution, laws, andtreaties
of the United States are the supreme law of the land. When there is a direct conflict
between a federal law and a state law, the state law is held to be invalid.
i. Preemption- When Congress chooses to act exclusively in an area of concurrent
federal and state powers, it is said to preempt the area, and a valid federal law
will take precedence over a conflicting state or local law.
ii. Congressional Intent- Generally, congressional intent to preempt will be found if
a federal law is so pervasive, comprehensive, or detailed that the states have no
room to supplement it. Also, when a federal statute creates an agency to enforce
the law, matters that may come within the
agency’s jurisdiction will likely preempt state laws.

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e. The Taxing and Spending Powers- Congress has the power to impose taxes, but all
taxes must be uniform among the states. In reviewing tax laws, the United States Supreme
Court focuses on whether the tax can be sustained as a valid exercise of federal
regulation. If a tax measure is reasonable, it is generally upheld. Also, a broad
interpretation of the commerce clause can provide a basis for sustaining a federal tax.
Through its spending power, Congress disposes of tax revenue.

II. Business and the Bill of Rights

b. Limits on Federal and State Governmental Actions - The first ten amendmentsto the
Constitution, known as the Bill of Rights, embody protections against various types of
interference by the federal government.
i. Fourteenth Amendment- Through the Fourteenth Amendment, most ofthese rights
have been held to apply to the states.
b. Freedom of Speech- The freedoms of religion, speech, press, assembly, and petition
are guaranteed by the First Amendment. Symbolic speech (gestures, clothing, and so
on) is protected.
i. Reasonable Restrictions- A balance must be struck between the
government’s obligation to protect its citizens and those citizens’ exercise of their
rights.
1. Content Neutral Laws- If a restriction imposed by the government is
content neutral (aimed at combating a societal problem such as
crime, not aimed at suppressing expressive conduct or its message),
then a court may allow it.
2. Laws that Restrict the Content of Speech- To regulate the content of
speech, a law must serve a compelling state interest and be narrowly
written to achieve that interest.
3. Corporate Political Speech- Speech that otherwise would be protected
does not lose that protection simply because its source is a corporation.
For example, corporations cannot be entirely prohibited from making
political contributions that individuals are permitted to make.
Corporations may, however, be prohibited from using corporate funds to
make independent expressions of opinion about political candidates.
4. Commercial Speech- Commercial speech is not protected as extensively
as noncommercial speech. Even if commercial speechconcerns a lawful
activity and is not misleading, a restriction on itwill generally be
considered valid as long as—
 The restriction seeks to implement a substantial
government interest.
 The restriction directly advances that interest.

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 The restriction goes no further than necessary to

accomplish its objective.
c. Unprotected Speech- Constitutional protection has never been afforded to certain
classes of speech—defamatory speech, threats, child pornography,
―fighting‖ words, and statements of fact, for example.
1. Threatening Speech- To violate criminal laws, the speaker musthave
meant to communicate an unlawful, violent act against a particular
person or group.
2. Obscene Speech- Obscene material is unprotected. But otherthan
child pornography, there is little agreement about what material
qualifies as obscene.
d. Knowledge Check Activity (1) PPT Slide: 1 minute(s) total (5 minutes withdiscussion and
review of answer). Tests students’ knowledge on the constitutionality of a law. After
answer is provided, review with students: 1) government action, 2) content vs. content
neutral restrictions.
e. Think Pair Share Activity (2) PPT Slide: 10 minute(s) total. Have students break into pairs or
small groups to discussion the constitutionality of the followingscenarios:
 An individual enters into a private business wearing a t-shirt that says
―Proud Atheist‖ and the business owner refuses to serve them. (Answer: Constitutional.
A business owner may refuse service in this situation.)
 A student wears a t-shirt to school which says ―Overthrow the Government‖ and is
suspended. (Answer: Possibly Unconstitutional: Students do not shed their
constitutional rights at the door, though a school has the right to regulate certain
types of student expression.)
 A business owner tells his employees that if they don’t publicly support his preferred
presidential candidate, they are fired. (Answer: Possibly Constitutional: Employers
(especially in employment at will states) have theright to fire employees for any
reason other than a discriminatory one. Political affiliation is not a protected class.
As a follow-up, ask students what ―support‖ means. Financial support? Or merely
oral statement? Is there a difference?)
 A politician posts on their social media page ―Oppose me and you’ll go to jail!‖
(Answer: Possibly Unconstitutional. Threatening speech which is unlawful, just as
jailing political opponents for no other reason, would be unconstitutional. There
may be some debate between the students about whether the threat is
valid/realistic and will be based on the context of thestatement. Was this from a
person running for county sheriff who has the power to actually jail someone? Or
from someone running for the positionof county coroner who has no authority to
jail an opponent?)
f. Freedom of Religion
i. The Establishment Clause- Under the establishment clause, the government
cannot establish a religion nor promote, endorse, or show a preference for any
religion. Federal or state law that does not promote, or

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place a significant burden on, religion is constitutional even if it has some impact
on religion. A public display of a religious symbol (such as the cross or a
menorah) is not unconstitutional if the display includes a nonreligious symbol
(reindeers, for example) or has historical significance(a war memorial).
ii. The Free Exercise Clause- Under the free exercise clause, the
government cannot prohibit religious practices.
1. Restriction Must Be Necessary- The government must have a
compelling state interest for restricting the free exercise of religion,
and the restriction must be the only way to further that interest.
2. Restrictions Must Not Be a Substantial Burden- A burden is
substantial if it pressures an individual to modify his or her behavior
and to violate his or her beliefs.
3. Public Welfare Exception- When public safety is an issue, an
individual’s religious beliefs often must give way to the
government’s interests in protecting the public.

III. Due Process and Equal Protection

a. Due Process- Both the Fifth and the Fourteenth Amendments provide that no
person shall be deprived ―of life, liberty, or property, without due process of law.‖
i. Procedural Due Process- A government decision to take life, liberty, or property
must be made fairly. Fair procedure has been interpreted as requiring that the
person have at least an opportunity to object to a proposed action before a
fair, neutral decision maker (who need not be a judge).
ii. Substantive Due Process- If a law or other governmental action limits a
fundamental right, it will be held to violate substantive due process unlessit
promotes a compelling or overriding state interest. Fundamental rightsinclude
interstate travel, privacy, voting, and all First Amendment rights. Compelling state
interests could include, for example, public safety. In all other situations, a law or
action does not violate substantive due process if it rationally relates to any
legitimate governmental end.
b. Equal Protection- Under the Fourteenth Amendment, a state may not ―deny to any person
within its jurisdiction the equal protection of the laws.‖ The equal protection clause
applies to the federal government through the due process clause of the Fifth
Amendment. Equal protection means that the government must treat similarly situated
individuals in a similar manner. When a law or actiondistinguishes between or among
individuals, the basis for the distinction (the classification) is examined.
i. Strict Scrutiny- If the law or action inhibits some persons’ exercise of a
fundamental right or if the classification is based on a race, national

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origin, or citizenship status, the classification is subject to strict scrutiny—it must be

necessary to promote a compelling state interest.
ii. Intermediate Scrutiny- Intermediate scrutiny is applied in cases involving
discrimination based on gender or legitimacy. Laws using these classifications must
be substantially related to important government objectives.
iii. The ―Rational Basis‖ Test- In matters of economic or social welfare, a
classification will be considered valid if there is any conceivable rational basis
on which the classification might relate to any legitimate government interest.
c. Knowledge Check Activity (2) PPT Slide: 1 minute(s) total (5 minutes withdiscussion and
review of answer). Tests students’ knowledge of which test a court will use during an equal
protection claim. After answer is provided, review with students the concept of 1) equal
protection tests and 2) exceptions for remedying past discriminatory conduct.

IV. Privacy Rights

A personal right to privacy is held to be so fundamental as to apply at both the state and the federal
level. Although there is no specific guarantee of a right to privacy in the Constitution, such a right has
been derived from guarantees found in the First, Third, Fourth, Fifth, and Ninth Amendments.
a. Federal Privacy Legislation- These statutes include:
i. the Freedom of Information Act of 1966, the Privacy Act of 1974, and other
laws.
ii. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 defines
the circumstances in which an individual’s health information may be used or
disclosed. Health-care providers, health-care plans, certain employers, and others
must inform patients of their rights and how the information might be used.
b. The USA Patriot Act- The USA Patriot Act of 2001 gave officials the authority to monitor
Internet activities and access personal information without proof of any wrongdoing.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is the conflict between the states’ police power and the commerce clause? The term
police power refers to the inherent right of the states to regulate private activities within their own borders
to protect or promote the public order, health, safety, morals, and general welfare. When state
regulation encroaches on interstate commerce—which Congress

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regulates under the commerce clause—the state’s interest in the merits and purposes of theregulation
must be balanced against the burden placed on interstate commerce.

2. What is the distinction between the degrees of regulation that may be imposed on commercial
and noncommercial speech? Commercial speech is not as protected as noncommercial speech. Even if
commercial speech concerns a lawful activity and is not misleading, a restriction on it will generally be
considered valid as long as the restriction (1) seeks to implement a substantial government interest, (2)
directly advances that interest, and (3) goes no further than necessary to accomplish its objective. As for
noncommercial speech, the government cannot choose what are and what are not proper subjects.

3. What does it mean that under the establishment clause the government cannot establish any
religion or prohibit the free exercise of religious practices? Federal or state regulation that does not
promote, or place a significant burden on, religion is constitutionaleven if it has some impact on religion.
The clause mandates accommodation of all religions and forbids hostility toward any.

4. Would a state law imposing a fifteen-year term of imprisonment without allowing a trial on
all businesspersons who appear in their own television commercials be a violation of substantive due
process? Would it violate procedural due process? Yes, the law would violate both types of due process.
The law would be unconstitutional on substantive due process grounds, because it abridges freedom of
speech. The law would be unconstitutional on procedural due process grounds, because it imposes a
penalty without giving an accused a chance to defend his or her actions.
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Additional Activities and Assignments

2. Business Case: Constitutional Law
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. What type of speech does the First Amendment regulate?
ii. How do you define ―misinformation‖?
iii. What is the balance that the CEO must strike between protecting shareholder
rights (to profits) and free speech on a social media platform that has become
culturally ubiquitous?

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iv. Should the government be able to force Interwebs to regulate the content of
speech on their site or should it let the free market decide whether to support the
site by creating profiles and interacting on it?
v. Is a social media site like Interwebs different from a news outlet in termsof its
content and how it should be regulated? Why or why not?
d. Role Play: Imagine you are the team responsible for coding algorithms at
Interwebs. The CEO has come to your team to discuss how to reach a
compromise between minimizing the presence of ―misinformation‖ on the site (so that the
bad press is minimized, and the shareholders will be happy) and
protecting speech that may be unpopular but nonetheless is necessary for a ―free
democracy.‖ Create a plan for how and when to regulate content, and design parameters
for the kind of speech that will be regulated. Then determine whether or not your
regulations could subject your company to lawsuits by users.
e. Writing Assignment: If the government decides to step in and regulate social media
platforms through under the Commerce Clause, can that power extend to regulating the
content of speech on the platform such that speech deemed to be hateful, a danger to
public health, or threating to the credibility of the election cycle be censored?
f. Ethics Question: Interwebs discovers that some users are using their app’s payment system
to conduct criminal enterprises, such as selling drugs, paying for prostitution, and paying
hit-men-for-hire. The transactions always appear legitimate in nature, however, recent
high-profile criminal convictions led to the discovery of the illicit transactions. Interwebs has
taken steps to ensure anyone receiving or sending payments must enter in a social security
number or tax identification number so that the transactions can be tied back to an
individual orcompany. However, most of these criminals have been able to defraud the
security check through entering false information or, at times, legitimate numbersthat
conceal the true nature of the business. Should Interwebs be responsible for actively
seeking out criminal activity on their app and reporting it to authorities- which would use a
large amount of the company’s financial resources- or remain passive and invest their time
and money growing the app and the market?
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.

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Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 05:
Business Torts

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 40
Cengage Supplements.................................................................................................................................................... 40
List of Student Downloads ......................................................................................................................................... 40
Chapter Objectives ......................................................................................................................................................... 40
Key Terms .......................................................................................................................................................................... 40
What's New in This Chapter .......................................................................................................................................... 42
Chapter Outline ............................................................................................................................................................... 43
Discussion Questions ........................................................................................................................................................ 47
Additional Activities and Assignments ......................................................................................................................... 49

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Additional Resources ....................................................................................................................................................... 50

Cengage Video Resources ........................................................................................................................................ 50
Appendix........................................................................................................................................................................... 51
Generic Rubrics............................................................................................................................................................ 51
Standard Writing Rubric ........................................................................................................................................... 51
Standard Discussion Rubric ........................................................................................................................................ 51

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Purpose and Perspective of the Chapter

The purpose of this chapter is to provide students a fundamental understanding of tort law as a whole,
including both intentional torts and negligence. Further, the chapter briefly touches on defenses to
negligence and distinguishes between comparative negligence and contributory negligence.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

15. Identify the types of intentional torts against persons

16. Identify the types of intentional torts against property

17. Name the four elements of negligence

18. Define strict liability

Key Terms
actual malice: A condition that exists when a person makes a statement with either knowledge of its
falsity or reckless.
disregard for the truth. In a defamation suit, a statement made about a public figure normally must be
made with actual malice for liability to be incurred.
assault: Any word or action intended to make another person fearful of immediate physical harm; a
reasonably believable threat.
assumption of risk: A defense against negligence that can be used when the plaintiff was aware of
a danger and voluntarily assumed the risk of injury from that danger.
battery: The unprivileged, intentional touching of another.
business invitee: Those people, such as customers or clients, who are invited onto business premises by
the owner of those premises for business purposes.
causation in fact: An act or omission without (―but for‖) which an event would not haveoccurred.

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comparative negligence: A theory in tort law under which the liability for injuries resulting from negligent
acts is shared by all parties who were negligent (including the injured party) on the
basis of each person’s proportionate negligence.
compensatory damages: A money award equivalent to the actual value of injuries or damages sustained
by the aggrieved party.
conversion: The wrongful taking, using, or retaining possession of personal property that belongs to
another.
damages: A monetary award sought as a remedy for a breach of contract or a tortious act.
defamation: Any published or publicly spoken false statement that causes injury to another’sgood
name, reputation, or character.
disparagement of property: An economically injurious false statement made about another’s product or
property. A general term for torts that are more specifically referred to as slander of quality or slander
of title.
duty of care: The duty of all persons, as established by tort law, to exercise a reasonable amount of
care in their dealings with others. Failure to exercise due care, which is normally determined by the
―reasonable person standard,‖ constitutes the tort of negligence. fraudulent
misrepresentation(fraud): Any misrepresentation, either by misstatement or omission of a material
fact, knowingly made with the intention of deceiving another and on which a reasonable person
would and does rely to his or her detriment.
general damages: In a tort case, an amount awarded to compensate individuals for the
nonmonetary aspects of the harm suffered, such as pain and suffering; not available to
companies.
intentional tort: A wrongful act knowingly committed.
libel: Defamation in writing or in some other form (such as a digital recording) having the quality of
permanence.
licensee: In the context of intellectual property, a contract permitting the use of a trademark, copyright,
patent, or trade secret for certain purposes. In the context of real property, a
revocable right or privilege of a person to come on another person’s land.
malpractice: Professional misconduct or the failure to exercise the requisite degree of skill as a
professional. Negligence—the failure to exercise due care—on the part of a professional, such asa
physician or an attorney, is commonly referred to as malpractice.
negligence: The failure to exercise the standard of care that a reasonable person would exercisein similar
circumstances.
privilege: In tort law, the ability to act contrary to another person’s right without that person’s having
legal redress for such acts. Privilege may be raised as a defense to defamation. proximate cause:
Legal cause; exists when the connection between an act and an injury is strong enough to justify imposing
liability.
public figure: An individual in the public limelight. Public figures include government officials and
politicians, movie stars, well-known businesspersons, and generally anybody who becomesknown to the
public because of his or her position or activities.
puffery: A salesperson’s exaggerated claims concerning the quality of goods offered for sale. Such
claims involve opinions rather than facts and are not considered to be legally binding promises or
warranties.

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reasonable person standard: The standard of behavior expected of a hypothetical ―reasonable person.‖
The standard against which negligence is measured and that must be observed to avoid liability for
negligence.
slander: Defamation in oral form.
slander of quality: The publication of false information about another’s product, alleging that it is not what
its seller claims; also called trade libel.
slander of title: The publication of a statement that falsely denies or casts doubt on another’s legal
ownership of property, causing financial loss to that property’s owner.
tort: A civil wrong not arising from a breach of contract. A breach of a legal duty that
proximately causes harm or injury to another.
tortfeasor: One who commits a tort.
trespass to land: The entry onto, above, or below the surface of land owned by another without the
owner’s permission or legal authorization.
trespass to personal property: The unlawful taking or harming of another’s personal property;
interference with another’s right to the exclusive possession of his or her personal property.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 Retained and Updated Digital Update feature—
o Revenge Porn and Invasion of Privacy with new section on ―State Statutes‖ with a case
example, based on a 2017 case.
 1 New Case:
o Case Analysis 6.1: Blake v. Giustibelli (2016)—Involves the application of free
speech guarantees to reviews of professional services posted online
o New Case 6.2: Bogenberger v. Pi Kappa Alpha Corp. (2018)—on whether a
fraternity’s local chapter and its officers owed a duty of care to their pledges.
o Spotlight Case 6.3: Taylor v. Baseball Club of Seattle, L.P. (2006)—on the
assumption of risk while attending a Seattle Mariners baseball game.
 2 New Case in Points
o 2017 case on false imprisonment
o 2015 on fraudulent misrepresentation
 1 New Case Problem (based on 2018 case on defamation)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on wrongful interference(based
on 2017 case)
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Chapter Outline
I. The Basis of Tort Law – Tort law compensates those who suffer a loss or injury due to
another’s wrongful act.
a. The Purpose of Tort Law- The purpose of tort law is to provide an injured
party with a remedy for the violation of legally recognized and protected
interests (physical security, freedom of movement, and property).
II. Intentional Torts Against Persons – An intentional tort requires intent. Intentmeans that
the actor intended the consequences of his or her act or knew with substantial certainty
that certain consequences would result from the act. The law generally assumes that one
intends the normal consequences of his or her actions. Thus a push is an intentional tort
because the object of the push can ordinarily be expected to go flying. Intent can be
transferred when a defendantintends to harm to one individual, but unintentionally
harms a second person.
g. Knowledge Check Activity: 1-5 minutes total. Tests students’ knowledge about
the definition of intent.
h. Assault - An intentional, unexcused act that creates a reasonably believable threat or
fear of immediate harmful or offensive contact is an assault. Actual contact is not
necessary. The interest protected is freedom from having to expect harmful or offensive
contact.
i. Battery- If the act that created the apprehension is completed and results in harm to the
plaintiff, it is a battery, which is defined as an unexcused and harmful or offensive
physical contact intentionally performed.
i. A battery is an unexcused, harmful, or offensive physical contact intentionally
performed. The contact can be to any part of the body or anything attached to
it—including an automobile in which one is sitting—and can be made by some
force the defendant sets in motion.
ii. Damages can be for emotional harm or loss of reputation, and for
physical harm.
iii. Defenses include self-defense and defense of others.
j. False Imprisonment- False imprisonment is the intentional confinement or restraint of
another person without justification. The interest protected is the freedom to move
without restraint.
i. Confinement can be by physical barriers, physical restraint, or threats of
physical force. Moral pressure or threats of future consequences are not
sufficient.
ii. Most states allow a merchant’s security personnel to detain a suspected shoplifter
if there is reasonable cause for suspicion and the confinement is reasonable.
k. Defamation- Wrongfully hurting another’s reputation is defamation. Doing so orally is
slander; doing it in writing or in a form of communication that has the potentially harmful
qualities characteristic of writing (pictures, signs, statues, and films) is libel. To establish
defamation requires proof of—

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1. A false statement of fact.

2. The statement must be about the plaintiff and tend to harm the
plaintiff’s reputation.
3. Publication to one other than the one being defamed.
4. Actual malice if the plaintiff is a public figure.
l. Fraud– To constitute fraudulent misrepresentation, a statement of fact must beinvolved.
Reliance on an opinion is not justified unless the person making the statement has
superior knowledge of the subject matter, and puffery, or seller’stalk, is too subjective.
The elements are—
 Misrepresentation of facts or conditions with knowledge that they are false or with
reckless disregard for the truth.
 Intent to induce another to rely on the misrepresentation.
 Justifiable reliance by the deceived party.
 Damages.
 Causal connection between the misrepresentation and the injury suffered.
i. Statement of Fact versus Opinion- To constitute fraudulent misrepresentation,
a statement of fact must be involved. Reliance on an opinion is not justified
unless the person making the statement has superior knowledge of the subject
matter, and puffery, or seller’s talk,
(―This is the best product!‖) is too subjective.
m. Wrongful interference
i. With a contractual relationship- Any lawful contract can be the basis forthis
action. The plaintiff must prove that the defendant actually induced the breach of
a contractual relationship, however, not merely that the defendant reaped the
benefits of a broken contract. The elements are—
 A valid, enforceable contract between two parties.
 A third party’s knowledge of the contract.
 The third party intentionally causing either of the two parties to break the
contract.
ii. With a business relationship- Individuals may not interfere unreasonably with
another’s business to gain a share of the market. The distinction between
competition and predatory behavior often depends on whether a business is
attempting to attract customers in general or to solicit only those customers who
have already shown an interest in the product or service of a competitor.
iii. Defenses to wrongful interference- Bona fide competitive behavior is a
privileged interference even if it results in the breaking of a contract. The public
policy that favors free competition in advertising outweighs the instability that
competitive activity might cause in contractual relations.

III. Intentional Torts Against Property - A wrong against property is a wrong against the individual
who has legally recognized rights with regard to the property. The law categorizes property as
real property (land and things permanently attached thereto) and personal property (all other
items).

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b. Trespass to Land- Harm to the land is not required. Trespass to land occurs when a
person, without permission—
 Enters onto another’s land.
 Causes anything or anyone to enter onto the land.
 Remains on the land, or permits anything to remain on it.
i. Establishing Trespass- Trespassers include guests who are asked to leave. A
trespasser assumes the risks of the premises (unless the owner laid a trap to
injure a trespasser or had a duty to warn of dangers on the property).
c. Trespass to Personal Property - This occurs when an individual unlawfully
harms another’s personal property or otherwise interferes with the owner’s rightto
exclusive possession and enjoyment. The tort may entail acts of damage, dispossession,
or both. A complete defense exists if the trespass was warranted.
d. Conversion- This occurs when a person wrongfully possesses or uses another’s personal
property as if it were their own. Conversion is trespass to personal property more serious
in terms of duration and use. Unlawfully taking property is trespass; unlawfully retaining it
is conversion.
i. Failure to return goods- Failing to return goods is conversion even if theowner
consented to the original taking.
ii. Intention- Believing one is entitled to the property is not a defense. Thus,
someone who buys stolen goods is guilty of conversion even if he or she did not
know the goods were stolen. The owner can seek their return or damages.
e. Disparagement of Property- Disparagement of property occurs when
economically injurious falsehoods are made about another’s product or property
i. Slander of Quality- Publication of false information about another’s product,
alleging it is not what its seller claims, is slander of quality, or trade libel. Actual
damages must be proved—that the publication caused a third party to refrain
from dealing with the plaintiff, who suffered damages as a result. Improper
publication may be both slander of qualityand defamation.
ii. Slander of Title- When a publication denies or casts doubt on another’s legal
ownership of property and results in financial loss to the owner, slander of title
may exist. This is usually done knowingly.
III. Negligence – An act that could be an intentional tort if not for a lack of intent may
constitute negligence. Under negligence theory, a tortfeasor neither wishes to bring about
the consequences of an act nor believes that they will occur. The actor’s conduct merely
creates a risk of the consequences. Without the creation of a risk, there can be no
negligence.
The risk must be foreseeable—that is, it must be such that a reasonable person would
anticipate it and guard against it. In determining whether the conduct creating the risk was
reasonable, courts consider the nature of the possible harm. A

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very slight risk of a dangerous explosion might be unreasonable; a distinctpossibility

of burning one’s fingers on a stove might be reasonable.
Negligence requires proof of four elements—

1. Duty of care.

2. Breach of the duty.

3. Causation (the breach must have caused the injury).

4. Damages (a legally recognizable injury).

g. Duty of Care and Breach- Negligence involves the careless performance of a legally
required duty or the failure to perform a legally required act. Courts consider the
nature of the act, the manner in which it is performed, and the nature of the injury in
determining whether a duty is breached.
a. Reasonable Person Standard- Duty is measured by a standard of
reasonableness. The measure is objective—how would a reasonable person act
in the same circumstances? The answer defines the duty—areasonable person
would exercise reasonable care.
b. Duty of Landowners
i. Duty to Warn Business Invitees of Risks - Business firms that invite
persons onto their premises usually have a duty to exercise reasonable
care to protect their business invitees against foreseeable risks that the
owner knew or should have known about.
ii. The Duty of Professionals- An individual with knowledge, skill, or
intelligence superior to that of an ordinary person has a higher standard
of care—that which is reasonable in light of those capabilities.
c. Injury Requirement and Damages- Without an injury (loss, harm, wrong, or
invasion of a protected interest), there is nothing to recover. The purpose of
damages is to compensate injured parties. To discourage especially reprehensible
behavior, however, punitive damages may be awarded.
d. Causation- The breach of the duty of care must have caused the harm forwhich
recovery is sought.
i. Two Questions- There must be—
1. Causation in fact—If an injury would not have occurred without
the breach, there is causation in fact. Causation infact can
usually be determined by the but-for test: But for the wrongful
act, the injury would not have occurred.
2. The act must be the proximate cause of the injury— Proximate
cause is a question not of fact but of law and

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policy: is the connection between an act and an injury strong

enough to justify imposing liability?
ii. Foreseeability- It would be unfair to impose liability on a defendant
unless the defendant's actions created a foreseeable risk of injury so a
determination of proximate cause is linked to the concept of
foreseeability.
e. Defenses to Negligence – Besides the defenses noted below, a defendant
might assert that a plaintiff failed to prove one or more of the required elements
for negligence.
i. Assumptions of Risk- This defense requires that the injured person knew
of the risk and voluntarily assumed it. The risk can be assumed by express
agreement or implied by the plaintiff’s knowledge of the risk and
subsequent conduct. The defense does not apply in emergency situations
or when a statute protects a class of people from specific harm and a
member of the class is injured by that harm.
ii. Discussion Activity: 5-10 minutes total. As a class, discussioneach of the
following as they relate to the assumption of risk:
a. A hockey player injured during a game as the result of a fight
b. A boxer being injured during a fight as the result of a forceful punch
c. A drunk patron leaving a bar being injured in a fight with another patron
d. A novice skier being injured on a ski slope after selecting an advanced hill
iii. Comparative Negligence - In most states, comparative negligence
reduces the amount of the tortfeasor’s liability if the injured person
failed to exercise reasonable care.
1. In a ―pure‖ comparative negligence jurisdiction, a judge or jury
assigns a percentage of fault to each responsible party and
apportions damages accordingly.
2. In some states, under a ―50 percent‖ rule, a plaintiff recovers
nothing if he or she is determined to have been more than 50
percent at fault. Under a ―51 percent‖ rule, a plaintiff recovers
nothing if he or she is determined to have been more than half at
fault.
h. Strict Liability- liability without fault. Suits can be brought under this premise when the
damages were caused by an abnormally dangerous activity due to the extreme risk of
the activity. It balances risk for potential harm.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. Should the application of the concept of proximate cause be expanded to allow recovery in more
cases, or should it be limited to reduce the frequency and amounts of recovery? Why? The application
of the concept of proximate cause should be limited, because these and other tort suits are crippling
business and inhibiting the economy for the benefit of lawyers and other persons who ―game the system.‖
The application of the principle of proximate cause should be expanded, because the victims in negligent
events often suffer horribly, with sometimes little, if any, other recourse for relief, and negligent actors
should not be allowed to avoid liability by ―gaming the system.‖

2. Suppose that George, the owner of a softball park, has a duty to provide a backstop to protect
spectators who want the protection against the risk of being hit by a ball. Nikita, a visitor from Eastern
Europe, sits in the stands behind the plate where the backstop should be. Nikita has never seen softball,
knows nothing about it, and does not understand the danger. During the game, Nikita is struck and
injured by a ball. Can Nikita recover from George for the injury? Nikita can recover from George for
the injury. Assumption of risk involves the question of what an injured person knew, understood, and was
willing to accept. Because Nikita knew nothing about softball, Nikita did not understand the risk and thus
Nikita could not have willingly assumed it.

Under the circumstances described in the previous question, Eldon, another spectator, also sitsin the stands
behind the plate where the backstop should be. Unlike Nikita, Eldon is fully aware of the risk. During the
game, Eldon is struck and injured by a ball. Can Eldon definitely recover from George for the injury?
Eldon may not be able to recover from George for the injury, despite George’s violation of the duty to
provide protection for spectators. Unlike Nikita in the previous question, Eldon was aware of the risk and
voluntarily assumed it.

3. Large damages awards in tort litigation have to be paid by someone. If the defendant is insured, then
insurance companies foot the bill. Ultimately, though, high insurance rates are passed on to consumers of
goods and services in the United States. Will tort reform that reduces the size and number of damages
awards ultimately mean lower costs of goods and services? Will tort reform lead to higher risks
associated with services and products? Insurance often covers damages awards in the United States, and
the premiums can be adjusted to reflect increased amounts of awards. But insurance premiums can also go
up simply to increase the profits of the insurance companies. Such increases may also be passed on to
consumers. If damages awards have been curtailed, businesses and consumers would thus be paying higher
prices without a trade off. If insurance premiums were lowered to reflect lower damages awards—this
seems unlikely, at least in the long run—it is not likely that a business would be willing to take higher risks
with dangerous products. The business’s reputation could suffer, and its profits could as easily disappear as
if they were paid to insurance companies as premiums. If tort liability is a businessperson’s primary
concern, then locations in which

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damages awards are fewer in number and lower in amount might be appropriate places in which to
choose to do business.

4. Considering that punitive damages are intended in part to punish, should a defendant’s financial
situation be taken into account in setting the amount? Yes, because the
―punishment‖ might otherwise be disproportionate to the ―wrong‖—too small in a case involving
a large, profitable corporation, or too big in a case involving a smaller business, which might then be left
with nothing to compensate others who might be injured. No, because the focus should be on the harm
suffered and the reprehensibility of the conduct, not the financial circumstances of the tortfeasor.

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Additional Activities and Assignments

3. Business Case: Negligence
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. What are the potential foreseeable harms for both patrons and
employees of a haunted attraction such as the one in this scenario?
ii. What are some risks that you expect to assume when you attend a
Halloween attraction as a patron?
iii. What are some risks that you would not expect to assume as a patron of a
Halloween attraction?
iv. What kinds of warnings should be given to patrons prior to entering the
attraction?
v. How can serious warnings be distinguished from theatrical warnings
(those designed to heighten the thrill of the attraction such as ―Enter ifYou
Dare‖ or ―Enter at Your Own Risk!‖)?
d. Role Play: In small groups of 4–6 students, divide the group in half with half of the group
representing The Haunted Witch Trials and the other half representing the liability
insurance carrier for The Haunted Witch Trials.

As the insurance carrier, you are trying to determine whether to continue to provide
insurance coverage for the attraction at the end of its current policy year based on the
risk of potential litigation against the attraction. Evaluate (1) the elements of any potential
claim against The Haunted Witch Trials by Theo and Lukas, (2) whether The Haunted Witch
Trials may be liable for negligence (causing

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a greater financial risk to your insurance company), and (3) what are the potential
damages that might be awarded (if any) in this case.
As The Haunted Witch Trials, you want to ensure that you can maintain coverage at a
reasonable premium or else your entire operation will be shut down. Which of your
business choices (involving the set up and operation of the attraction) do you think will be
sufficient to defend against any liability claim and what changes should you consider
making to improve your liability protection?
e. Writing Assignment: Is there a difference between the duty of care owed to Theo
and that owed to Lukas?
f. Ethics Question: What are some of the steps, as a business owner of The Haunted
Witch Trials, that you might take to ensure your guests are safe and have an
enjoyable experience beyond what might be legally required? What kinds of
additional costs may be associated with those choices?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Intentional Torts
o The Difference Between Assault and Battery
o Reasonable Person Standard
o Negligence
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress,and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 06:
Intellectual Property Rights

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 54
Cengage Supplements.................................................................................................................................................... 54
List of Student Downloads ......................................................................................................................................... 54
Chapter Objectives ......................................................................................................................................................... 54
Key Terms .......................................................................................................................................................................... 54
What's New in This Chapter .......................................................................................................................................... 55
Chapter Outline ............................................................................................................................................................... 56
Discussion Questions ........................................................................................................................................................ 60
Additional Resources ....................................................................................................................................................... 61
Cengage Video Resources ........................................................................................................................................ 63
Appendix........................................................................................................................................................................... 64

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Generic Rubrics............................................................................................................................................................ 64
Standard Writing Rubric ........................................................................................................................................... 64
Standard Discussion Rubric ........................................................................................................................................ 65

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Purpose and Perspective of the Chapter

The purpose of this chapter is to introduce students into the concept of intellectual property through
patents, trademarks, and copyrights. Further, students will learn about both federal and international
protections provided to various types of intellectual property through statutes and treaties.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

19. Identify intellectual property

20. Discuss legal protection for trademarks

21. Describe legal protections for patents

22. Summarize legal protections for copyrights

23. Define trade secret

Key Terms
copyright: The exclusive right of authors to publish, print, or sell an intellectual production for astatutory
period of time. A copyright has the same monopolistic nature as a patent or trademark, but it differs in
that it applies exclusively to works of art, literature, and other works of authorship, including computer
programs.
dilution: With respect to trademarks, a doctrine under which distinctive or famous trademarks are
protected from certain unauthorized uses regardless of a showing of competition or a likelihood of
confusion. Congress created a federal cause of action for dilution in 1995 with the passage of the
Federal Trademark Dilution Act.
intellectual property: Property resulting from intellectual, creative processes. Patents,
trademarks, and copyrights are examples of intellectual property.
license: In the context of intellectual property, a contract permitting the use of a trademark,
copyright, patent, or trade secret for certain purposes. In the context of real property, a revocable
right or privilege of a person to come on another person’s land.

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patent: A government grant that gives an inventor the exclusive right or privilege to make, use, or sell his
or her invention for a limited time period.
service mark: A mark used in the sale or the advertising of services, such as to distinguish the services of
one person from the services of others. Titles, character names, and other distinctive features of radio and
television programs may be registered as service marks.
trade name: A term that is used to indicate part or all of a business’s name and that is directly related to
the business’s reputation and goodwill. Trade names are protected under the
common law (and under trademark law, if the name is the same as the firm’s trademark).
trade secret: Information or a process that gives a business an advantage over competitors who do not
know the information or process.
trademark: A distinctive mark, motto, device, or implement that a manufacturer stamps, prints, or
otherwise affixes to the goods it produces so that they may be identified on the market and their origins
made known. Once a trademark is established (under the common law or through registration), the owner
is entitled to its exclusive use.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New chapter-opening scenario on international trademark infringement in the beverage-drinking

industry.
 1 New Case:
o Classic Case 8.1: The Coca-Cola Co. v. The Koke Co. of America (1920)—on whether a
rival soda company infringed on the Coca-Cola trademark by using asimilar name for
a similar product.
o New Case 8.2: Headspace International, LLC v. Podwords Corp. (2018)—on allegations of
trademark dilution/infringement under state trademark law against a firm selling cannibus
concentrate for vapes.
o Case Analysis 8.3: Winstead v. Jackson (2013)—on whether a rapper’s song andfilm
infringed on the copyright of a book.
 New Global Insight feature—
o Aleve versus Flanex—Same Pain Killer, but in Different Countries
 1 New Example:
o trademark confusion regarding Nike and Converse product
 1 New Case Problem (based on 2018 case on patent infringement)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on copyright infringement(based on
2017 case)
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Chapter Outline
I. Trademarks and Related Property - A trademark is a distinctive mark, motto, device, or implement
that a manufacturer stamps, prints, or otherwise affixes to the goods it produces so that they may be
identified on the market and their origin vouched for.

f. Statutory Protection of Trademarks- Statutory protection of trademarks and related

property is provided at the federal level by the Lanham Trademark Act of 1946
(amended by the Federal Trademark Dilution Act of 1995 and the Trademark Dilution
Revision Act of 2006), which incorporates the common law of trademarks. Many states
also have trademark statutes.
i. Trademark Dilution- The dilution cause of action protects certain marks from
unauthorized use regardless of a showing of competition or a likelihood of
confusion. To state a claim for dilution, a plaintiff must prove—
(1) The plaintiff owns a famous mark that is distinctive.
(2) The defendant is using a mark in commerce that allegedly is
diluting the famous mark.
(3) The marks’ similarity gives rise to an association between them.
(4) The association is likely to impair the distinctiveness of the famous mark or
to harm its reputation.
(5) Marks Need to be identical- A famous mark may be diluted by the
unauthorized use of an identical or a similar mark.
ii. Distinctiveness of the Mark- Only trademarks deemed sufficiently
distinctive from competing trademarks are protected.
(1) Strong Marks- These marks are generally protected without proof of
secondary meaning.
(2) Fanciful and Arbitrary Marks- Fanciful and arbitrary marks are
considered the most distinctive trademarks.
(3) Suggestive Trademarks- Suggestive trademarks bring to mind
something about a product without describing the product directly.
(4) Secondary Meaning- Descriptive terms, geographical terms, and
personal names are not inherently distinctive and do not receive
protection until they acquire a secondary meaning. Whether a secondary
meaning becomes attached to a term or name depends on how
extensively the product is advertised, the market for the product, the
amount of sales, and other factors.
(5) Generic Terms- Generic terms, such as bicycle or computer, cannot be
trademarked, even if they acquire secondary meanings (but they still
cannot be used to deceive consumers).
iii. Trademark Registration- To register for federal protection, an application
must be filed with the U.S. Patent and Trademark Office in Washington, D.C.
A mark can be registered if— It is currently in commerce.

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(1) The applicant intends to put the mark into commerce within six months.
(Under some circumstances, the six-month period can beextended to
three years.)
(2) Registration is renewable between the fifth and sixth years after the
initial registration and every ten years thereafter (twenty years for
marks registered before 1990).
(3) Trademark Infringement- When a trademark is copied to a
substantial degree or used in its entirety by another, it has been
infringed. To obtain a remedy—an injunction, damages, the
infringer’s profits, the destruction of the infringing goods,
attorney’s fees—its owner must show that the use created a likelihood of
confusion about the origin of the infringing goods or services. A person
need not have registered a mark to sue for infringement, but registration
is proof of the date of inception of
the mark’s use.
g. Counterfeit Goods- Counterfeit goods copy or imitate trademarked goods but are not
genuine. U.S. laws do not apply to foreign counterfeiters, but U.S. officials can obtain a
court order to shut down a Web site that sells counterfeit goods,
regardless of the site owner’s citizenship.
i. The Stop Counterfeiting in Manufactured Goods Act- This act makes ita crime to
intentionally traffic in counterfeit goods or services, or use a counterfeit mark on
or in connection with goods or services. The act covers counterfeit labels, stickers,
packaging, and similar items, whether or not they are attached to any goods.
ii. Penalties for Counterfeiting- These include fines of up to $2 million and
imprisonment of up to ten years (more for repeat offenders). Forfeiture of
counterfeit products and the payment of restitution to a trademark holder or other
victim can be imposed.
iii. Combating Foreign Counterfeiters- U.S. laws do not apply to foreign
counterfeiters, but U.S. officials can obtain a court order to shut down aWeb
site that sells counterfeit goods, regardless of the site owner’s citizenship.
h. Service, Certification, and Collective Marks
i. Service mark—Distinguishes the services of one person or company from those of
another (such as the mark of each airline that distinguishes it from other airlines).
ii. Trade Names- A trade name indicates part or all of a business’s name. Atrade
name may be protected at common law (if it is unusual or fanciful), but it is not
protected under federal statutes and cannot be registered with the federal
government—unless it is of course the same as the
business’s trademarked product (such as Coca-Cola).
i. Domain Names
i. TLDs and SLDs

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ii. Unauthorized use of another’s mark in a domain name constitutes

trademark infringement if the use would cause customer confusion
j. Cybersquatting is illegal with the person offering the domain name for sale has a ―bad
faith intent‖ to profit from using the trademark.
k. Meta Tags or keywords inserted into coding to increase the frequency with which a
site appears in search engine results. Using another’s trademark in a meta tag
without permission constitutes trademark infringement.
II. Patents - A patent gives an inventor the exclusive right to make, use, and sell an invention for
a period of twenty years and a design for fourteen years. Like most other countries, the United
States grants a patent for an invention to the first person to file a patent application.

a. Patent Infringement- A firm that makes, uses, or sells another’s patented design,
product, or process without the patent owner’s permission commits
patent infringement. But no patent infringement occurs when a product is made and sold in
another country.
b. Licensing- to avoid litigation, patent holders will often sell a license whereby thelicensee
pays royalties to the patent owner.
III. Copyrights – A copyright is an intangible right granted by federal statute (the Copyright Act of 1976)
to the author or originator of certain literary or artistic productions. The right is granted automatically
(registration is not required). Protection lasts for the life of the author plus 70 years. Copyrights owned
by publishing houses expire 95 years from the date of publication or 120 years from the date of
creation, whichever is first. For works by more than one author, the copyright expires 70 years after
the death of the last surviving author.
i. What is Protected Expression- To be copyrighted, a work must be ―fixed in a
durable medium‖ from which it can be perceived, reproduced, or communicated.
Copyright law protects works that are original and fall into one of the following
categories—
a. Literary works.
b. Musical works.
c. Dramatic works.
d. Pantomimes and choreographic works.
e. Pictorial, graphic, and sculptural works.
f. Films and other audiovisual works.
g. Sound recordings.
h. Architectural works.

j. Section 102 Exclusions

a. Protection is not available for any ―idea, procedure, process, system, method
of operation, concept, principle, or discovery, regardless of the form in which it
is described, explained, illustrated, or embodied.‖ Ideasmay be freely used
by anyone.

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b. What can be copyrighted is the way in which an idea is expressed. If anidea

and its expression are inseparable, the expression cannot be copyrighted.
c. Generally, anything that is not original—facts, page numbers,
mathematical calculations—will not qualify for protection.
k. Copyright Infringement- Copyright infringement occurs when the form or expression of an
idea is copied in substantial part (a copy does not have to mirror the original or reproduce
it entirely).
a. The ―Fair Use‖ Exception- The reproduction of copyrighted material is permitted
without payment of royalties under the Copyright Act’s fair usedoctrine. To
determine whether a use is fair, courts consider—
 The purpose of the use.
 The nature of the copyrighted work.
 How much of the original is copied.
 The effect of the use on the market for the copyrighted work
b. What is Fair Use? Courts determine this on a case-by-case basis. The lastfactor
above is often the most important.
c. The First Sale Doctrine- The owner of an authorized copy of a copyrighted
work can sell, or otherwise dispose of it however he or she sees fit.
l. Copyright Protection for Software- The Computer Software Copyright Act of 1980
extended Copyright Act protection to computer programs. A program’s source code (the
part of a program readable by humans) was clearly included. Protection has also been
extended to the binary object code (readable only by computers). Program structure,
sequence, and organization have been held copyrightable. The trend is not to extend
copyright protection to programs’ ―lookand feel‖ (general appearance, menus, windows,
and other displays). Trademark laws may apply, however.
m. Copyrights in Digital Information-
a. Digital Millennium Copyright Act (DMCA)
b. ISP Limited Liability
c. File-sharing
IV. Trade Secrets – Some business processes and information that cannot be patented, copyrighted, or
trademarked are protected against appropriation as trade secrets. Trade secrets include generally
anything that makes an individual company unique and that would have value to a competitor such as—
 Customer lists.
 Business plans.
 Research and development.
 Pricing information.
 Marketing techniques.
 Production techniques.
 Product formulas

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d. Knowledge Check: 1 minute total. Tests students’ understanding of what

qualifies as a trade secret.
e. Think Pair Share Activity: 5-10 minutes total. Ask the students to break into pairs or small
groups and consider the following: Monica has created her own cleaning solution. Monica’s
friends encourage her to sell the cleaning solution; they think it is so fantastic that they
believe Monica will make a lot of money on it. What are the benefits and drawbacks of
patenting her solution as opposed to keeping it a trade secret?

V. International Protection for Intellectual Property

a. The Berne Convention- Under the Berne Convention, if an American writes a book, every
country that has signed the convention must recognize his or her copyright in the book. Also, if a
citizen of a country that has not signed the convention first publishes a book in a country that has
signed, all other countries that have signed the convention must recognize that author’s copyright.
b. The TRIPS Agreement- More significant is the agreement on Trade-Related Aspects ofIntellectual
Property Rights (TRIPS). TRIPS was part of the agreement creating the World Trade Organization
(WTO).
i) Establishes Standards and Procedures- TRIPS established standards for the
international protection of intellectual property rights.
ii) Prohibits Discrimination- Generally, each member country must provide broad
intellectual property rights and effective remedies (including civil and criminal penalties)
for violations of those rights.
c. The Anti-Counterfeiting Trade Agreement-
i) Goals and Provisions- The goal of the Anti-Counterfeiting Trade Agreement (ATA) isto
increase international cooperation, facilitate the best law enforcement practices, and provide
a legal framework to combat counterfeiting. The ATA applies to counterfeit physical goods
and pirated copyrighted works.
ii) Border Searches- Member nations are required to establish border measures that allow
officials, on their own initiative, to search commercial shipments of imports and exports for
counterfeit goods.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Should the principles applied to the confusingly similar product of a domestic manufacturer also apply to the
goods of foreign producers? Why or why not? Yes, particularly if they are sold in the United States, where
those principles apply under the law, and especially today, when products are easily imported, often at
lower prices than similar goods can be obtained domestically, the same rules should be applied to all
goods to insure a ―level

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playing field‖ in the marketplace. No, different rules should apply to products made in different places,
particularly if they are not sold in the United States or in any other locale in which those principles might
apply, and with due consideration to the cultural and economic characteristics of those locales.

2. Why is it important to allow those who have applied for trademark protection to defend
preemptively against the use of the mark by another party? Policy considerations, especially the
promotion of certainty in business transactions by fixing an applicant's priority right as of the date of its
filing an application, and the encouragement and reward of early filing so as to put claims to marks on the
public record as soon as possible.

3. What are some of the pros and cons of having an international standard for trademark protection?
An international standard for trademark protection promotes progress and development in the arts and
sciences, and saves the time and expense of applying for the protection many times in different countries.
The cons may include the differing application of that protection in various countries. Also, any flaw that
exists in that standard will have universal application.

4. Why don’t all software products qualify for patent protection? A patent is a grant from the federal
government securing the exclusive right to make, use, and sell an invention for seventeen years (designs
are covered for a shorter period). The invention or design must be genuine, novel, useful, and not obvious.
Software products often do not meet the ―novel‖ and
―not obvious‖ requirements because much software only automates procedures that can be performed
manually. Also, the basis for a computer program is often a mathematical equation or formula, which is
not patentable.

5. Discuss the fair use doctrine and what factors are considered in determining whether a use is fair.
Reproduction of copyrighted works is permitted without payment of royalties under the fair use doctrine.
The factors used in determining whether a use qualifies as fair are (1) the purpose and character of the
use, including whether it is of a commercial nature or is for nonprofit educational purposes; (2) the nature
of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the work as a
whole; and (4) the effect of the use on the potential market for or value of the copyrighted work.

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Additional Activities and Assignments

4. Business Case: Intellectual Property

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a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. Is it fair to allow other individuals or companies to purchase and hold web
domains that are close in name to other companies?
ii. What are the best ways for companies to protect their valuable
information, like Luciana’s eyeshadow formula?
iii. Should things like ―eye shadow color stories‖ be protected as intellectual
property?
iv. If yes, under what category of intellectual property should they be
protected?
v. Do dupes (knock offs of higher end cosmetics) infringe on the goodwill and
reputation that a business has built up in a product?
d. Role Play: In small groups of three to five individuals, complete the following activity.
Imagine you have been hired as auditors for Luciana Cosmetics and are tasked with
recommending possible risk aversion measures to the company. Specifically, your group is
to evaluate potential legal liabilities involving intellectual property. Write out a list of all
the potential liability the company faces over its use or ownership of intellectual property,
and what recommendations you would make for minimizing financial risk to the company.
e. Writing Assignment: If the laboratory technician wants to patent her mascara wand,
under which classification would she file the patent (Design, Utility, or Plant) and why?
Would the patent be approved?
f. Ethics Question: In order to prevent employees from using trade secrets, which they have
learned during the course of their employment with Luciana Cosmetics,the company
implements a non-compete clause which contains the following language:
―In consideration of the employment opportunity with Luciana Cosmetics, employee hereby
agrees that for two years following termination of employment with the company
(voluntarily or involuntarily) employee agrees not to engage in any business activity which
is competitive with the company within 250 miles of
the company.‖
An employee, who has been trained as a chemist, wants to resign and leave to work
for a pharmaceutical company who is starting a new division of
―cosmecuticals‖ which are cosmetics with pharmaceutical properties. Both the employee
and the new company are aware of the terms of the non-compete. What are the
ethical consequences of the new company offering the employee the role of
―Laboratory Supervisor- Pharmaceuticals Division‖ even though the employee will be
directly working on cosmetic products in order to avoid litigation?

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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Intellectual Property and Social Media
o A Comparison of Intellectual Property Types
o The First Sale Doctrine
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 07:
Business Crimes

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 54
Cengage Supplements.................................................................................................................................................... 54
List of Student Downloads ......................................................................................................................................... 54
Chapter Objectives ......................................................................................................................................................... 54
Key Terms .......................................................................................................................................................................... 54
What's New in This Chapter .......................................................................................................................................... 55
Chapter Outline ............................................................................................................................................................... 56
Discussion Questions ........................................................................................................................................................ 60
Additional Resources ....................................................................................................................................................... 61

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Cengage Video Resources ........................................................................................................................................ 63

Appendix........................................................................................................................................................................... 64
Generic Rubrics............................................................................................................................................................ 64
Standard Writing Rubric ........................................................................................................................................... 64
Standard Discussion Rubric ........................................................................................................................................ 65

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine various types of crimes related to the operation of a business
and revisit court procedures in the context of a criminal trial.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

24. Indicate elements of criminal liability

25. Outline the rights of criminal suspects

26. List the crimes that affect business

27. Summarize the defenses to criminal liability

28. Know the legal protection for online victims

Key Terms
burglary: The unlawful entry into a building with the intent to commit a felony. Some state statutes
have expanded bur- glary to include the intent to commit any crime.
computer crime: Any violation of criminal law that involves knowledge of computer technology for its
perpetration, investigation, or prosecution.
cyber crime: A crime that occurs online, in the virtual com- munity of the Internet, as opposedto the
physical world.
cyber fraud: Fraud that involves the online theft of credit- card information, banking details, and other
information for criminal use.
embezzlement: The fraudulent appropriation of money or other property by a person to whom the money
or property has been entrusted.
exclusionary rule: In criminal procedure, a rule under which any evidence that is obtained in violation
of the accused’s constitutional rights guaranteed by the Fourth, Fifth, and Sixth Amendments, as well as
any evidence derived from illegally obtained evidence, will not be admissible in court.

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forgery: The fraudulent making or altering of any writing in a way that changes the legal rights and
liabilities of another.
hacker: A person who uses one computer to break into another.
identity theft: The act of stealing another’s identifying information—such as a name, date ofbirth, or
Social Security number—and using that information to access the victim’s financial resources.
larceny: The wrongful taking and carrying away of another person’s personal property with the intent to
permanently deprive the owner of the property. Some states classify larceny as either grand or petit,
depending on the property’s value.
malware: Malicious software programs designed to disrupt or harm a computer, network,
smartphone, or other device.
phishing: Online fraud in which criminals pretend to be legitimate companies by using e-mailsor
malicious websites that trick individuals and companies into providing useful information, such as bank
account numbers, Social Security numbers, and credit-card numbers.
robbery: The act of forcefully and unlawfully taking personal property of any value from another; force
or intimidation is usually necessary for an act of theft to be considered a robbery.white-collar crime:
Nonviolent crime committed by individuals or corporations to obtain a personal or business advantage.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 New subsection on the Foreign Corrupt Practices Act—
o contains new discussions on the Prohibition against Bribery of Foreign Officials and
Accounting Requirements
 1 New Case in Point
o 2012 case on illegal payments to a foreign official
 1 New Case:
o New Case 10.1: United States v. Crabtree (2018)—on whether the evidence was
sufficient to prove that the defendant had ―knowingly and voluntarily‖ participated in
a conspiracy to commit health-care fraud.
o Spotlight Case 10.2: People v. Sisuphan (2010)—a case showing that the intent to return
embezzled property is not a defense to the crime of embezzlement.
o Case Analysis 10.3: United States v. Warner (2016)—the defendant was charged with
identity theft in connection with the filing of five thousand false income tax returns to
obtain refunds.
 1 New Digital Update feature—
o Using Twitter to Cause Seizures—A Crime?
 1 New Case Problem (based on 2018 case on types of crimes)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on identity theft (based on2017
case)
 Updated Limited-Time Group Assignment with a new activity.
 New Unit-Ending Task-Based Simulation feature

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Chapter Outline
I. Civil Law and Criminal Law - Civil law relates to duties between persons or between citizens and
their governments, except for the duty not to commit crimes. Criminal law concerns crime—wrongs
against society declared in statutes and punishable through fines, imprisonment, or death.
l.Key Differences in the Civil and Criminal Law Systems
i. Prosecuted by the State- Crimes are offenses against society as a whole and are
prosecuted by public officials (local district attorneys, for example), not by
victims.
ii. Burden of Proof- Proof that a certain person committed a crime must be beyond
a reasonable doubt. The government must prove that the defendant committed
each element of the offense with which she or he ischarged beyond a reasonable
doubt. If a jury views the evidence as
reasonably permitting either a guilty or a not guilty verdict, then the jury’sverdict
must be not guilty.
iii. Criminal Sanctions- Criminal sanctions are intended to punish those who commit
crimes and to deter others from committing similar acts. Sanctions include fines,
imprisonment, and death.
m. Classification of Crimes- Crimes are classified as felonies or misdemeanors.
i. Felonies are punishable by death or by imprisonment for more than a year.
ii. Misdemeanors are punishable by a fine or by confinement for up to a year.
Petty offenses are a subset of misdemeanors.
n. Criminal Liability- Crime requires (1) The performance of a prohibited act, (2) A
specified state of mind.
VII. Constitutional Safeguards
a. Constitutional Safeguards- These safeguards apply in all federal courts. The United
States Supreme Court has ruled that most of them also apply in state courts (by virtue of
the due process clause of the Fourteenth Amendment). Theyinclude—
i. Fourth Amendment—Protects against unreasonable searches and seizures.
ii. Fourth Amendment—No warrants for a search or an arrest can be issuedwithout
probable cause.
iii. Fifth Amendment—No one can be deprived of ―life, liberty, or property
without due process of law.‖
iv. Fifth Amendment—Prohibits double jeopardy.
v. Sixth Amendment—Guarantees a speedy trial, trial by jury, public trial, right
to confront witnesses, and right to legal counsel.
vi. Eighth Amendment—Prohibits excessive bail and fines, and cruel and unusual
punishment.

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b. Fourth Amendment Protections- Before searching or seizing private property, law

enforcement officers must obtain a search warrant from a judge or other public official.
i. Probable Cause- To issue a search warrant, an official must be convinced that
there is probable cause to believer that a search will reveal a specific illegality
based on evidence that would convince a reasonable person the search is more
likely justified than not.
ii. Scope of Warrant- General warrants and general searches are prohibited. There
must baa particular description of what is to be searched or seized, and the
search cannot extend beyond the description.
iii. Reasonable Expectation of Privacy- The Fourth Amendment only
protects against searches that violate a person’s reasonable expectation ofprivacy.
A reasonable expectation of privacy exists if—
(1) The individual actually expects privacy.
(2) The person’s expectation is one that society as a whole would think is
legitimate.
c. Exclusionary Rule- All evidence obtained in violation of the rights spelled out in the
Fourth, Fifth, and Sixth Amendments must be excluded from trial, as well as all ―fruit of
the poisonous tree‖—evidence derived from the illegally obtained
evidence. Courts determine whether evidence has been obtained improperly. The purpose
of the rule is to deter police misconduct.
d. Informing Suspects of Their Rights – Individuals who are arrested must be informed
that they have a right to remain silent and a right to legal counsel. These rights may
be waived if the waiver is knowing and voluntary.
e. Think Pair Share Activity: 5-10 minutes total. Ask students to get into pairs orsmall groups
and consider the following: The EPA obtained a search warrant to examine the property of
a business, which they believe to be in violation of numerous environmental laws. During the
course of their search of the business, they discovered evidence of other financial crimes.
Must this evidence be excludedfrom any prosecution of the business?
VIII. Crimes Affecting Business
n. White Collar Crime - White-collar crime is often committed in the course of a
legitimate occupation.
a. Robery- wrongful taking of money, personal property, or any other article of
value from a person by means of force or fear.
b. Larceny- Larceny is the wrongful or fraudulent taking and carrying away by any
person of the personal property of another.
c. Forgery- Forgery is the fraudulent making or alteration of any writing that
changes the legal liability of another.
d. Embezzlement- Embezzlement is the fraudulent conversion of property or
money owned by one person but entrusted to another. Intending to ultimately
return embezzled property is not a defense.

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e. Mail and Wire Fraud- Use of the mails to defraud is a federal crime that
requires devising a scheme using the U.S. mail, commercial carriers, or wire
(including phone, TV, or the Internet) to defraud the public.
f. Bribery- Bribery of public officials is a crime. The bribe can be of anything that
the official considers valuable. Commission of the crime occurs when the bribe is
tendered—the official does not have to agree to do anything nor even accept the
bribe. Commercial bribery—kickbacks and payoffs from an individual working
for one company to another individual working for another company—is a crime.
Commercial bribes are typically given to obtain proprietary information, cover up
an inferior product, or secure new business. Industrial espionage sometimes
involvescommercial bribery.
g. Racketeering- To curb the entry of organized crime into legitimate business, the
Organized Crime Control Act of 1970 included the Racketeer Influenced and
Corrupt Organizations Act (RICO). It is a federal crime—
 Use income obtained from racketeering activity to purchase any
interest in an enterprise.
 Acquire or maintain an interest in an enterprise through
racketeering activity.
 Conduct or participate in the affairs of an enterprise through
racketeering activity.
 Conspire to do any of these things
 Broad Application of RICO- RICO incorporates by reference twenty-six
federal crimes and nine state felonies; if a person commits two of these
offenses, he or she is guilty of racketeeringactivity. Criminal sanctions
include fines up to $25,000 per violation or imprisonment up to twenty
years, or both, and forfeiture of assets used in the illegal activity or
acquired because of it.
IX. Defenses to Criminal Liability
a. Insanity- A person who suffers from a mental illness may be incapable of the state of
mind required to commit a crime. Thus, insanity can be a defense to a criminal charge.
b. Mistake- A mistake of fact will operate as a defense if it negates the required mental
state.
c. Duress- Duress exists when a wrongful threat induces a person to do something that he or
she would not otherwise do. Duress excuses the crime if the defendant reasonably
believed in the immediate danger and the judge or jury concludes that the belief was
reasonable.
d. Entrapment- This occurs when a government officer suggests that a crime be committed
and pressures or induces an individual to commit it. The important issue is whether a
person who committed a crime was predisposed to do so.
e. Immunity- To obtain information, the state can grant immunity from prosecution. A
person may then be compelled to answer questions (under the

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Fifth Amendment a person can refuse to answer questions only on the ground of self-
incrimination). Often a grant of immunity is part of a plea bargain under which a
defendant may be convicted of a lesser offense, and the state uses his or her testimony to
prosecute accomplices for more serious crimes.
X. Cyber Crime - Computer crime is a violation of criminal law that involves knowledge of computer
technology for its perpetration, investigation, or prosecution. Cyber crimes are computer crimes
that occur within the Internet community.
a. Cyber Fraud- Fraud (a misrepresentation knowingly made with the intent to deceive another
and on which a reasonable person relies to his or her detriment) that occurs online is cyber
fraud.
b. Cyber Theft- Cyber theft occurs when a thief steals data from a computer via the Internet
i) Identity Theft- Identity theft occurs when a form of identification is stolen and used to access
the victim’s financial resources. The Internet can provide criminals with easy access to private
data.
ii) Phishing- This occurs when a criminal posing as a legitimate business e-mails an
unsuspecting individual to update or confirm personal banking, credit, or other
information.
c. Hacking- A hacker uses one computer to break into another, often without the knowledge of
either computer’s owner. A hacker might appropriate a number of computers by secretly
installing a program on each to operate as a robot, or bot, andforward a transmission to
more computers, creating a botnet.
i) Malware- A bot program, or any software harmful to a computer or its user, is malware.
Other examples include a worm, which can reproduce itself and spread from computer to
another, and a virus, which can reproduce but must be attached to a host file to travel
between computers.
ii) Service-Based Hacking- The business trend of software as a service (SAAS) has been adopted
by hackers who rent their crimeware as a service through various Web sites. Those who hire
the service can target individual groups, if desired, for minimal cost.
d. Cyberterrorism- A cyberterrorist exploits a computer for a serious impact, such as a wholesale
theft of data or the insertion of false codes or data. A business might be targeted to steal a
customer list or business plans, to sabotage products or services, or to disrupt operations.
e. Prosecuting Cyber Crime
i) Jurisdiction and Identification Challenges- Jurisdictional issues and the anonymous nature
of technology can hamper the investigation and prosecution ofcyber crimes. For example, a
person who commits an act that constitutes a crime inone jurisdiction may have acted from a
different jurisdiction, where the act is not a crime. If the act is committed via e-mail, there
may not be ―sufficient contacts‖ to support a prosecution.
ii) The Computer Fraud and Abuse Act- The Counterfeit Access Device and Computer Fraud and
Abuse Act of 1984 prohibits cyber theft. The crime consists of (1) accessing a computer without
authority and (2) taking data. Penalties include fines and imprisonment for up to twenty years
(and civil suits).

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Should evidence obtained through an illegal search be excluded from a criminal trial even if the evidence
clearly shows the guilt of the person charged? The Bill of Rights was enacted to protect all citizens’ civil rights
from the potential coercion of the government. The Constitution is the supreme law of the land and
violations of these rights are among the most serious transgressions. Even accused persons who are citizens
have constitutional rights. Of course, criminals should be brought to justice. As the question suggests, these
policies can conflict when, for example, evidence obtained in violation of an accused’s constitutional rights
is excluded from trial. Essentially, the law attempts to balance the rights of all citizens, including criminal
defendants, against the need to protect all citizens from crimes. The ethical underpinnings for these policies
and their application can be ascribed to all sources of ethical principles—religion and philosophy—and
viable arguments can be made for nearly any point of view.

2. Is the global reach of the Internet a reason in support of a court’s assertion of authority over activities that
occur in another jurisdiction? Discuss. One reason in favor of the assertion of such authority is the rationale
that supports the exercise of jurisdiction under long- arm statutes. If a party is violating the laws of a
jurisdiction, and his or her ―minimum contacts’ with that jurisdiction can be proved, then he or she should
expect to be hauled into court for those violations. Reasons against the exercise of such authority include
the practicalities affectedby the sheer numbers of jurisdictions and laws, and the vast reach of the Internet.

3. Could probable cause exist to detain a suspect and conduct a search if the suspect has multiple e-mail
accounts, regularly uses the Internet, is sophisticated with computers, and knows how to protect access to
passwords and accounts? The Fourth Amendment provides protection against unreasonable searches and
seizures and requires that probable cause must exist before a search can be conducted or a warrant for a
search can be issued. If a suspect refuses to consent to a search, a law enforcement officer has to obtain a
search warrant. If the officer then searches without a warrant and cannot show that there were exigent
circumstances constituting probable cause to justify the search, the exclusionary rule will prohibit the
introduction at trial of any evidence the officer obtains. The factors listed here could support a finding of
probable cause, especially when coupled with other indications of crime. For example, if the suspect is
accused of cyberstalking an individual whom he or she clearly knows but denies knowing, probable cause
would exist. Similarly, if the suspect denies having the computer expertise or owning the hardware that he
or she clearly possesses, a search may be justified.

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4. Suppose that a foreign nation does not prosecute cyber criminals and does not cooperate with U.S.
authorities to investigate cyber crimes against U.S. citizens. What effect might this have on the deterrence or
proliferation of cyber crime? The most likely effect is that these circumstances would allow cyber crime to
increase. The Internet is not limited by political boundaries, and cyber crime similarly knows no bounds. An
individual who resides in a nation that does not prohibit or punish acts constituting crimes in other nations
and does not cooperate with those that do can operate with near impunity from that locale. Even if such
acts were universally recognized as crimes, issues of jurisdiction, evidence and proof, and national
sovereignty could delay or limit criminal prosecutions.

5. The media has exposed Web sites that purported to sell tickets to certain concerts and would accept credit
and banking information from would-be buyers but did not deliver the tickets. What can consumers do to avoid
being duped by such fraud? A legitimate Web site that offers concert tickets to the public should have
several features that are likely to distinguish it from a bogus site. A legitimate seller, for example, would
probably offer tickets to more than one event and possibly to more than a single venue. A legitimate seller
would likely post one or more customer service phone numbers that someone would actually answer. A
legitimate seller is more likely to offer a refund and describe how it could be obtained (even if a service
charge is imposed). A consumer might also be more protected if he or she uses a credit card rather than
debit card.

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Additional Activities and Assignments

5. Business Case: Criminal Law
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. As business owner, it is often more efficient to allow certain employees to act as
signers on business bank accounts. What are the risks of having another person
act as a formally authorized signer? What if the signer is not officially authorized
through the bank, but the owner permits them to regularly sign on the owner’s
behalf?
ii. What steps should Cole take to ensure his business is protected from criminal
liability? What about himself, personally?
iii. Should Nico’s below market value pricing coupled with the rumors in the
community about his business practices be sufficient to alert Ernesto’s about
potential criminal activity? Should knowledge of Nico’s criminality

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be imputed to Ernesto’s so that Ernesto’s may be held criminally liable for

receiving stolen property?
d. Role Play: Divide into small groups of 3- 5 students.
Imagine you are assistant prosecutors who have been tasked with helping your boss
―clean up‖ the corrupt businesses in your district. You have been in touch with local law
enforcement who provides you a summary of all the activity in the fact pattern above.
Prepare: (1) a list of potential defendants; (2) a list of criminal charges against each of
those defendants; (3) any additional information you would need from law enforcement
to bring additional charges for which you feel
there is currently insufficient evidence; and (4) the likelihood of success at trial foreach of
the charges.
e. Writing Assignment: In 7-10 sentences, answer the following: Assume in the present state,
there is a criminal conspiracy which makes it illegal to conspire withanother to engage in
illegal conduct. The statute reads:
―No person, with the intent to commit or help commit:
(1) a felony,
(2) engaging in a pattern of corrupt activity,
(3) the commission of a felony offense of unauthorized use of a vehicle
shall do either of the following:

(1) With another person, plan or aid in planning the commission ofany of
the specified offenses;

(2) Agree with another person that one or more of them will engage
in conduct that facilitates the commission of any of the specified
offenses.‖
Have Sally, Cole, or Mitch met the requisite mental state to be guilty under thisstatute?
Why or why not?
f. Ethics Question: Considering that criminal sanctions are designed to punish those who
commit crimes and deter others from committing similar crimes while civil sanctions are
designed to compensate those harmed by wrongful acts by the wrongdoer, are criminal
sanctions the most appropriate here to serve justice? Why or why not?

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Crimes of Theft
o Steps of a Criminal Prosecution

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 08:
Nature and Terminology

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 80
Cengage Supplements.................................................................................................................................................... 80
List of Student Downloads ......................................................................................................................................... 80
Chapter Objectives ......................................................................................................................................................... 80
Key Terms .......................................................................................................................................................................... 80
What's New in This Chapter .......................................................................................................................................... 81
Chapter Outline ............................................................................................................................................................... 82
Discussion Questions ........................................................................................................................................................ 85
Additional Resources ....................................................................................................................................................... 85
Cengage Video Resources ........................................................................................................................................ 85
Appendix........................................................................................................................................................................... 86

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Generic Rubrics............................................................................................................................................................ 86
Standard Writing Rubric ........................................................................................................................................... 86
Standard Discussion Rubric ........................................................................................................................................ 88

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Purpose and Perspective of the Chapter

The purpose of this chapter is to introduce students to terms related to contract formation,which will
be explored in more depth in subsequent chapters.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

29. List the four requirements of a contract

30. Contrast express and implied contracts

31. Distinguish valid, voidable, unenforceable, and void contracts

32. Understand the plain meaning rule

Key Terms
bilateral contract: A type of contract that arises when a promise is given in exchange for a promise.
contract: An agreement that can be enforced in court; formed by two or more parties, each of whom
agrees to perform or to refrain from performing some act now or in the future. executed contract: A
contract that has been completely per- formed by both parties. executory contract: A contract that has
not yet been fully performed.
express contract: A contract in which the terms of the agreement are fully and explicitly stated in words,
oral or written.
extrinsic evidence: Evidence that relates to a contract but is not contained within the document itself,
including the testimony of the parties, the testimony of witnesses, and additional agreements and
communications. A court may consider extrinsic evidence only when a contract term is ambiguous and the
evidence does not contradict the express terms of the contract. formal contract: A contract that by law
requires a specific form, such as being executed under seal, to be valid.
implied contract: A contract formed in whole or in part from the conduct of the parties (as opposed
to an express contract).

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informal contract: A contract that does not require a specified form or formality in order to be valid.
objective theory of contracts: A theory under which the intent to form a contract will be judged by
outward, objective facts as interpreted by a reasonable person, rather than by the party’s own secret,
subjective intentions. Objective facts might include what a party said when entering into the contract,
how a party acted or appeared, and the circumstances surrounding the transaction.
offeree: A person to whom an offer is made.
offeror: A person who makes an offer.
promise: A person’s assurance that he or she will or will not do something.
promisee: A person to whom a promise is made.
promisor: A person who makes a promise.
quasi contract: A fictional contract imposed on parties by a court in the interests of fairness and justice;
usually, quasi con- tracts are imposed to avoid the unjust enrichment of one party at the expense of
another.
unenforceable contract: A valid contract rendered unenforceable by some statute or law. unilateral
contract: A contract that results when an offer can be accepted only by the offeree’s performance.
valid contract: A contract that results when the elements necessary for contract formation
(agreement, consideration, contractual capacity, and legality) are present.
void contract: A contract having no legal force or binding effect.
voidable contract: A contract that may be legally avoided (canceled) at the option of one of the parties.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:
o Case Analysis 11.1: Weston v. Cornell University (2016)—on the effect of an offerand
acceptance between a university and an associate professor on a previous agreement
between the same parties.
o New Case 11.2: Boswell v. Panera Bread Co. (2018)— on the revocation of offersfor
unilateral contracts and on the rule (in some states) that as soon as the offeree begins
performing, the offeror is precluded from revoking or modifying the offer.
o Spotlight Case 11.3: Wagner v. Columbia Pictures Industries, Inc. (2007)—on how the
admissibility of extrinsic evidence can significantly affect the court’s interpretation of
ambiguous contractual provisions and thus the outcome of litigation. But when the
contract is clear and unambiguous, a court normally cannot consider evidence outside the
contract.

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 1 New Case Problem (based on 2018 case on quasi-contracts)

 1 New ―A Question of Ethics‖ using all-new IDDR Approach on contract requirements(based on
2017 case)
 Updated Limited-Time Group Assignment with a new activity.
[return to top]

Chapter Outline
I. Overview of Contract Law
a. The Definition of a Contract – A contract is a promise for the breach of which the law
gives a remedy or the performance of which the law recognizes as a duty (in other words,
an agreement that can be enforced in court). A contract may be formed when two or
more parties each promise to perform or to refrain from performing some act now or in
the future. A party who does not fulfill his or her promise may be subject to sanctions,
including damages or, under some circumstances, being required to perform the promise.
b. The Objective Theory of Contracts- The intent to enter into a contract isimportant
in the formation of a contract. The objective theory of contracts
determines intent. Under this theory, a party’s intention to enter into a contract is judged
by outward, objective facts as a reasonable person would interpret them, rather than by
the party’s own secret, subjective intentions. Objective facts include—
i. What the party said.
ii. How the party acted or appeared.
iii. The circumstances surrounding the transaction.
c. Requirements of a Valid Contract- The four essential elements of a contractare—
i. Agreement.
ii. Consideration.
iii. Contractual capacity.
iv. Legality.
d. Defenses to the Enforceability of a Contract – Defenses to the formation or
enforcement of a contract include—
v. Voluntary consent.
vi. Form.

III. Types of Contracts

o. Bilateral v. Unilateral Contract - Every contract involves at least two parties: anofferor
and an offeree. The offeror promises to do or not to do something. Whether a contract is
unilateral or bilateral depends on what the offeree must do to accept.
a. Bilateral- A bilateral contract is a promise for a promise; if the offeree need
only promise to perform, the contract is bilateral.

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b. Unilateral- A unilateral contract is a promise for an act; if an offeree can

accept only by complete performance, a contract is unilateral.
c. Contests, Lotteries, and Prizes- Contests, lotteries, and other competitions
involving prizes are examples of offers to form unilateral contracts. If a person
complies with the rules of the contest—such as bysubmitting the right lottery
number at the right place and time—a unilateral contract is formed.
d. Revocation of Offers for Unilateral Contracts- A unilateral contract’soffer
becomes irrevocable once substantial performance is completed.
e. Think Pair Share Activity.: 5-10 minutes total. Ask students to get intopairs or small
groups and consider how to classify each of the following types of contracts:
i. A contest at a basketball halftime show in which a person will be
awarded $100 if they can make three baskets in 15 seconds
ii. A business owner who has been a long-time client of an accountant,stops by
the accountant’s office with a box of business receipts during tax season.
The owner leaves the box outside the
accountant’s door because the accountant is not in the office.
iii. An oral agreement between a pharmaceutical laboratory worker to sell
expired prescription pills to a pharmacist at a discounted price
p. Express v. Implied Contracts
a. Express Contracts- An express contract is one in which the terms are
expressed in words, oral or written.
b. Implied Contracts- A contract that is implied from the conduct of the parties is an
implied-in-fact contract, or simply an implied contract. The parties’ conduct
reveals that they intended to form a contract and creates and defines its terms.
c. Requirements for Implied Contracts- To establish an implied-in-fact
contract—
i. The plaintiff must have furnished some service or property.
ii. The plaintiff must have expected to be paid and the defendant knew
or should have known that payment was expected.
iii. The defendant had a chance to reject the service or property and did
not.
d. Mixed Contracts with Express and Implied Terms- A contract may contain
some express terms, while others are implied.
f. Quasi Contracts- A quasi contract is not based on an express promise to pay for a benefit
received or on conduct implying such a promise. Quasi contracts, or contracts implied in
law, are imposed by courts to avoid unjust enrichment—the theory that individuals should
not be allowed to profit or enrich themselves inequitably at the expense of others. The
plaintiff recovers in quantum meruit.
a. Limitations on Quasi-Contractual Recovery- There are situations in which the
recipient of a benefit is not liable. People cannot normally be

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forced to pay for benefits thrust on them as a result of another’s

misconduct or negligence, for example.
b. When an Actual Contract Exists - A quasi contract will not normally be imposed
when there is a contract that covers the matter.
c. Discussion Activity: 5-10 minutes total. Ask students to think of someexamples of
quasi contracts.
q. Formal v. Informal Contracts- Formal contracts require a special form or method of
formation to be enforceable. Formal contracts include negotiable instruments, which
include checks, drafts, promissory notes, and certificates of deposit. All other contracts
are informal contracts, or simple contracts. For these, no special form is required (except
for certain types of contracts that must be in writing).
r. Executed versus Executory Contracts- Contracts are also classified according to their
stage of performance. A contract that has been performed is an executed contract. A
contract that has not been performed is an executory contract. If oneparty has fully
performed but the other has not, the contract is executed on the one side and executory
on the other, and it is classified as executory.
s. Contract Enforceability- A valid contract results when all of the elements necessary to
contract formation exist—when the parties agree, through an offer and an acceptance,
to form a contract; the contract is supported by consideration; the contract is for a legal
purpose; and the parties had legal capacity to contract.
a. Voidable Contracts- A voidable contract is a valid contract in which oneor both
of the parties have the option of avoiding his or her legal obligations. If the
contract is avoided, both parties are released. If it is ratified, both parties must
perform.
b. Unenforceable Contracts - An unenforceable contract is a valid contract that
cannot be enforced due to certain defenses. For example, a valid contract
barred by a statute of limitations is an unenforceable contract.
ii. Void Contracts- A contract that is void is no contract. A void contractgives rise
to no legal obligation on the part of any party. An illegal contract is, for
example, a void contract.

IV. Interpretation of Contracts – The most important principle to keep in mind in considering these rules is
that the law attempts not just to enforce a contract but to enforce the contract theparties made.

a. The Plain Meaning Rule – When a contract is in writing that is not subject to conflictingmeanings,
a court will enforce the writing according to its plain meaning. The meaning of the words must be
determined from the face of the instrument—a court cannot consider evidence extrinsic evidence.
i) Ambiguity – A contract is ambiguous when—
(1) The intent of the parties cannot be determined from the language.
(2) The contract lacks a provision on a disputed issue.
(3) A term is susceptible to more than one interpretation.

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(4) There is uncertainty about a provision.

ii) Extrinsic Evidence - If a contract is ambiguous, a court may interpret it against the party
who drafted it or the court may consider extrinsic evidence—the testimony of the parties,
additional agreements or communications, or other information relevantto determining the
parties’ intent.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is the objective theory of contracts? Intent to enter into a contract is important in the contract’s
formation. Intent is determined by the objective theory of contracts. That is, it is judged by outward,
objective facts as they would be interpreted by a reasonable person, rather than by the party’s own
secret, subjective intentions. These facts include what the party said, how he or she acted or appeared,
and the circumstances surrounding the transaction. Generally, courts examine objective facts, conduct, and
circumstances surrounding a particular transaction to determine whether the parties made a contract and, if
so, what its terms are.

2. How does a quasi contract differ from an express or an implied-in-fact contract? A quasi contract is
not based on an express promise or on conduct implying a promise; in other words, a quasi contract is not
based on a contract. Quasi contracts are imposed by courts to avoid unjust enrichment. The doctrine under
which the court imposes a quasi contract is called quantum meruit, or ―as much as he deserves,‖ and that
also describes the extent of compensa- tion that a court will award. The recipient of a benefit does not
have to pay for it if it was thrust on him or her. A quasi contract will not normally be imposed when there
is a contract that covers the matter.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Quasi Contracts
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

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Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 09:
Offer and Acceptance

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................... 90
Cengage Supplements.................................................................................................................................................... 90
List of Student Downloads ......................................................................................................................................... 90
Chapter Objectives ......................................................................................................................................................... 90
Key Terms .......................................................................................................................................................................... 90
What's New in This Chapter .......................................................................................................................................... 91
Chapter Outline ............................................................................................................................................................... 92
Discussion Questions ........................................................................................................................................................ 95
Additional Resources ....................................................................................................................................................... 96

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Cengage Video Resources ........................................................................................................................................ 96

Appendix........................................................................................................................................................................... 96
Generic Rubrics............................................................................................................................................................ 96
Standard Writing Rubric ........................................................................................................................................... 96
Standard Discussion Rubric ........................................................................................................................................ 98

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Purpose and Perspective of the Chapter

The purpose of this chapter is to take an in-depth review of how agreement and mutual assent functions in
the creation of contracts.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to completethe activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

33. Identify the elements of an offer

34. Recognize a counteroffer

35. Identify the elements of a valid acceptance

36. Describe a click-on agreement

Key Terms
Acceptance: (1) In contract law, the offeree’s notification to the offeror that the offeree agrees to be
bound by the terms of the offeror’s proposal. (2) In negotiable instruments law, the
drawee’s signed agreement to pay a draft when presented.
Agreement: A meeting of two or more minds in regard to the terms of a contract; usually broken down
into two events—an offer by one party to form a contract, and an acceptance ofthe offer by the
person to whom the offer is made.
browse-wrap terms: Terms and conditions of use that are presented to an Internet user at the time a
product, such as software, is downloaded but that need not be agreed to before the product is installed
or used.
click-on agreement: An agreement that arises when a buyer, engaging in a transaction on a computer,
indicates his or her assent to be bound by the terms of an offer by clicking on a
button that says, for example, ―I agree‖; sometimes referred to as a click-on license or a click-wrap
agreement.
counteroffer: An offeree’s response to an offer in which the offeree rejects the original offer and at
the same time makes a new offer.

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e-contract: A contract that is entered into in cyberspace and is evidenced only by electronicimpulses
(such as those that make up a computer’s memory), rather than, for example, a typewritten form.
e-signature: As defined by the Uniform Electronic Transactions Act, ―an electronic sound, symbol, or process
attached to or logically associated with a record and executed or adopted by a person with the intent to
sign the record.‖
mailbox rule: A rule providing that an acceptance of an offer becomes effective on dispatch. mirror
image rule: A common law rule that requires, for a valid contractual agreement, that the terms of the
offeree’s acceptance adhere exactly to the terms of the offeror’s offer.
offer: A promise or commitment to perform or refrain from performing some specified act in the future.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 Restructured sections on E-Signatures and Uniform Electronic Transactions Act for better
organization and fluency.
 1 New Case:
o Classic Case 12.1: Lucy v. Zehmer (1954)—on whether an offer made to purchase a farm
―after a few drinks‖ met the serious-intent requirement.
o Spotlight Case 12.2: Basis Technology Corp. v. Amazon.com, Inc. (2008)—one party
claimed that the agreement, which was formed via e-mail, was binding. The other party
claimed that the e-mail exchange was merely an agreement to work out the terms of a
settlement in the future. Can an exchange of e-mails create a complete and unambiguous
agreement?
o New Case 12.3: Bailey v. Kentucky Lottery Corp. (2018)—a lottery entrant claimedthat
the lottery breached its contract with him when it denied him the prize. The lottery
acknowledged that he had accepted its offer to contract when he entered the contest
online, and that his ticket had won the drawing. But it asserted that he was disqualified
because he had failed to comply with the terms of the contract—that is, the rules of the
contest.
 4 New Case in Points
o 2016 case on forum-selection clause
o 2017 case on click-on agreements
o 2017 case on shrink-wrap agreements
o 2017 case on browse-wrap agreements
 1 New Case Problem (based on 2018 case on online acceptances)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on intention (based on 2017case)

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[return to top]

Chapter Outline
I. Agreement- Essential to any contract is an agreement: an offer must be made and it must be
accepted. The parties must manifest their assent to the same bargain. In interpreting the parties’
words and conduct, the law adheres to the objective theory of contracts.
a. Requirements of the Offer- An offer is a promise to do or refrain from doing some
specified thing in the future. The elements necessary for an effective offer are—
1) A serious intent by the offeror.
2) Reasonably certain, or definite, terms (that can be ascertained by the
parties and a court).
3) Communication of the offer to the offeree.
i. Intention- Serious intent is determined by what a reasonable person in the
offeree’s position would conclude the offeror’s words and actions meant.
Offers made in obvious anger, jest, or undue excitement do not meet the
test.
ii. Expressions of Opinion- An expression of opinion is not an offer. For
example, a doctor’s opinion that a hand will heal within a few days of an
operation is not an offer.
iii. Preliminary Negotiations- A request or invitation to negotiate is not an
offer. (This includes statements such as ―Will you sell your estate?‖ and ―I
wouldn’t sell my car for less than $1,000.‖)
iv. Advertisements and Price Lists- In general, ads and price lists are
treated as invitations to negotiate.
v. Live and Online Auctions
a. ―Offers‖ to sell items on eBay and other sites are treated as
invitations to negotiate.
b. An auction is not an offer—the owner is expressing a willingness
to sell. The bidder is the offeror, and the auctioneer is the
offeree. A bidder may revoke his or her bid, or the auctioneer
may reject it, before the auctioneer strikes the hammer, which
constitutes acceptance. When a bid is accepted, all previous bids
are rejected.
b. Definiteness of Terms- A contract must have reasonably definite terms so that a court can
determine if a breach has occurred and can give an appropriate remedy. An offer may
invite an acceptance to be worded in specific terms so that the contract is made definite.
Generally, expressed or inferable contract terms include—
i. Identification of the parties.

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ii. Identification of the object or subject matter of the contract—the specific

goods, services, or land—with the quantity when appropriate and the
work to be performed.
iii. Consideration to be paid.
iv. Time of payment, delivery, or performance.

c. Communication- An offer must be communicated to the offeree, so that the offeree knows
it. Ordinarily, one cannot agree to a bargain without knowing that it exists.
II. Termination of the Offer- An offeree can transform an offer into a contract by acceptance. This
power of acceptance can be terminated, however, by action of the parties or operation of law.
a. Termination by Action of the Parties
1) Revocation- An offer may be revoked any time before acceptance, even
if the offeror agreed to hold it open. Revocation can be—
a. Expressly repudiated.
b. Implied by conduct inconsistent with the offer.
ii. Revocation is effective only on receipt.
iii. Revocation of an offer made to the general public must be communicated
in the same manner in which the offer was communicated.
2) Rejection- An offeree may reject an offer. A subsequent attempt to accept
constitutes a new offer. Rejection is effective only on receipt. Asking about an
offer is not rejection.
3) Counteroffer- A counteroffer is a rejection and a simultaneous making of a new
offer. The mirror image rule requires that the offeree’s acceptance match the
offeror’s offer—any material change in the terms automatically terminates the
offer and substitutes a counteroffer.
b. Termination by Operation of Law
1) Lapse of Time- An offer terminates automatically when the time specified in
the offer has passed. The specified time begins to run when the offeree receives
the offer, not when it is sent. If the offer is delayed, the period begins to run
from the date the offeree would have received it, but only if the offeree knows
or should know of the delay. If no time is specified, the offer terminates at the
end of a reasonable period, as determined by the subject matter of the
contract, business and market conditions, and other relevant circumstances.
2) Destruction, Death, or Incompetence- An offer terminates if the subject matter
is destroyed before the offer is accepted. An offer terminates if the offeror or
offeree dies or becomes incompetent. This rule applies whether or not the other
party had notice of the death or incompetence.
3) Supervening Illegality- A statute or court decision that makes an offer illegal
automatically terminates the offer.

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III. Acceptance- Acceptance is a voluntary act (either words or conduct) by the offeree that shows
assent to the terms of an offer. Except in special circumstances, only the person to whom the offer is
made can accept.
a. Unequivocal Acceptance- Unequivocal acceptance is required by the mirror image rule.
An acceptance subject to new conditions or with terms that materially change the offer
may be considered a counteroffer. An acceptance may be unequivocal even though the
offeree expresses dissatisfaction. Conditions that add no new terms do not turn an
acceptance into a rejection unless the acceptance is made conditional.
1) Silence as Acceptance- Ordinarily, silence cannot be acceptance. Silence can
operate as acceptance when--
b. Communication of Acceptance
1) Bilateral contract—communication of acceptance is necessary because
acceptance is in the form of a promise, and the contract is formed when
the promise is made. Communication is not necessary if the offer dispenses with
it or the offer can be accepted by silence.
2) Unilateral contract—no communication of acceptance is generally necessary,
because acceptance is evident. Notice is necessary if the offeror requests it or
has no adequate means of determining whether there has been performance.
3) The Mailbox Rule- Acceptance is effective when it is sent by whatever means
is authorized by the offeror. This is the mailbox rule.
4) Authorized Means of Acceptance
i. Specific means can be stated in the offer or authorized by facts or by
law. If an offeror specifies an exclusive means, the contract is not formed
unless the offeree uses it.
ii. If the offeror does not specify a certain means, the offeree can accept by
any medium reasonable under the circumstances. A medium is reasonable
if it is the same means as the offeror used to communicate the offer or a
faster means.
5) Substitute Method of Acceptance- An acceptance sent by
unauthorized means is effective on receipt.
6) Knowledge Check Activity: 1 minute total. Tests students’
understanding of the definition of intention.
7) Knowledge Check Activity: 3 minutes total. Tests students’
understanding of mutual assent in a brief hypothetical scenario.
IV. Agreement in E-Contracts- Disputes arising from contracts entered into online concernthe terms
and assent to those terms.
a. Online Offers
1) Displaying the Offer- Terms should be conspicuous and clearly spelled out.
On a website, this can be done with a link to a separate page that contains the
details.
2) Provisions to Include- Subjects that should be covered include—

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i.
Acceptance of terms—a mechanism by which an offeree can
affirmatively indicate consent (such as an ―I agree‖ box to click on).
ii. Payment, including taxes.
iii. Refund and return policies.
iv. Disclaimers.
v. Limitation of remedies.
vi. Privacy policies.
vii. Dispute resolution.
b. Online Acceptances
1) Click-On Agreements- A click-on agreement occurs when a buyer,
completing a transaction on a computer, is required to indicate his or her assent
to be bound by the terms of an offer by clicking on a button that says, for
example, ―I agree.‖ The buyer does not have to actually read the terms to
be bound.
2) Poll Activity: 1 minute total: Asks students to evaluate their personal feelings
about the legality and ethical nature of a contract.
c. The UETA
1) The Uniform Electronic Transactions Act (UETA) was issued in 1999 by the
National Conference of Commissioners on Uniform State Laws (NCCUSL) and
the American Law Institute. Under the UETA, a signature may not be denied
legal effect or enforceability solely because it is in electronic form.
2) The UETA removes barriers to e-commerce by giving the same legal effect to
electronic records and signatures as to paper documents and signatures.
i. The Scope and Applicability of the UETA- The UETA applies only to e-
records and e-signatures relating to a transaction (an interaction between
two or more people relating to business, commercial or governmental
activities). The UETA does not apply to wills or testamentary trusts,
transactions covered by the UCC (except Articles 2 and 2A), and
applications of other laws excluded by the states.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is unequivocal acceptance? Unequivocal acceptance is acceptance that adds no new terms or
terms that materially change the offer (―I accept the offer, but only if I can pay on ninety days’ credit‖).
Under the mirror image rule, an acceptance subject to new conditions or with terms that materially change
the offer may be considered a counteroffer. An acceptance may be unequivocal even though the offeree
expresses dissatisfaction (―I accept the offer, but I

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wish I’d gotten a better deal‖). An acceptance that is made conditional is a rejection (―I accept ifyou send
a written contract‖). Under the UCC, acceptance is valid even if terms are added.

2. Is a court likely to enforce a click-on agreement? Yes, unless the agreement is objectionable on
grounds that apply to contracts generally. This is if the party who agrees to the terms has an opportunity
to read them before the contract is made.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Modification of an Offer
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not
related and consistent. conclusions are mostly logically related and
10 points logically related and consistent.
consistent.

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7 points 0 points
Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 10:
Consideration

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 100
Cengage Supplements.................................................................................................................................................. 100
List of Student Downloads ....................................................................................................................................... 100
Chapter Objectives ....................................................................................................................................................... 100
Key Terms ........................................................................................................................................................................ 100
What's New in This Chapter ........................................................................................................................................ 101
Chapter Outline ............................................................................................................................................................. 101
Discussion Questions ...................................................................................................................................................... 103
Additional Resources ..................................................................................................................................................... 103

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Cengage Video Resources ...................................................................................................................................... 103

Appendix......................................................................................................................................................................... 104
Generic Rubrics.......................................................................................................................................................... 104
Standard Writing Rubric ......................................................................................................................................... 104
Standard Discussion Rubric ...................................................................................................................................... 105

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Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the idea of the sufficiency of consideration. It examineswhat
qualifies as consideration and what does not qualify as valid consideration.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

37. List the elements of consideration

38. State the preexisting duty rule

39. Name two ways to settle a legal claim

40. Understand the concept of promissory estoppel

Key Terms
accord and satisfaction: An agreement for payment (or other performance) between two parties,
one of whom has a right of action against the other. After the payment has been
accepted or other performance has been made, the ―accord and satisfaction‖ is complete, and the
obligation is discharged.
consideration: Generally, the value given in return for a promise or a performance. The consideration,
which must be present to make the contract legally binding, must be some- thingof legally sufficient value
and must be bargained for.
covenant not to sue: An agreement to substitute a contractual obligation for some other type of legal
action based on a valid claim.
estopped: Barred, impeded, or precluded.
forbearance: The act of refraining from exercising a legal right; an agreement between a lender and a
borrower in which the lender agrees to temporarily cease requiring mortgage payments, to delay
foreclosure, or to accept smaller payments than previously scheduled.
liquidated debt: A debt that is due and certain in amount.
past consideration: Something given or some act done in the past, which cannot ordinarily be
consideration for a later bargain.

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promissory estoppel: A doctrine that applies when a promisor makes a clear and definite promise
on which the promisee justifiably relies. Such a promise is binding if justice will be better served by
the enforcement of the promise.
release: A contract in which one party forfeits the right to pursue a legal claim against the otherparty.
rescission: (pronounced rih-sih-zhen) A remedy whereby a contract is canceled and the parties are
returned to the positions they occupied before the contract was made; may be effected through the
mutual consent of the parties, by their conduct, or by court decree.
unliquidated debt: A debt that is uncertain in amount.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case:
o Classic Case 13.1: Hamer v. Sidway (1891)—on forbearance from using tobaccoand
alcohol as consideration for contract
o New Case 13.2: Cincinnati Reds, LLC v. Testa (2018)—on whether a major league
baseball team receives consideration from fans in exchange for promotional items that
the fans receive on attending a game.
o Spotlight Case 13.3: Already, LLC v. Nike, Inc. (2013)—on how a covenant not to sue
can form the basis for a dismissal of the claims of either party to the covenant.
 1 New Case in Point
o 2016 case on bargained-for exchange
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on illusory promises (basedon 2018
case)
[return to top]

Chapter Outline
I. Elements of Consideration- Consideration is the value given in return for a promise. Asnoted
above, there are two elements—
a. Legally Sufficient Value- This may be—
i. A promise to do something that one has no prior legal duty to do.
ii. The performance of an action that one is otherwise not obligated to
undertake.
iii. The refraining from an action that one has a legal right to undertake.
b. Bargained-for Exchange- The consideration given by the promisor must induce the
promisee to offer a return promise, performance, or forbearance, which must induce the
promisor to make the promise. This element of bargained-for exchange distinguishes
contracts from gifts.
c. Knowledge Check Activity: 1 minute total. Tests students’ knowledge of consideration.

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II. Agreements That Lack Consideration

a. Preexisting Duty- Under most circumstances, a promise to do what one already has a
legal duty to do is not legally sufficient consideration. There are exceptions—
i. Unforeseen Difficulties- When a party to a contract runs into unforeseen and
substantial difficulties that could not have been anticipated at the time the
contract was entered into, the parties may agree to extra compensation for
overcoming the difficulties, and a court may enforce the agreement. These
unforeseen difficulties do notinclude risks ordinarily assumed in business.
ii. Rescission and New Contract- Two parties can agree to rescind their contract,
at least to the extent that it is executory. When rescission andthe making of the
new contract take place at the same time, some courts may find a preexisting
duty and refuse to enforce the newpromise.
b. Past Consideration- Promises made with respect to events that have already taken place
are unenforceable. They lack the element of bargained-for exchange.
c. Illusory Promises- If a contract expresses such uncertainty of performance that the
promisor has not actually promised to do anything, the promise is illusory— without
consideration and unenforceable.
d. Knowledge Check Activity: 1 minute total. Tests a students’ knowledge of consideration.

III. Settlement of Claims

a. Accord and Satisfaction- For an accord and satisfaction, the amount of the debtmust be
in dispute.
b. Release- A release bars further recovery. A release is binding if—
• It is secured and given in good faith.
• It is in a signed writing (not required in all states).
• Consideration is given (not required under the UCC).
c. Promissory Estoppel
i. Requirements to Establish Promissory Estoppel- Reasonable reliance on a
promise may form a basis for enforceable contract rights and duties under the
doctrine of promissory estoppel (or detrimental reliance) if there is—
ii. A clear and definite promise.
iii. The promisor’s expectation that the promisee will rely on the promise.
iv. The promisee’s act or refraining from acting in reasonable reliance onthe
promise.
v. The promisee’s definite reliance results in substantial detriment.
vi. Justice better served by enforcement of the promise.
d. Discussion Activity: 5-10 minutes total. As a class, discussion whether any ofthe
following are legally enforceable:

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i. Before Lucia starts college, an uncle promises to give her $100,000 when she
graduates. She goes to a college which costs $50,000 a year in tuition. During
her final semester of college, her uncle sends her a note revoking his promise.
ii. Olivia promises to give $50 a month to a cancer research foundation for the
next year. However, several months later she loses her job and can no longer
afford the payment.
iii. Lewis loaned Karl $25,000 who made payments for seven years but then
stopped before the total amount had been paid. A year later Lewis filed
suit. The statute of limitations in the state is six years for these types of claims.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. The courts generally do not weigh the sufficiency of consideration according to the comparative
economic value of what is exchanged. Should they? Why or why not? The legal sufficiency of a
consideration for a promise does not depend on the comparative economic value of the consideration
and of what is promised in return, because the parties are deemed to be the best judges of their bargains.
A party is presumed to contract for the performance of an act that will afford him or her pleasure, gratify
an ambition, please a fancy, or express appreciation of a service another has rendered.

2. Discuss the doctrine of detrimental reliance, or promissory estoppel. The doctrine of detrimental
reliance, or promissory estoppel, (not available in some jurisdictions) involves a promise given by one party
that induces another party to rely on it to his or her detriment. When the promisor can reasonably have
expected the reliance, the promise will be enforced if injustice cannot otherwise be avoided. The
promisee’s reliance must have been justified, and generally the act must have been of a substantial nature.
The promisor is estopped from asserting the lack of consideration as a defense—that’s how the promise is
enforced.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Legally Sufficient Consideration
o Promissory Estoppel

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[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 11:
Capacity and Legality

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 107
Cengage Supplements.................................................................................................................................................. 107
List of Student Downloads ....................................................................................................................................... 107
Chapter Objectives ....................................................................................................................................................... 107
Key Terms ........................................................................................................................................................................ 107
What's New in This Chapter ........................................................................................................................................ 108
Chapter Outline ............................................................................................................................................................. 108
Discussion Questions ...................................................................................................................................................... 110
Additional Resources ..................................................................................................................................................... 111
Cengage Video Resources ...................................................................................................................................... 111

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Appendix......................................................................................................................................................................... 112
Generic Rubrics.......................................................................................................................................................... 112
Standard Writing Rubric ......................................................................................................................................... 112
Standard Discussion Rubric ...................................................................................................................................... 112

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine how capacity impacts the validity of contracts.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

41. Understand a minor’s right to disaffirm a contract

42. Identify obligations that minors cannot avoid

43. Explain how intoxication can affect a contract

44. Discuss how mental incompetence can affect a contract

Key Terms
age of majority: The age at which an individual is considered legally capable of conducting himself or
herself responsibly and is entitled to vote. In contract law, the age at which one is no longer an infant and
can no longer disaffirm a contract.
contractual capacity: The legal ability to enter into contracts; the threshold mental capacity required by
law for a party who enters into a contract to be bound by that contract. disaffirmance: The legal
avoidance, or setting aside, of a contractual obligation. emancipation: In regard to minors, the act of
being freed from parental control; occurs when a child’s parent or legal guardian relinquishes the legal
right to exercise control over the child.
Normally, a minor who leaves home to support him- self or herself is considered emancipated.
necessaries: Necessities required for life, such as food, shelter, clothing, and medical attention; may
include whatever is believed to be necessary to maintain a person’s standard of living or financial and
social status.
ratification: The act of accepting and giving legal force to an obligation that previously was not
enforceable.
reformation: A court-ordered correction of a written contract so that it reflects the true intentions
of the parties.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:
o Case 14.1: PAK Foods Houston, LLC v. Garcia (2014)—on whether a minor had
effectively disaffirmed an agreement to arbitrate with her employer
o New Case 14.2: Kennedy v. Shave Barber Co. (2018)—on whether whether by
adding the words ―current location‖ to a court-reformed noncompete agreement was
reasonable.
oCase Analysis 14.3: Holmes v. Multimedia KSDK (2013)—the court considered
whether an exculpatory clause that released ―any Event sponsors and their agents and
employees‖ from liability for future negligence was ambiguous.
 Retained and Updated Managerial Strategy feature—
o Creating Liability Waivers That Are Not Unconscionable (Updated with new 2018case
regarding a ski lift injury that involved a waiver.)
 1 New Example:
o on implied ratification by a minor in purchasing a grand piano
 1 New Case in Point
o 2016 case on voidable contracts
 1 New Business Scenario:
o on contractual capacity
 2 New Case Problems (based on 2018 cases)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on minors (based on 2017case)
[return to top]

Chapter Outline
I. Contractual Capacity- Generally, courts presume that parties to a contract have contractual
capacity, but there are some situations in which capacity is lacking or may be questionable. In
some situations, a party may have capacity but also the right to avoid liability under it.
a. Poll Activity: 1 minute total. Asks students to consider whether they have ever been a
party to a contract as a minor.
b. Minors
 In most states, the age of majority for contractual purposes is eighteen. Some
states provide for the termination of minority on marriage and emancipation.
 A minor can enter into any contract that an adult can enter into, except a contract
prohibited by law for minors.

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 Generally, a contract entered into by a minor is voidable at the minor’s option.

i. Disaffirmance
1. To avoid a contract, a minor need only manifest intent not to be bound.
This may be expressed by words or conduct. A minor must disaffirm an
entire contract.
2. An adult who enters into a contract with a minor cannot avoid contractual
duties unless the minor opts to avoid the contract
ii. Disaffirmance within a Reasonable Time- A contract can ordinarily be
disaffirmed at any time during minority or for a reasonable time after coming of
age.
iii. Minor’s Obligations on Disaffirmance- Generally, a minor need only return the
goods (or other consideration), if they are still within his or her control, regardless
of their condition. In a few states, minors have a duty to restore the other party to
the position he or she was in before the contract was made.
iv. Exceptions to a Minor’s Right to Disaffirm
1. Misrepresentation of age—In many states, this is enough to prohibit
disaffirmance.
2. Business contracts—Some states prohibit a minor who engaged in business
as an adult from disaffirming related contracts.
3. Necessaries—A minor who enters into a contract for necessaries (food,
clothing, and other items) may disaffirm the contract but must still pay the
reasonable value of the goods. What qualifies as a necessary depends
on what is needed for the minor’s subsistence and the minor’s standard of
living or financial or social status.
v. Ratification- Ratification is an act or an expression in words by which a minor, on
or after reaching majority, indicates intent to become bound by a contract. In
general, any act or conduct showing an intent to affirm the contract will be
deemed ratification.
vi. Parents’ Liability- Generally, parents are not liable for their minor children’s
contracts. If a parent is a co-party, he or she may be liable. Generally, minors are
also liable for their own torts unless a parent fails to use proper parental control.
vii. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider the following:
1. A 16 year old buys a used vehicle from a car dealership for $2,500. He
wrecks the car and then decides to disaffirm the contract.
2. Another 16 year old boy (with substantial family wealth) buys a
$250,000 McLaren sports car. He wrecks the care and then decides to
disaffirm the contract.
3. Is there any difference in these cases? Is one car a necessary and one a
luxury? Would it make any difference if the minors used fake

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identification to make the dealership think they were 18 at the time of

purchase?
II. Intoxication- Intoxication is a condition in which a person’s capacity to act or think is inhibited by
alcohol or some other drug. Many courts look at objective indications to determine whether a
contract is voidable because of intoxication rather than inquire into a party’s mental state.
a. Disaffirmance- If a person is intoxicated enough to lack mental capacity, a contract
entered into at the time may be voidable at his or her option (with, in most states, full
restitution). Being so intoxicated means being so impaired as not to comprehend the
consequences of contracting.
b. Ratification- On sobriety, a contract may be ratified.
III. Mental Incompetence
a. When the Contract Will Be Void- If a court has adjudged a person to be incompetent and
appointed a guardian, any contract made by the incompetent is void.
b. When the Contract Will Be Voidable- If a person has not been adjudged
incompetent, any contract entered into by the person is voidable if the individual does not
know he or she is entering into a contract or lacks the capacity to comprehend its subject
matter, nature, and consequences. Voidable contracts may be disaffirmed or ratified
(after the incompetent becomes competent or by an appointed guardian).
c. When the Contract Will Be Valid- If an incompetent understands the nature and effect
of entering into a certain contract, the contract is valid, despite a lack of capacity for
other activities. Similarly, an incompetent may have a lucid interval during which he or she
will be considered to have full capacity.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What effect does contracting for necessaries have on a minor’s right to disaffirm? A minor who
contracts for necessaries may disaffirm but must pay the reasonable value of whatever he or she receives.
A minor is liable only for the reasonable value of the goods because on disaffirmance there is no contract
and thus no contract price. To be liable for necessaries, a minor must not be under the care of a parent or
guardian who is required, and able, to provide for the minor. If a minor has a parent or guardian who is
able to provide necessaries, but fails to do so, the parent or guardian is liable—in quasi contract—for the
reasonable value of any necessaries that the minor buys.

2. What effect does intoxication have on persons’ contractual capacity? The inhibition by alcohol or
some other drug of a person’s capacity to act or think is intoxication. A contract

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entered into by a person who is intoxicated can be either voidable or valid. If the person was intoxicated
enough to lack mental capacity (that is, so impaired as not to comprehend the consequences of entering
into a contract), the contract is voidable at his or her option. Otherwise, the contract is enforceable. Many
courts look at objective indications to determine whether a contract is voidable because of intoxication
rather than inquire into a party’s mental state. A contract favorable to one party does not mean that it is
voidable (unless fraud is present). A contract held voidable because of intoxication may be disaffirmed,
but most courts require full restitution as a condition of disaffirmance. (In cases involving necessaries, a
person will be liable in quasi contract for the reasonable value of the necessaries.) A contract that is
voidable because of intoxication may be ratified, expressly or implicitly (for example, by failing to
disaffirm within a reasonable time after becoming sober). An alcoholic who makes a contract while sober
does not lack capacity.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Discharge of Contractual Obligations
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 12:
Legality

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 115
Cengage Supplements.................................................................................................................................................. 115
List of Student Downloads ....................................................................................................................................... 115
Chapter Objectives ....................................................................................................................................................... 115
Key Terms ........................................................................................................................................................................ 115
What's New in This Chapter ........................................................................................................................................ 115
Chapter Outline ............................................................................................................................................................. 116
Discussion Questions ...................................................................................................................................................... 118
Additional Resources ..................................................................................................................................................... 119
Cengage Video Resources ...................................................................................................................................... 119
Appendix......................................................................................................................................................................... 120

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Generic Rubrics.......................................................................................................................................................... 120

Standard Writing Rubric ......................................................................................................................................... 120
Standard Discussion Rubric ...................................................................................................................................... 120

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine how provisions of contracts may deemed to be illegal.

Cengage Supplements
The following product-level supplements provide additional information that may help you inpreparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

45. Identify contracts contrary to statute

46. Describe an enforceable covenant not to compete

47. Identify contracts contrary to public policy

48. Explain the consequences of an illegal agreement

Key Terms
covenant not to compete: A contractual promise to refrain from competing with another party for a
certain period of time and within a certain geographic area. Although covenants not to compete restrain
trade, they are commonly found in partnership agreements, business sale agreements, and employment
contracts. If they are ancillary to such agreements, covenants not to compete will normally be enforced by
the courts unless the time period or geographic area is deemed unreasonable.
exculpatory clause: A clause that releases a contractual party from liability in the event of
monetary or physical injury, no matter who is at fault.
unconscionable: (pronounced un-kon-shun-uh-bul) contract or clause A contract or clause that is void on the
basis of public policy because one party is forced to accept terms that are unfairly burdensome and that
unfairly benefit the dominating party.
usury: Charging an illegal rate of interest.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:

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o Case 14.1: PAK Foods Houston, LLC v. Garcia (2014)—on whether a minor had
effectively disaffirmed an agreement to arbitrate with her employer
o New Case 14.2: Kennedy v. Shave Barber Co. (2018)—on whether whether by
adding the words ―current location‖ to a court-reformed noncompete agreement was
reasonable.
oCase Analysis 14.3: Holmes v. Multimedia KSDK (2013)—the court considered
whether an exculpatory clause that released ―any Event sponsors and their agents and
employees‖ from liability for future negligence was ambiguous.
 Retained and Updated Managerial Strategy feature—
o Creating Liability Waivers That Are Not Unconscionable (Updated with new 2018case
regarding a ski lift injury that involved a waiver.)
 1 New Example:
o on implied ratification by a minor in purchasing a grand piano
 1 New Case in Point
o 2016 case on voidable contracts
 1 New Business Scenario:
o on contractual capacity
 2 New Case Problems (based on 2018 cases)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on minors (based on 2017case)
[return to top]

Chapter Outline
IV. Legality- A contract to do something that is prohibited by statute or public policy is illegal and
unenforceable.
a. Contracts Contrary to Statute
i. Contracts to Commit a Crime- Any contract to commit a crime is a contract in
violation of a statute and is not enforceable. If the contract is rendered illegal
after it has been entered into, it is discharged by law.
ii. Usury- Usury statutes place a ceiling on rates of interest, but there are exceptions
to, for example, facilitate business transactions such as corporate loans. The
effects of a usurious loan—whether the lender can recover only the principal, or
the principal plus interest up to the legal maximum, or nothing—differ from state
to state. Federal rules set upper limits on interest rates and fees on credit cards.
iii. Gambling- All states regulate gambling. Nearly all states operate lotteries,
allow horse racing, or permit games of chance (such as bingo) for charitable
purposes. A few states allow casino gambling.

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iv. Licensing Statutes- All states require certain professionals to obtain licenses.
When a person contracts with an unlicensed individual, the contract may not be
enforceable, depending on the underlying purposeof the licensing requirement.
1. If the purpose is to raise revenue, the contract normally will be
enforceable.
2. If the purpose is to protect the public from unlicensed practitioners, the
contract will be unenforceable.
v. Contracts in Restraint of Trade- Contracts in restraint of trade (price- fixing
agreements, for example) adversely affect the public because they inhibit
competition. Also, they usually violate an antitrust statute. Excepted are restraints
that are considered reasonable.
1. Covenants Not to Compete and the Sale of an Ongoing Business- A
covenant not to compete is often in a contract for the sale of an ongoing
business. This enables a seller to sell, and a buyer to buy, the goodwill
and reputation of a business. A seller agrees not to initiate a similar
business within a certain area for a specified period of time. The
restrictions must be reasonable.
2. Covenants Not to Compete in Employment Contracts- A covenant not to
compete may accompany an employment agreement if the restriction is
no greater than necessary to protect a legitimate business interest. What
constitutes a reasonable time period online may be shorter because the
restrictions are global.
3. Enforcement Issues- The laws governing the enforceability of covenants
not to compete vary from state to state. If a covenant is unreasonable in
time or geographic area, to prevent undue hardship courts in some states
convert the terms into reasonable ones and enforce the covenant.
b. Contracts Contrary to Public Policy
i. Unconscionable Contracts or Clauses- In some circumstances, bargains are so
oppressive that a court will relieve an innocent party of part or all of the
contractual duties.
ii. Procedural Unconscionability- Procedural unconscionability concerns how a term
becomes part of a contract. It may involve a party’s lack of knowledge or
understanding of a term due to inconspicuous print, unintelligible language, or
lack of opportunity to read the contract or to ask about its meaning, such as may
occur in cases involving adhesion contracts.
iii. Substantive Unconscionability- Substantive unconscionability describes contracts
or terms that are oppressive—provisions that deprive one party of the benefits of
the agreement or leave that party without remedy for nonperformance.
iv. Knowledge Check Activity: 1 minute total. Examines students comprehension of
legality of a contract in a brief hypothetical scenario.

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c. Exculpatory Clauses
i. Often Violate Public Policy- Often held to be unconscionable are contract clauses
attempting to absolve parties of negligence or other wrongs.
ii. When Courts Will Enforce Exculpatory Clauses- Exculpatory clauses can be found
in rental agreements, sales agreements, and commercial and residential property
leases. They may be enforced if the party seeking enforcement is a private
business unimportant to the public interest (health clubs, amusement parks).
V. Effect of Illegality- In general, an illegal contract is void. Exceptions include—
a. Justifiable Ignorance of the Facts- A party who is relatively innocent can often recover
benefits conferred under a partially executed contract. An innocent party who has fully
performed may be able to enforce the contract (for example, a trucker who unknowingly
delivers illegal goods may be able to recover thedelivery fee).
b. Members of Protected Classes- If a statute is clearly designed to protect a certain class,
a member of the class can enforce a contract in violation of the statute. (Despite statutes
limiting excessive working hours, for example, an employee who works overtime can
recover overtime pay. Similarly, if an insurance company violates an insurance-sales
regulation, the buyer can still enforce the policy.)
c. Withdrawal from an Illegal Agreement- If the illegal part of a bargain has not been
performed, a party can withdraw from the bargain and recover whatever he or she
rendered in performance or its value (a bettor can quit an illegal bet, for example,
before the winner is paid).
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Should the restrictions on the enforcement of contracts with unlicensed practitioners extend beyond
the performance of professional services to include negotiations to provide the services? Yes. An offer
by an unlicensed practitioner to render such services would be deceptive even in a state in which only their
performance was prohibited. In fact, licensing statutes sometimes define the ―practice‖ of a covered
profession to encompass negotiations and agreements, as well as performance.

2. Should an employer be able to restrict a former employee from engaging in a competing business
on a global level? Why or why not? It could be acceptable to limit a former employee’s employment to
a wide radius, depending on the individual’s significance to

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the employer’s trade and the reach of that trade. But it would seem to be too aggressive toextend
that restriction beyond the territory in which the employer actually does business.

3. Does the Internet affect covenants not to compete? Explain. The Internet could impact the terms that
an employer might want—or might be permitted—to include in a covenant not to compete by expanding
their scope. The Internet might affect the enforceability—or the lack thereof—of a covenant not to
compete if the provision is construed as too broad a limitation. The Internet might also undercut the point
for insisting on such a covenant in the first place. Restricting a former employee from competing within a
fifty-mile radius, for example, might seem outdated when international business is possible with the click of
an online link. Of course,the effect of any covenant covering, or not covering, the Internet would depend on
the nature ofthe parties’ business.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Discharge of Contractual Obligations
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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 Business Law: Text & Exercises (MindTap Course List)

discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 13:
Voluntary Consent

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 123
Cengage Supplements.................................................................................................................................................. 123
List of Student Downloads ....................................................................................................................................... 123
Chapter Objectives ....................................................................................................................................................... 123
Key Terms ........................................................................................................................................................................ 123
What's New in This Chapter ........................................................................................................................................ 124
Chapter Outline ............................................................................................................................................................. 124
Discussion Questions ...................................................................................................................................................... 127
Additional Resources ..................................................................................................................................................... 128
Cengage Video Resources ...................................................................................................................................... 128
Appendix......................................................................................................................................................................... 128

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Generic Rubrics.......................................................................................................................................................... 128

Standard Writing Rubric ......................................................................................................................................... 128
Standard Discussion Rubric ...................................................................................................................................... 129

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine how mistakes and fraud can render a contract unenforceable.
Further, it explores the concept of voluntary consent and how the lack of consent can also render a contract
unenforceable.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

49. State the difference between mistakes of fact and of value

50. List the elements of fraud

51. Contrast misrepresentations of a material fact and of law

52. Recognize the difference between undue influence and duress

Key Terms
bilateral mistake: A mistake that occurs when both parties to a contract are mistaken about the same
material fact.
duress: Unlawful pressure brought to bear on a person, causing the person to perform an act that he or
she would not otherwise perform (or refrain from doing something that he or she would otherwise do).
innocent misrepresentation: A false statement of fact or an act made in good faith that deceives
and causes harm or injury to another.
latent defect: A defect that is not obvious or cannot readily be ascertained.
scienter: (pronounced sy-en-ter) Knowledge by the misrepresenting party that material facts have been
falsely represented or omitted with an intent to deceive.
undue influence: Persuasion that is less than actual force but more than advice and that induces a
person to act according to the will or purposes of the dominating party. unilateral mistake: A
mistake that occurs when one party to a contract is mistaken as to a material fact.
voluntary consent: Knowing and voluntary agreement to the terms of a contract. If voluntary consent is
lacking, the contract will be voidable.

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[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

New chapter-opening scenario on voluntary consent using a student’s claim of fraud against a
university with no accreditation.
 1 New Case:
o New Case 15.1: McCullough v. Allstate Property and Casualty Insurance Co.
(2018)—the effect of a merger clause on an allegation that the contract
containing it was procured by fraud.
o Case Analysis 15.2: Cronkelton v. Guaranteed Construction Services (2013)—the
buyer of a car wash relied on the seller’s representations that the property would be
―appropriately winterized‖ to protect it from damage, but it was not. Was the buyer
justified in relying on the seller’s representations?
o Case 15.3: Fazio v. Cypress/GR Houston I, LP (2013)—a real estate investor claimedthat
a seller’s failure to disclose material facts about the property affected its value. The court
had to determine not only if the seller’s conduct constituted fraud, but also whether the
fraud had caused harm to the property value.
 1 New Digital Update feature—
o ―Catfishing‖ and Fraudulent Misrepresentation
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on fraudulent
misrepresentation (based on 2017 case)
[return to top]

Chapter Outline
I. Mistakes- There is a difference between mistakes as to judgment of market conditions (believing
something will be worth more than it ultimately proves to be) and mistakes as to facts (believing
something is other than what it is). Only under a mistake of fact can a contract be avoided.
a. Unilateral Mistakes of Fact- A unilateral mistake occurs when one party is mistaken as to
a material fact. Generally, the mistaken party has no right to relief. There are two
exceptions—
i. The rule does not apply if the other party knew or should have known that a
mistake of fact was made.
ii. Some states will not enforce a contract against a mistaken party if an error was
due to a mathematical mistake and it was done inadvertently and without gross
negligence (for example, a typo).
b. Bilateral (Mutual) Mistakes of Fact

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i. Either Party Can Rescind the Contract- When parties to both sides of a contract
are mistaken as to the same material fact, either party can rescind the contract at
any time.
ii. When the Parties Reasonably Interpret a Term Differently- If the parties to a
contract attach materially different meanings to a term, a court may allow the
contract to be rescinded because there was no ―true meeting of the minds.‖
c. Mistakes of Value- When a mistake concerns the later market value of the object of the
contract, normally either party can enforce the contract.
d. Think Pair Share Activity: 5-10 minutes. Ask students to form pairs or small groups to
consider the following:
i. Bev buys a car from her friend. They both believe the car is worth $5,000
however, it is actually only worth $2,000.
ii. Coleman buys a painting from an art dealer labeled ―Impressionist
Painting‖ for $2,500. However, the painting turns out to be an original Monet
worth significantly more.
iii. Alaina wanted to purchase a chair from a local furniture store and inquired
about it via email. The store owner responded and mistakenly stated he would
take ―$60‖ for it, but he meant to type ―$600.‖ Alaina replied stating ―It’s a
deal. I’ll come pick it up this afternoon.‖

II. Fraudulent Misrepresentation- Fraud affects the genuineness of the defrauded party’s consent to
the contract. Normally, the innocent party can either rescind the contract and be restored to his or
her original position or enforce the contract and seek damages for any injuries. The elements
are—
 Misrepresentation of a material fact.
 An intent to deceive.
 The innocent party’s justifiable reliance on the misrepresentation.
 To collect damages, the innocent party’s injury.
a. Misrepresentation Has Occurred- Misrepresentation can occur through wordsor conduct,
including concealment.
i. Misrepresentation by Words- Representations of future facts (―this land will be
worth twice as much next year‖), statements of opinion (―this car will last for
years‖), and sales puffery are not fraud. An expert’s statement of opinion to a
layperson is treated as fact. In a cased of contract fraud, this may entitle an
innocent party to rescission or reformation.
ii. Misrepresentation by Conduct- Misrepresentation can occur by concealing a fact
material to a contract.
iii. Misrepresentation of Law- A misrepresentation of law (―you can build anything
you want here‖) does not entitle a party to relief from a contract, unless the
misrepresenting party is in a profession known to require greater knowledge of
the law than a layperson possesses (for example, real estate brokers are
expected to know the law governing land sales anduse).

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iv. Misrepresentation by Silence- Ordinarily, a party to a contract can keep silent

without liability, unless a serious potential problem or latent defect (a crack in a
building’s foundation, for instance) is known to the seller but cannot reasonably be
suspected by the buyer. Failure to disclose may constitute fraud in a fiduciary
relationship.
b. Intent to Deceive- Scienter (―guilty knowledge‖) signifies an intent to deceive.
Scienter exists if a party—
 Knows a fact is not as stated.
 Makes a statement that he or she believes not to be true or makes a
statement recklessly, without regard to whether it is true or false.
 Says or implies that a statement is made on some basis such as personal
knowledge or personal investigation when it is not.
i. Innocent Misrepresentation- This occurs when a person makes a statement
that he or she believes to be true but that misrepresents a material fact.
Remedies include rescission but usually not damages.
c. Justifiable Reliance on the Misrepresentation- A deceived party must justifiably rely on
the misrepresentation, and the misrepresentation must be an important factor in inducing
the party to contract, though it need not be the sole factor. Reliance is not justified if the
innocent party knows the truth or relies on obviously extravagant statements.
d. Injury to the Innocent Party- A showing of injury may not be required in an action to
rescind a contract, but in an action to recover damages, proof of injury is universally
required. The measure of damages is ordinarily equal to what the value of the property
would have been if it had been delivered as represented, less what it is actually worth. In
actions based on fraud, courts often award punitive damages.
III. Undue Influence- Undue influence occurs in relationships in which one party can greatly influence
another, thus overcoming the other’s free will. A contract entered into under undue influence is
voidable.
a. One Party Dominates Another- Relationships in which one party may dominate another
include fiduciary relationships—parent-child, trustee-beneficiary, and guardian-ward, for
example. The party unduly influenced must not act out of his or her free will.
b. Presumption of Undue Influence in Certain Situations- When a dominant party is
enriched from a fiduciary relationship, undue influence is presumed.
c. Knowledge Check Activity: 1 minute total. Tests students’ understanding of undue
influence.

IV. Duress- Duress involves conduct of a coercive nature, such as forcing a party to contract by
threatening the party with a wrongful act. Duress is a defense to the enforcement of a contract and
a ground for rescission.
a. The Threatened Act Must Be Wrongful or Illegal- Generally, the threatened act must be
wrongful or illegal.

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b. Economic Duress- Being in need is generally not a circumstance that will lead toa finding
of duress, unless the party exacting the price has created the need.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Why are mistakes of value not accorded the same relief as mistakes of fact? At different times, the
same thing may have different values. A contract establishes the value of an object for the moment. The
next moment, the value may change. A party may be mistaken about the direction that the change will
take, but that mistake will almost never justify voiding the contract. Each party is considered to assume the
risk that the value will change or prove to be different. A contract may be avoided if the parties are
mutually mistaken as to a material fact that affects the value of the subject matter of their deal (a seller
may be able to avoid delivering a cow that he and the buyer believed was barren, on learning that the
cow is with calf).

2. The elements of fraudulent misrepresentation include misrepresentation of a material fact. Discuss

this element. Misrepresentation can be in words (―this is a Warhol,‖ if the work is by another artist).
Misrepresentation can occur through conduct (concealment by showing samples that differ markedly from
actual goods). All of us are expected to use care and judgment when entering into contracts, however—
predictions (―this land will be worth twice as much next year‖) or statements of opinion (―this car will last
for years‖) are ordinarily not subject to claims of fraud. A seller can use puffery without liability for fraud,
but an expert’s statement of opinion to a layperson is treated as fact. As regards the law, at common law
people are assumed to know the law where they live. A layperson should not rely on a statement made
by a nonlawyer about a point of law. A misrepresentation of law (―you can build anything you want here‖)
does not normally entitle a party to relief from a contract. There is an exception if the person who makes
the misrepresentation is a member of a profession that is known to require greater knowledge of the law
than a layperson possesses (realtors are expected to know the law governing land sales and use).
Disclosing some, but not all, of the facts can be deceitful. Nevertheless, normally, a contract cannot be set
aside because certain pertinent information (a used car was in an accident) is not volunteered. That is,
under normal circumstances, no party to a contract has a duty to disclose. If a serious potential problem or
latent defect (a crack in a building’s foundation) is known to the seller but cannot reasonably be suspected
by the buyer, however, the seller may have a duty to speak. Also, in a fiduciary relationship, one party’s
failure to disclose facts that materially affect the other’s interests may constitute fraud. There are other
exceptions. If circumstances change so that what once was true is now false, the party aware of the change
has a duty to inform the other. Other exceptions are provided by statutes (the Truth-in-Lending Act).

3. In the context of fraudulent misrepresentation, when does a party evidence an intent to deceive?
Scienter indicates that there was an intent to deceive. Scienter exists (1) if a party knows a fact is not as
stated; (2) if a party makes a statement that he or she believes not to be

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true or makes a statement recklessly, without regard to whether it is true; or (3) if a party says or implies
that a statement is made on some basis such as personal knowledge or personal investigation when it is
not.

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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Contracts: Mistakes
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not

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upon appropriate and upon adequate academic based upon appropriate

adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 14:
Contracts That Must Be in Writing

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 131
Cengage Supplements.................................................................................................................................................. 131
List of Student Downloads ....................................................................................................................................... 131
Chapter Objectives ....................................................................................................................................................... 131
Key Terms ........................................................................................................................................................................ 131
What's New in This Chapter ........................................................................................................................................ 132
Chapter Outline ............................................................................................................................................................. 132
Discussion Questions ...................................................................................................................................................... 135
Additional Resources ..................................................................................................................................................... 136
Cengage Video Resources ...................................................................................................................................... 136
Appendix......................................................................................................................................................................... 137
Generic Rubrics.......................................................................................................................................................... 137
Standard Writing Rubric ......................................................................................................................................... 137
Standard Discussion Rubric ...................................................................................................................................... 137

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Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the Statute of Frauds and writing requirements forcontracts.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

53. Identify contracts that must be in writing

54. Describe what satisfies the writing requirement

55. State the parol evidence rule

56. Differentiate between an integrated and a partially integrated contract

Key Terms
collateral promise: A secondary promise that is ancillary (subsidiary) to a principal transaction or
primary contractual relationship, such as a promise made by one person to pay the debts of another if
the latter fails to perform. A collateral promise normally must be in writing to be enforceable.
integrated contract: A contract that completely sets forth all the terms and conditions agreed to by the
parties and is intended as a final statement of their agreement.
parol evidence rule: A substantive rule of contracts under which a court will not receive into
evidence the parties’ prior negotiations, prior agreements, or contemporaneous oral agreements if that
evidence contradicts or varies the terms of the parties’ written contract.
prenuptial agreement: An agreement made before marriage that defines each partner’s
ownership rights in the other partner’s property. Prenuptial agreements must be in writing to be
enforceable.
Statute of Frauds: A state statute under which certain types of contracts must be in writing tobe
enforceable.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:
o Case Analysis 16.1: Sloop v. Kiker (2016)—on whether a land-sale agreement metthe
writing requirement.
o New Case 16.2: Moore v. Bearkat Energy Partners, LLC (2018)—the plaintiff soughtto
obtain payment for his performance under a written agreement to assist in acquiring
mineral leases. The description of the property to be acquired was vague.
o Case 16.3: Frewil, LLC v. Price (2015)—an appellate court considered whether the trial
court should have admitted parol evidence regarding the terms of an apartment lease.
 4 New Case in Points
o 2017 case on one-year rule
o 2013 case on partial performance
o 2017 case on exception to the parol evidence rule
o 2017 case on integrated contracts
 1 New Case Problem (based on 2018 cases)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on partial performance(based
on 2018 case)
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Chapter Outline
I. The Statute of Frauds- To be enforceable, certain contracts must be in writing (even ifboth
parties acknowledge an oral contract, it may not be enforced).
a. Contracts That Require a Writing- The contracts are—
 Contracts involving interests in land.
 Contracts that cannot by their terms be performed within one year from the day
after the date of formation.
 Collateral contracts.
 Promises made in consideration of marriage.
 Contracts for the sale of goods priced at $500 or more.
a. Contracts Involving Interests in Land- Contracts for the sale of land—including physical
objects that are permanently attached to it (buildings, fences, trees, minerals, timber)—
and for the transfer of other interests in land (such as mortgages) must be in writing.
b. The One-Year Rule- A contract that cannot, by its own terms, be performed within one
year from the date it was formed must be in writing to be enforceable.
a. Time Period Starts the Day after the Contract Is Formed- The one-year period
begins to run the day after the contract is made.

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b. Must Be Objectively Impossible to Perform within One Year- Performance must

be objectively impossible. Emphasize that even if improbable, if performance within
a year is possible, a contract need not be in writing.
c. Collateral Promises
i. Primary v. Secondary Obligations- Generally, a contract in which a party
assumes a primary obligation doe not need to be in writing to be enforceable.
Secondary obligations—promises made by one person to pay the debts or
discharge the duties of another if the latter fails to perform—must be in writing to
be enforceable.
ii. An Exception—The ―Main Purpose‖ Rule- If the main purpose of the
guarantor in accepting secondary liability is to secure a benefit for himself or
herself, the contract need not be in writing to be enforceable.
b. Promises Made in Consideration of Marriage- A unilateral promise to pay money or
give property in consideration of a promise to marry must be in writing to be enforceable.
The same rule applies to prenuptial and postnuptial agreements.
c. Contracts for the Sale of Goods- The UCC requires a writing for a sale of goods priced
at $500 or more [UCC 2–201]. The writing need only state the quantity term and be
signed by the party to be charged.
d. Exceptions to the Writing Requirement (LO1 and LO2)
i. Partial Performance- On a contract for a transfer of an interest in land, if the
buyer has paid part of the price, taken possession, and made permanent
improvements to the property, and the parties cannot be returned to their
precontract status, a court may grant specific performance. Under the UCC, an
oral contract is enforceable to the extent that a seller accepts payment or a
buyer accepts delivery.
ii. Admissions- In some states, if a party against whom enforcement of an oral
contract is sought admits under oath that a contract for sale was made, the
contract will be enforceable. Under the UCC, this will of course be enforceable
only to the extent of the quantity admitted.
iii. Promissory Estoppel- Some courts have used the doctrine of promissory estoppel
to allow parties to recover under oral contracts that would otherwise be
unenforceable under the Statute of Frauds.
e. Think Pair Share Activity: 5-10 minutes. Ask students to form pairs or small groups and
consider the following:
i. A contract to build a house, which will likely take 15 months to complete
ii. An employment contract from Jan 1 to Dec 31
iii. A contract to wash every car at a car dealer for 18 months
iv. A contract in which a person promises to pay the credit card debt of theirsibling
v. A contract to rent a home on 10 acres

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II. Sufficiency of the Writing- The Statute of Frauds requires a writing signed only by the party
against whom enforcement is sought. The signature can be no more than an initial and can be
anywhere in the writing.
a. What Constitutes a Writing?- Any confirmation, invoice, sales slip, check, or telegram can
constitute a sufficient writing. The writing does not have to consist of a single document to
constitute an enforceable contract.
b. Essential Terms
i. Under the UCC, a writing need only name the quantity.
ii. Under statutes of frauds covering transactions other than sales of goods, the
writing must name the parties, the subject matter, the consideration, and the
essential terms with reasonable certainty.
iii. In some states, contracts for the sale of land must state the price and describe the
property with sufficient clarity to allow them to be determined without reference
to outside sources.
c. Signatures
i. Signature can be anywhere in the writing and does not need to be placedat the
end
ii. Can be initials rather than a full name
iii. E-signatures permitted under the UETA
iv. Only the party against whom enforcement is sought must have signed the writing.
d. Knowledge Check Activity: 1 minute total. Tests students’ understandingabout what
qualifies as a writing under the Statute of Frauds.
III. The Parol Evidence Rule- Parol evidence is testimony or other evidence of communications
between the parties not contained in the written contract. If the parties intended their written
contract to be a complete and final statement of their agreement, evidence of the parties’ prior
negotiations or agreements, and contemporaneous oral agreements cannot be introduced in a
court if that evidence contradicts the terms.
a. Exceptions to the Parol Evidence Rule- Parol evidence is admissible in cases involving the
following.
i. Contracts Subsequently Modified- Evidence of the subsequent modification (oral
or written) of a written contract is admissible (but an oral modification may not be
enforceable if it brings the contract under the Statute of Frauds).
ii. Voidable or Void Contracts- This may occur if a contract was entered into under
deception or induced in bad faith.
iii. Contracts Containing Ambiguous Terms
iv. Incomplete Contracts
v. Prior Dealing, Course of Performance, or Usage of Trade- Under the UCC,
evidence can be introduced to explain or supplement a contract by showing a
prior dealing, course of performance, or usage of trade.
vi. Contracts Subject to Orally Agreed-on Conditions Precedent- Proof of such a
condition does not alter or modify the written terms but affects the enforceability
of a written contract.

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vii. Contracts with Obvious or Gross Clerical (or Typographic) Errors-

These must clearly not represent the agreement of the parties.
b. Integrated Contracts- The key is whether a written contract is intended to a complete and
final embodiment of the parties’ agreement. If the contract is only partially integrated,
evidence of consistent additional terms is admissible to supplement the written agreement

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. Explain the one-year rule. A contract that cannot, by its own terms, be performed within one year
from the date it was formed must be in writing to be enforceable. The one-year period begins the day
after the contract is made. A contract for a one-year term that begins the day the contract is made is
enforceable whether or not it is in writing. A contract for a nine-month term that starts six months later is not
enforceable unless it is in writing. The performance must be objectively impossible. Even if improbable, if
performance within a year is possible, a contract need not be in writing. Thus, an oral contract to do
something ―as long as the promisor remains in business‖ is enforceable—the promisor could go out of
business in less than a year.

2. What happens if the party against whom enforcement of an oral contract is sought admits in court
that a contract was made? In some states, if a party against whom enforcement of an oral contract is
sought admits in ―pleading, testimony or otherwise in court that a contract for sale was made,‖ the
contract will be enforceable, but only to the extent of the quantity admitted.

3. What are the reasons for the parol evidence rule? What are some criticisms of these purposes? The
policy behind the parol evidence rule is to support the contracting parties’ writing against
intentionally false testimony and possibly false memories. It is also purposed to exclude terms that have
been superseded by the writing (for example, terms that the parties discussed in negotiation but that they
did not intend to include in the end). The rule is also intended to force parties put their complete
agreement into writing and thereby make transacting business more certain. Criticisms of these points
include that the rule can exclude as much true evidence as perjury and that it has never effectively forced
parties to put all of their contract terms into writing, with business continuing unabated.

4. The parol evidence rule is an age-old and important rule of contract law. Why should the courts
allow exceptions to this rule? Freedom of contract is one of the most important principles of contract
law. Simply stated, the law assumes that people should be free make

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whatever bargains they wish, whether they be wise or foolish. The law also assumes that people should be
held to their bargains. Nonetheless, as indicated throughout this unit on contracts, in the interests of equity
and fairness, some contracts will not be enforced by the courts. Similarly, the courts on occasion make
exceptions to the parol evidence rule in the interests of fairness and justice. In this case, the contract
itself only referred to the ―house‖ or the ―home,‖ but it was clear from the evidence that the parties did not
intend to sell or buy only the house. Therefore, it would be unfair to apply the parol evidence rule in this
situation and exclude oral evidence. There are several other situations when exceptions to the parol
evidence rule will be allowed to make the meaning of a contract clear or to prevent injustice. For example,
when one party, through deception or fraud, entices another to enter into a contract, if parol evidence
could not be admitted to demonstrate that fraud or deception had occurred, it bring about an injustice

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Statute of Frauds
o Promissory Estoppel
o Parol Evidence
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 15:
Third Party Rights

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 140
Cengage Supplements.................................................................................................................................................. 140
List of Student Downloads ....................................................................................................................................... 140
Chapter Objectives ....................................................................................................................................................... 140
Key Terms ........................................................................................................................................................................ 140
What's New in This Chapter ........................................................................................................................................ 141
Chapter Outline ............................................................................................................................................................. 141
Discussion Questions ...................................................................................................................................................... 144
Additional Resources ..................................................................................................................................................... 145
Cengage Video Resources ...................................................................................................................................... 145
Appendix......................................................................................................................................................................... 145

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Generic Rubrics.......................................................................................................................................................... 145

Standard Writing Rubric ......................................................................................................................................... 145
Standard Discussion Rubric ...................................................................................................................................... 146

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine how third parties may be entitled to certain damages for a
breach of contract.

Cengage Supplements
The following product-level supplements provide additional information that may help you inpreparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

57. Describe a contract assignment

58. Define a contract delegation

59. Identify noncontracting parties with contract rights

60. Explain when a third party beneficiary’s rights in a contract vest

Key Terms
Alienation: In real property law, the voluntary transfer of property from one person to another (as
opposed to a transfer by operation of law).
Assignee: The person to whom contract rights are assigned.
Assignment: The act of transferring to another all or part of one’s rights arising under a contract.
Assignor: The person who assigns contract rights.
Delegatee: One to whom contract duties are delegated by another, called the delegator. Delegation:
The transfer of a contractual duty to a third party. The party delegating the duty (the delegator) to the
third party (the delegatee) is still obliged to perform on the contract should the delegatee fail to
perform.
Delegator: One who delegates his or her duties under a con- tract to another, called the
delegatee.
incidental beneficiary: A third party who incidentally benefits from a contract but whose benefit was not
the reason the contract was formed. An incidental beneficiary has no rights in a contract and cannot sue to
have the contract enforced.
intended beneficiary: A third party for whose benefit a con- tract is formed; an intended
beneficiary can sue the promisor if such a contract is breached.

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obligee: One to whom an obligation is owed.

obligor: One who owes an obligation to another.
privity of contract: The relationship that exists between the promisor and the promisee of a contract.
third party beneficiary: One for whose benefit a promise is made in a contract but who is not a party to
the contract.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case:
o Case 17.1: Bass-Fineberg Leasing, Inc. v. Modern Auto Sales, Inc. (2015)—on the
enforceability of an anti-assignment clause.
o New Case 17.2: Mirandette v. Nelnet, Inc. (2018)—without proof to the contrary, does a
delegatee of a duty to service a loan owe any obligation to the debtor?
o Case Analysis 17.3: Bozzio v. EMI Group, Ltd. (2016)—on whether lead singer in
Missing Persons band was third party beneficiary of contract made by band’s
corporation that had lost its corporate status.
 1 New Case in Point
o 2018 case on intended third party beneficiaries
 2 New Case Problems (based on 2017 and 2018 cases)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on delegation (based on2018
case)
[return to top]

Chapter Outline
I. Assignment and Delegations
a. Assignments- The transfer of contract rights to a third person is an assignment. No special
form is required. Assignments are involved in much business financing. Assignments may
involve accounts receivable, proceeds from executory contracts, or general intangibles
(property that is a right rather than a physical object—stocks, bonds, and the goodwill of
a business, for example).
i. The Effect of an Assignment
1. Extinguishes the Rights of the Assignor- When contract rights are
assigned unconditionally, the rights of the assignor are extinguished, and
the assignee has a right to demand performance from the obligor. The
assignee takes only those rights that the assignor originally had.
2. Assignee’s Rights Are Subject to the Same Defenses- The assignee’s
rights are subject to the defenses that the obligor has against the
assignor. (If a creditor fraudulently procures the right

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to a debtor’s payment, the debtor may raise the fraud as a defense

against payment to the creditor’s assignee).
3. Form of the Assignment- An assignment can take any form—oralor
written—subject to the Statute of Frauds.
ii. Rights That Cannot Be Assigned- Generally, all rights can be assigned
except—
1. When a Statute Prohibits Assignment
2. When a Contract Is Personal in Nature
3. When an Assignment Will Significantly Change the Risk orDuties
of the Obligor
4. When the Contract Prohibits Assignment- Exceptions to this lastexception
include assignments of—
a. A right to receive money.
b. Rights in real estate.
c. Negotiable instruments.
d. A right to receive damages for breach of contract orpayment
of an account owed under the UCC.
5. Knowledge Check Activity: 1 minute total. Test student’s
understanding of assignments.
iii. Notice of Assignment- An assignment is effective immediately, whetheror not
notice is given to the obligor. When notice is not given—
1. Priority Issues- If the same right is assigned to different persons, the first
assignment in time is the first in right (some states give priority to the first
assignee who gives notice to the obligor).
2. Potential for Discharge by Performance to the Wrong Party- Until the
obligor has notice, the obligor can discharge his or her obligation by
performance to the assignor. Once the obligor has notice, only
performance to the assignee can discharge the obligation.
b. Delegations- A party can transfer duties under a contract through a delegation. No
special form is required to create a valid delegation of duties. As long as the delegator
expresses a present intention to make the delegation, it is effective.
i. Duties That Cannot Be Delegated- Delegation is prohibited when—
1. When the Duties Are Personal in Nature- This occurs when performance
depends on the personal skill or talents of the obligor, or when special
trust has been placed in the obligor.
2. When Performance by a Third Party Will Vary Materially from That
Expected by the Obligee
3. When the Contract Prohibits Delegation- A contract can expressly
prohibit delegation.
ii. Effect of a Delegation- Normally, if the delegatee fails to perform, the delegator
is still liable to the obligee. (For example, a contractor who delegates the
construction of a house is liable if the delegatee fails to build the house—the
obligee can sue either the contractor or the

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delegatee. In effect, the obligee’s position is that of a third party beneficiary to

the contractor-delegatee contract).
iii. Knowledge Check Activity: 1 minute total. Test student’s understanding of
delegations.
c. Assignment of ―All Rights‖- When a contract provides for assignment of ―all rights‖
(or states ―I assign the contract‖ or uses similar general words), the contract is
construed as implying an assignment of rights and a delegation and an assumption of
duties.

II. Third Party Beneficiaries- When a promisee intends at the time of contracting that performance
benefit a third person, the third person becomes a beneficiary of the contract and has legal rights.
If the promisor fails to keep the promise that benefits the third party, the third party normally can
bring an action against the promisor to enforce the contract.
a. Knowledge Check Activity: 1 minute total. Test student’s understanding of third party
beneficiaries.
b. Types of Intended Beneficiaries
i. Creditor Beneficiary- If a promisee’s main purpose in contracting is to discharge a
duty or debt he or she already owes to a third party, the third party is a creditor
beneficiary.
ii. Donee Beneficiary- If a promisee’s main purpose in making a contract is to confer
a gift on a third party, the third party is a donee beneficiary (a common contract
involving a donee beneficiary is a life insurance policy). The ―modern view‖ is
not to distinguish between types of intended beneficiaries.
c. When the Rights of an Intended Beneficiary Vest- Until the rights of an intended third
party vest, he or she cannot enforce the contract against the original parties. The rights
vest when the original parties cannot rescind or change the contract without the third
party’s consent. This occurs when the beneficiary—
i. Materially alters his or her position in justifiable reliance on the contract.
ii. Brings a lawsuit on the promise.
iii. Manifests assent to the contract at the promisor and promisee’s request. If a
contract expressly reserves to the contracting parties the right to cancel, rescind,
or modify it, the beneficiary’s rights are subject to those changes.
d. Incidental Beneficiaries- An incidental beneficiary cannot enforce a contract to which he
or she is not a party, because the benefit that he or she receives from the contract is
unintentional.
i. Intended v. Incidental Beneficiaries- If a reasonable person in the beneficiary’s
position would believe that the promisee intended to confer on the beneficiary the
right to enforce the contract, the beneficiary is an intended beneficiary. Other
factors indicating an intended, rather than an incidental, beneficiary include—

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ii. Performance under the contract is rendered directly to the third party.
iii. The third party has rights to control the details of performance.
iv. The contract expressly designates the third party’s status.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What problems arise when notice of an assignment is not given to the obligor? If the same right is
assigned to different persons, who has the right to performance? The majority rule is that the first
assignment in time is the first in right, but some states give priority to the first assignee who gives notice to
the obligor. Until the obligor has notice of the assignment, the obligor can discharge his or her obligation
by performance to the assignor, which also discharges his or her obligation to the assignee. Once the
obligor has notice, only performance to the assignee can discharge the obligor’s obligation.

2. What happens if the delegatee fails to perform? Ordinarily, the delegator is still liable to the obligee.
The obligee can also hold the delegatee liable if the delegatee has promised performance that will
directly benefit the obligee (a contractor who delegates the construction of a house is liable if the
delegatee fails to build the house, for instance—the obligee can sue either the contractor or the
delegatee). After a novation, however, a delegator has no further liability.

3. What do courts focus on when determining whether a third party beneficiary is an intended or an
incidental beneficiary? In determining whether a third party beneficiary is an intended or an incidental
beneficiary, courts focus on intent, as expressed in the language of a contract and implied by the
surrounding circumstances. Courts often apply the reasonable person test—would a reasonable person in
the position of the beneficiary believe that the promisee intended to confer on the beneficiary the right to
enforce the contract? In addition, a court may consider the following factors to conclude that a third party
is an intended beneficiary to a contract: (1) performance is rendered directly to the third party, (2) the
third party has the right to control the details of performance, or (3) the third party is expressly
designated as a beneficiary in the contract.

4. What right does the status of an intended beneficiary confer on a third party to a contract? As the
intended beneficiary of a contract, a third party has legal rights and can sue the promisor directly for
breach of the contract. A third person becomes an intended third party beneficiary of a contract when the
original parties to the contract agree that the performance should be rendered to or directly benefit a
third person. This is an exception to the doctrine of privity of contract (which prohibits anyone who is not a
party to a contract from suing to enforce it). Allowing a third party to sue the promisor directly in effect
circumvents the "middle person"

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(the promisee) and thus reduces the burden on the courts. Otherwise, the third party would sue the
promisee, who would then sue the promisor.
[return to top]

Additional Resources
Cengage Video Resources
 [list]
 MindTap Videos:
o [list]
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.

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0 points
Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual

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Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 16:
Termination and Remedies

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 148
Cengage Supplements.................................................................................................................................................. 148
List of Student Downloads ....................................................................................................................................... 148
Chapter Objectives ....................................................................................................................................................... 148
Key Terms ........................................................................................................................................................................ 148
What's New in This Chapter ........................................................................................................................................ 149
Chapter Outline ............................................................................................................................................................. 149
Discussion Questions ...................................................................................................................................................... 154
Additional Resources ..................................................................................................................................................... 155
Cengage Video Resources ...................................................................................................................................... 155
Appendix......................................................................................................................................................................... 156
Generic Rubrics.......................................................................................................................................................... 156
Standard Writing Rubric ......................................................................................................................................... 156
Standard Discussion Rubric ...................................................................................................................................... 156

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Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the various ways contracts are performed and
discharged.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

61. Explain the difference between complete and substantial performance

62. Describe discharge by agreement

63. Identify different types of damages

64. Define the remedy of recission and restitution

Key Terms
breach of contract: The failure, without legal excuse, of a promisor to perform the obligations of a
contract.
commercial impracticability: A doctrine under which a seller may be excused from performinga contract
when (1) a contingency occurs, (2) the contingency’s occurrence makes performance impracticable, and (3)
the nonoccurrence of the contingency was a basic assumption on which the contract was made.
condition: A possible future event, the occurrence or nonoccurrence of which will trigger the performance
of a legal obligation or terminate an existing obligation under a contract. discharge: (1) The termination
of an obligation, such as occurs when the parties to a contract have fully performed their contractual
obligations. (2) The termination of a bankruptcy debtor’s obligation to pay debts.
impossibility of performance: A doctrine under which a party to a contract is relieved of his or her duty to
perform when performance becomes impossible or totally impracticable (through no fault of either party).
novation: The substitution, by agreement, of a new contract for an old one, with the rightsunder the old
one being terminated. Typically, there is a substitution of a new party who is

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responsible for the contract and the removal of an original party’s rights and duties under the contract.
performance: In contract law, the fulfillment of one’s duties arising under a contract; the normal way of
discharging one’s contractual obligations.
consequential damages: Special damages that compensate for a loss that is not direct or immediate
(for example, lost profits). The special damages must have been reasonably foreseeable at the time the
breach or injury occurred in order for the plain- tiff to collect them.incidental damages: Damages that
compensate for expenses directly incurred because of a breach of contract, such as those incurred to
obtain performance from another source. mitigation of damages: A rule requiring a plaintiff to have
done whatever was reasonable to minimize the damages caused by the defendant.
restitution: An equitable remedy under which a person is restored to his or her original position prior to loss
or injury, or placed in the position he or she would have been in had the breach notoccurred.
specific performance: An equitable remedy requiring the breaching party to perform as promised under
the contract; usually granted only when money damages would be an inadequate remedy and the subject
matter of the contract is unique (for example, real property).

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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:
o Classic Case 18.1: Jacob & Youngs v. Kent (1921)—on substantial performance.
o Case Analysis 18.2: Kohel v. Bergen Auto Enterprises, LLC (2013)—on deciding
whether a party’s breach of contract was material.
o New Case 18.3: DWB, LLC v. D&T Pure Trust (2018)—two commercial lessees
insisted on an accord and satisfaction to discharge their potential liability for
damage to the leased premises.
 1 New Case in Point
o 2016 case on substantial performance
 1 New Case Problem (based on 2018 case)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on discharge by operation of law
(based on 2017 case)
[return to top]

Chapter Outline
I. Contract Termination
a. Conditions- Sometimes performance is conditioned on a certain event. If the condition is
not satisfied, the obligations of the parties are discharged. There are three types of
conditions.

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i. Conditions Precedent- A condition that must be fulfilled before performance is

required is a condition precedent.
ii. Conditions Subsequent- When a condition operates to terminate a party’s duty
to perform, it is a condition subsequent. Generally, conditions precedent are
common, and conditions subsequent are rare. The Restatement (Second) of
Contracts does not use the terms.
iii. Concurrent Conditions- Concurrent conditions exist when each party’s
performance is conditioned on the other’s simultaneous performance.
iv. Express and Implied Conditions- Express conditions are supplied by the parties’
agreement. Implied conditions are not in the express agreement, but exist in the
purpose of the agreement, the intent of the parties, or the performance of the
contract.
b. Discharge by Performance- (LO2) Most contracts are discharged by performance—by
doing what was promised. Performance may also be accomplished by tender.
i. Complete Performance- Ordinarily, express conditions must fully occur for
complete performance to take place. Any deviation operates as a discharge.
ii. Substantial Performance- To qualify as substantial—
1. The party must have performed in good faith.
2. Performance must not vary greatly from that promised in thecontract.
3. Performance must create substantially the same benefits.
4. Courts Must Decide- Courts decide whether performance was substantial
on a case-by-case basis.
5. Effect on Duty to Perform- When a party fulfills his or her contract
obligation in good faith with substantial performance, the other party may
be held to his or her obligation to perform.
c. Material Breach of Contract- When performance is not substantial, a breach is
material—the non-breaching party is excused from performing and can sue for
damages.
i. Material versus Minor Breach- If a breach is not material, the innocent party’s
duty to perform may be only suspended until the breach is remedied.
d. Performance to the Satisfaction of Another
i. When the Contract Is Personal- When the subject matter of a contract that
requires personal satisfaction is personal, personal satisfaction is a condition—
performance must actually satisfy the party. The party to be satisfied must act
honestly and in good faith.
ii. Reasonable Person Standard- Other contracts need only be performed to the
satisfaction of a reasonable person. When a contract requires performance to the
satisfaction of a third party, some courts require the personal satisfaction of the
third party. Most courts require the work to be satisfactory to a reasonable
person.

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e. Discharge by Agreement
i. Discharge by Mutual Rescission
1. To mutually rescind, the parties must make another contract. Their
promises not to perform constitute consideration for the newagreement.
2. An oral rescission agreement is generally enforceable unless it concerns a
transfer of land or the original contract required written rescission.
Contracts that are executory on both sides can be rescinded solely by
agreement.
3. Contracts that are executed on one side can be rescinded only if the
party who has performed receives consideration for the promise to call
off the deal.
ii. Discharge by Novation- Novation substitutes a new party for an original party
by agreement of all the parties. This requires—
1. A previous valid obligation.
2. An agreement of all the parties to a new contract.
3. The extinguishment of the old obligation (discharge of the prior party).
4. A new valid contract.
iii. Discharge by Accord and Satisfaction- An accord is an executory contract to
perform an act to satisfy a contractual duty that has not been discharged. A
satisfaction is the performance of the accord. An accord suspends the original
obligation. The obligor discharges the obligation by performing the accord. If
the obligor refuses to perform the accord, the obligee can sue on the original
obligation or on the accord.
iv. Knowledge Check Activity: 1 minute total. Test students’ recollection of the
definition of novation.
f. Discharge by Operation of Law
i. Statutes of Limitations- The UCC provides that an action for breach of a sales
contract must be initiated within four years after the cause accrues. The running of
a limitations statute does not extinguish the obligation under a contract.
ii. Impossibility of Performance- If contractual performance becomes impossible in
an objective sense, the contract may be discharged.
1. When Performance Is Impossible- Situations that generallyqualify
include—
2. A party essential to a personal contract dies or becomes
incapacitated before performing.
3. The specific subject matter of a contract is destroyed.
4. A change in law renders performance illegal.
5. Temporary Impossibility
iii. Commercial Impracticability- If circumstances arise that make performance
extremely difficult or costly, the contract may be discharged under the doctrine
of commercial impracticability. The anticipated

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performance must become extremely difficult or costly. Circumstances of which

businesspersons at the time of contracting are or should be aware, however, do
not qualify.
iv. Knowledge Check Activity: 1 minute total. Test students’ understanding about
commercial impracticability.
v. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider the following:
1. A contract for the sale of widgets between a company based in a foreign
country and a company based in the U.S. just weeks before a war was
declared between the two countries
2. A contract for the performance of certain services by an individual who
decides to sell his business to another before the services are due
3. A contract for the construction of a new home on land discovered to be an
important archeological site
II. Contract Remedies- Damages are designed to compensate the injured party for the loss of the
contract or give the injured party the benefit of the contract—that is, an innocent party is to be
placed in the position he or she would have been in if the contract had been fully performed.
a. Types of Damages- The broad categories are—
 Compensatory damages—To cover direct losses and costs.
 Consequential damages—To cover indirect and foreseeable losses.
 Punitive damages—To punish and deter wrongdoing.
 Nominal damages—To recognize wrongdoing without a showing of a monetary
loss.
i. Compensatory Damages- Compensatory damages compensate the injured
party for the loss of the bargain (for injuries arising directly from the loss).
Incidental damages (expenses that are caused directly by a breach of
contract such as those incurred to obtain performance from another source)
may also be recovered.
1) Standard Measure- The measurement of compensatory damages varies
by type of contract. The standard measure is the difference between the
value of the promised performance and the actual performance, less any
loss that the injured party could have avoided.
2) Sale of Goods- The usual measure is the difference between the contract
price and the market price. When a buyer breaches and the seller has
not yet produced the goods, the measure is instead normally lost profits
on the sale.
3) Sale of Land- In most states, the measure of damages is the difference
between the contract and market prices of the land. In some states, when
a seller breaches a contract and the breach is not deliberate, the buyer
recovers only the down payment and

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expenses, placing him or her in the position occupied before the sale, not
the benefit of the bargain.
ii. Consequential Damages- These are foreseeable damages that flow from the
consequences of a breach but that are caused by circumstances beyond the
contract. The breaching party must know or have reason to know that special
circumstances will cause the nonbreaching party to suffer the additional loss.
iii. Punitive Damages- Punitive damages are designed to punish a wrongdoer
and to deter similar, future conduct. They normally are not awarded in a
breach of contract action unless a tort is involved.
iv. Liquidated Damages versus Penalties- A liquidated damages provision in a
contract specifies a certain amount to be paid on a breach. If a provision is
construed as a penalty, it will not be enforced.
1) Enforceability- There are two requirements for an enforceable
liquidated damages provision—
2) When the contract was made, it must have been difficult toestimate the
damages that would be incurred on a breach.
3) The amount set as damages must be reasonable (not excessive).
b. Rescission and Restitution- Rescission is essentially an action to cancel a contract. When
fraud, mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is
present, a contract may be rescinded unilaterally. A failure to perform entitles the
nonbreaching party to rescind. A rescinding party must give prompt notice to the
breaching party.
i. Restitution- Generally, to rescind, the parties must make restitution by returning
goods, property, or money conveyed. If the actual goods or property can be
returned, they must be. If they cannot be returned, restitution must be made in
an equivalent amount of money.
ii. Restitution Is Not Limited to Rescission Cases- Restitution is available in
various actions—
1) Breach of contract and tort actions. When money or property is
transferred through a mistake or fraud or incapacity, or misconduct
within a special relationship.
2) Criminal cases. Embezzlement, conversion, theft, or copyright
infringement.
c. Specific Performance- Specific performance provides the exact bargain promised in a
contract—performance of the promised act. This remedy is not granted unless the legal
remedy (damages) is inadequate. Contracts for the sale of goods rarely qualify—the
legal remedy is ordinarily adequate because substantially identical goods can be bought
or sold in the market. If goods are unique, specific performance will be ordered.
i. Sale of Land- Because each parcel of land is unique, specific performance of a
contract to buy land will likely be ordered.
ii. Contracts for Personal Services- Normally, specific performance of personal
service contracts is refused, because public policy discourages

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involuntary servitude. Also, courts do not want to monitor a continuing service

contract if supervision would be difficult.
d. Mitigation of Damages- injured party has a duty to mitigate the damages they suffer.
The way in which a party can mitigate their damages will depend on the nature of the
situation.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. When a contract’s performance is not impossible, how can it be discharged by operation of law?
Alteration of Contract. An innocent party is discharged when another party to the contract materially
alters it (changes a quantity or price term, for instance) without the innocent party’s consent. Statute of
Limitations. Statutes of limitations limit the period during which a party can sue on a cause of action
(breach of the contract). The statute runs whether or not the innocent party knows of the breach. The
running of the statute does not extinguish the contractual obligation. If the obligor makes a new promise to
perform (agrees in writing to pay an amount owed or actually pays part of it, for instance), the cause
barred by the statute revives. (Typically, suits for breach of oral contracts must be brought within two
or three years; forwritten contracts, four or five years; for recovery of amounts awarded in judgment, ten
to twenty years. The UCC provides that an action for breach of a sales contract must be initiated within
four years after the breach occurs.) Bankruptcy. A discharge in bankruptcy will normally bar enforcement
of most of a debtor’s contracts by the creditors. (Partial payment of a debt after discharge in bankruptcy
will not revive the debt.)

2. How does the impossibility of performance discharge a contract? Situations that generally qualify to
discharge contractual obligations under the doctrine of impossibility of performance include: (1) one of the
essential parties to a personal contract dies or becomes incapacitated before performing (an actor’s death
before fulfilling a contract to make a film discharges the contract); (2) the specific subject matter of a
contract is destroyed (a fire that destroys a building discharges a contract for its sale); (3) a change in law
renders performance illegal (lowering the usury rate renders contracts to loan money at higher rates
illegal). Commercial Impracticability. To discharge a contract under the doctrine of impracticability, per-
formance must become extremely difficult or costly (ten times more than the original estimate).
Circumstances of which businesspersons at the time of contracting are or should be aware do not qualify
(foreseeable, foreign political events). Frustration of Purpose. A contract will be discharged under the
doctrine of frustration of purpose if circumstances make it impossible to attain the purpose the parties
intended when contracting (when a parade is canceled, for instance, the purpose of contracts for hotel
rooms en route—viewing the parade—is frustrated, and the would-be observers may be excused from
payment). Temporary Impossibility. An event that makes it temporarily impossible to perform a
contract (war) suspends performance

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until the impossibility ceases. If the lapse of time and any change in circumstances surrounding the contract
make it substantially more burdensome to perform, (if the war is long and inflation high) the parties will be
discharged.

3. Why might those entering into contracts be worse off in the long run if the courts increasingly
accept impossibility of performance as a defense? Certainly, in the short run, those who are allowed to
use impossibility of performance to avoid their contract obligations are better off. In the long run, in
contrast, those who enter into such contracts will spend more time and effort to make sure that this avenue
is either a very remote possibility or if it isn’t, they simply won’t enter into the contract at all. In the
alternative, all such contracts may include a premium to take care of expected higher losses for those
contracts that are not honored.

4. Discuss rescission and restitution. Rescission is an action to cancel a contract, to return the parties to
the positions they were in before the transaction. A contract may be rescinded unilaterally if fraud,
mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present. A failure to
perform entitles the nonbreaching party to rescind. A rescinding party must give prompt notice to the
breaching party. Generally, to rescind, the parties must make restitution by returning goods, property, or
money conveyed. Restitution is a party’s recapture of a benefit conferred on another through which the
other has been unjustly enriched. If the goods or property conveyed can be returned, they must be. If they
cannot be returned, restitution must be made in an equivalent amount of money.

5. Will specific performance be granted on a breach of contract for personal services? Ordinarily,
specific performance of personal service contracts is refused, because public policy strongly discourages
involuntary servitude. Also, courts do not want to monitor a continuing service contract if supervision would
be difficult, as it would be if a contract required the exercise of personal judgment or talent.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Substantial Performance
o The Capacity to Contract
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and thediscussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 17:
Introduction to Sales and Lease Contracts

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 159
Cengage Supplements.................................................................................................................................................. 159
List of Student Downloads ....................................................................................................................................... 159
Chapter Objectives ....................................................................................................................................................... 159
Key Terms ........................................................................................................................................................................ 159
What's New in This Chapter ........................................................................................................................................ 160
Chapter Outline ............................................................................................................................................................. 160
Discussion Questions ...................................................................................................................................................... 165
Additional Resources ..................................................................................................................................................... 165
Cengage Video Resources ...................................................................................................................................... 165
Appendix......................................................................................................................................................................... 166

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Generic Rubrics.......................................................................................................................................................... 166

Standard Writing Rubric ......................................................................................................................................... 166
Standard Discussion Rubric ...................................................................................................................................... 167

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further explore the Uniform Commercial Code and sales contracts.

Cengage Supplements
The following product-level supplements provide additional information that may help you inpreparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

65. State the scope of Article 2 of the UCC

66. Identify how the UCC deals with open contract terms

67. Explain the UCC’s treatment of additional terms

68. Discuss the UCC’s Statute of Frauds

Key Terms
course of dealing: Prior conduct between parties to a contract that establishes a common basis for their
understanding.
course of performance: The conduct that occurs under the terms of a particular agreement. Such
conduct indicates what the parties to an agreement intended it to mean.
fully integrated contract: A contract that completely sets forth all the terms and conditions agreed to
by the parties and is intended as a final statement of their agreement.
lease agreement: In regard to the lease of goods, an agreement in which one person (the lessor) agrees
to transfer the right to the possession and use of property to another person (the les- see) in exchange for
rental payments.
lessee: A person who pays for the use or possession of another’s property.
lessor: A property owner who allows others to use his or her property in exchange for payment.
merchant: A person who is engaged in the purchase and sale of goods. Under the Uniform Commercial
Code, a person who deals in goods of the kind involved in the sales contract; for further definitions, see
UCC 2–104.
predominant-factor test: A test courts use to determine whether a contract is primarily for the sale of
goods or for the sale of services.

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requirements contract: An agreement in which a buyer agrees to purchase and the seller agrees to
sell all or up to a stated amount of what the buyer needs or requires.
sale: The passing of title (evidence of ownership rights) from a seller to a buyer for a price. sales
contracts: A contract for the sale of goods under which the ownership of goods is transferred from
a seller to a buyer for a price.
usage of trade: Any practice or method of dealing having such regularity of observance in a place,
vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in
question.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 Retained and Updated Digital Feature feature—

o Taxing Web Purchases (Updated with new 2018 Supreme Court case of South Dakota v.
Wayfair, Inc., which changed the definition of ―physical presence‖ withina state for online
sales tax purposes, including a new Critical Thinking question.)
 1 New Case:
o New Case 20.1: Toll Processing Services, LLC v. Kastalon, Inc. (2018)—on and open
duration term that rendered contract unenforceable.
o Case 20.2: C. Mahendra (N.Y.), LLC v. National Gold & Diamond Center, Inc. (2015)—
What constitutes a material alteration is frequently a question of fact that only a court can
decide.
o Classic Case 20.3: Jones v. Star Credit Corp. (1969)—a classic case on
unconscionability of a contract.
 1 New Numbered Example
o on acceptance of a sales and lease contract
 3 New Case in Points
o 2014 case on defining a sale under Article 2 of UCC
o 2017 case on the sale of goods and services combined under Article 2 of the UCC
o 2016 case on the mirror image rule
 1 New Case Problem (based on 2018 case)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on sales and lease contracts(based
on 2017 case)
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Chapter Outline
I. Sales and Leases of Goods
a. Article 2—The Sale of Goods - When the UCC speaks, its principles apply. Whenthe
UCC is silent, other state statutes and the common law apply. Article 2 deals

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with sales of goods—not real property, services, or intangible property (stocks and
bonds).
1) What Is a Sale?- A sale is ―the passing of title from the seller to the buyer
for a price‖ [UCC 2–106(1)]. The price may be payable in money, goods, or
services.
2) What Are Goods?- Goods are tangible and movable.
i. Goods Associated with Real Estate- With respect to goods associated
with real estate, a contract for a sale of minerals, oil, or gas is a contract
for a sale of goods if severance is to be made by the seller. A sale of
growing crops or timber to be cut is a sale of goods regardless of who
severs them.
ii. Goods and Services Combined- When goods and services are combined,
courts determine which factor is predominant—the goods or the service. If
the contract is primarily for goods, UCC applies to a dispute.
3) Who Is a Merchant?- In some cases, special standards apply to merchants. A
merchant for one type of goods is not necessarily a merchant for another
type. A merchant is a person who—
i. Deals in goods of the kind involved in the contract.
ii. By occupation, holds himself or herself out as having knowledge and skill
peculiar to the practices or goods involved in the transaction.
iii. Employs a merchant as a broker, agent, or other intermediary [UCC
2–104].
4) What is a Lease- Article 2A covers any transaction that creates a lease of
goods, as well as subleases of goods [UCC 2A–102, 2A–103(k)]. Article 2A
echoes the principles of Article 2, but varies to reflect differences between sale
and lease transactions.
i. Definition of a Lease Agreement- A lease agreement is a lessor and a
lessee’s bargain with respect to a lease of goods as found in their
language and as implied by other circumstances, including course of
dealing and usage of trade or course of performance [UCC 2A–
103(1)(k)].
II. Sales and Lease Contracts- The following sections summarize how the UCC changes the effect of
the common law of contracts.
a. Offer
1) Open Terms- A sales or lease contract will not fail for indefiniteness even if
one or more terms are left open, as long as—
 The parties intended to make a contract.
 There is a reasonably certain basis for the court to grant an appropriate
remedy [UCC 2–204(3), 2A–204((3)].
i. Open Price Term- If the parties have not included a price term, a court
will set a reasonable price at the time for delivery [UCC 2– 305(1)]. If,
through the fault of one of the parties, a price is not

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fixed, the other party can fix a reasonable price or treat the contract as
canceled [UCC 2–205(3)].
ii. Open Payment Term- If the payment is not specified, payment is due at
the time and place at which the buyer will receive the goods [UCC 2–
310(a)].
iii. Open Delivery Term- If a delivery term is not specified, delivery is at the
seller’s place of business (or, if no place of business, the seller’s residence)
[UCC 2–308(a)].
a. Duration of an Ongoing Contract- If unspecified successive
performances are due, either party can terminate the
relationship on reasonable notice [UCC 2– 309(2), (3)].
b. Options and Cooperation with Regard to Performance- If the
contract specifies shipment, but the arrangements are
unspecified, the seller has the right to make them [UCC 2–311]. If
terms relating to an assortment of goods are omitted, the buyer
can specify them [UCC 2–311].
iv. Open Quantity Terms- If the quantity term is left open, a court will
have no basis for determining a remedy [UCC 2–306].
a. Requirements Contracts- Requirements contracts are
exceptions—the quantity is the amount that occurs during a
normal production year, and the actual quantity cannot be
unreasonably disproportionate.
b. Output Contracts- Output contracts are also exceptions.
2) Merchant’s Firm Offer
i. When a Merchant’s Firm Offer Arises- This arises when a merchant gives
assurances that an offer will remain open. The offer is irrevocable,
without consideration for the stated period of time, or, if no definite
period is specified, a reasonable period (neither period to exceed three
months) [UCC 2–205, 2A–205].
ii. Requirements for a Firm Offer- The offer must be written and be signed
by the offeror.
b. Acceptance- Generally, acceptance of an offer to buy or sell goods may be made in any
reasonable manner and by any reasonable means.
 Acceptance may be by a prompt shipment of goods or a promise to ship [UCC
2–206(1)(b)].
 A shipment of nonconforming goods is both an acceptance and a breach,
unless the seller seasonably notifies the buyer that the shipment is offered only
as an accommodation.
1) Communication of Acceptance- When acceptance by performance is
reasonable, ―an offeror who is not notified of acceptance within a
reasonable time may treat the offer as having lapsed before acceptance‖
[UCC 2–206(2), 2A–206(20].

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2) Additional Terms- If an offeree’s response indicates a definite acceptance, a

contract is formed, even if the acceptance includes terms in addition to or
different from the offer [UCC 2–207(1)].
i. Rules When One Party or Both Parties Are Nonmerchants- If the
modifications are not conditional, and one of the parties is a merchant, the
contract is formed according to the terms of the original offer.
ii. Rules When Both Parties Are Merchants- If the modifications are not
conditional, and both parties are merchants, the additional terms are part
of the contract unless—
a. The original offer requires the acceptance of its terms.
b. The new or changed terms materially alter the contract.
c. The offeror rejects the new terms within a reasonable time.
iii. Prior Dealings between Merchants- Courts also consider theparties’ prior
dealings in contracts between merchants.
3) Conditioned on Offeror’s Assent- A response is not an acceptance if the
modifications are conditional on the offeror’s assent.
4) Additional Terms May Be Stricken- Also, if conduct by both parties recognizes
the existence of a contract, this is sufficient to establish a contract, even without
a writing, which means in practice that a court can strike any terms on which the
parties do not agree [UCC 2–207(3)].
5) Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or
small groups and consider the following: Bailey offered to sell Jones one
hundred gallons of ice cream but did not state when delivery would be made
or how much the ice cream would cost. Jones replied back, ―Great. I’ll take
them. Deliver them to my warehouse.‖
i. Has a valid contract been made?
ii. What are the terms of the contract?
iii. How would your answers be different if this agreement were for services
and fell under the common law? (such as 10 sessions of yoga instead of
100 gallons of ice cream)
c. Consideration- The UCC requires no consideration for an agreement modifying a
contract [UCC 2–209(1), 2A–208(1)].
1) Of course, modification must be sought in good faith [UCC 1–203].
2) If a sales or lease contract requires that a modification be in writing [UCC 2–
209(2), 2A–208(2)], or if a modification brings a contract under the Statute of
Frauds, it must usually be in writing [UCC 2–209(3)].
d. The Statute of Frauds- The UCC requires a writing for a contract for a sale of goods to
be enforceable when the price of the goods is $500 or more [UCC 2– 201]—a lease
requires a writing for payments of $1,000 or more [UCC 2A– 201(1)]—signed by the
party against whom enforcement is sought.
1) Sufficiency of the Writing- A writing is sufficient if it indicates that a contract
was intended and it is signed by the party against whom enforcement is
sought. A contract is not enforceable beyond the

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quantity of goods shown in the writing. Other terms can be proved by oral
testimony.
2) Special Rules for Contracts between Merchants- In a transaction between
merchants, the requirement of a writing is satisfied if one of them sends a
signed, written confirmation to the other. If the recipient does not object in
writing within ten days, the confirmation will be enforceable against him or her.
i. Exceptions- A contract otherwise subject to the Statute of Frauds will be
enforceable despite the absence of a writing if—
a. Specially Manufactured Goods- The contract is for—
i. Specially manufactured goods for a particularbuyer.
ii. The goods are not suitable for resale to others in the
ordinary course of the seller’s business.
iii. The seller has substantially started to manufacture the
goods or made commitments for their manufacture.
b. Admissions- The party against whom enforcement of a contract
is sought admits in pleadings, testimony, or other court
proceedings that a contract for sale was made.
c. Partial Performance- If payment has been made and accepted
or goods have been received and accepted, an oral contract for
a sale or lease of goods is enforceable at least to the extent of
the performance.
e. Parol Evidence- Generally, if the parties to a contract set forth its terms in writing, the
terms cannot be contradicted by evidence of prior agreements or contemporaneous oral
agreements. If the writing is not fully integrated—i.e., some terms are missing—it can be
explained or supplemented by consistent additional terms.
1) Course of Dealing and Usage of Trade- The terms can be explained or
supplemented by course of dealing and usage of trade [UCC 2–202, 2A–
202]. If the course of dealing or usage of trade is not consistent with the
writing, the latter prevails.
2) Course of Performance- The terms can also be explained or supplemented by
the parties’ course of performance [UCC 2–208(1), 2A–207(1)].
3) Knowledge Check Activity: 1 minute total. Tests a students’ recollection of the
requirements under the Statute of Frauds.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What difference does it make whether UCC Article 2 applies to a contract? At common law, if an
offeror makes an offer that the offeree accepts with modifications to the terms, there is no contract. This is
the mirror-image rule. Under Article 2, however, a contract exists, despite the added terms, and the
question is whether those terms are also part of the contract. Thus, to determine whether the UCC applies
to a contract is also to determine which rules will apply to its terms. Projecting conclusions based on those
rules suggests to the parties’ actions that would be to their benefit.

2. How do the common law and the UCC differ regarding an offeree’s acceptance that includes terms
in addition to or different from the offer? At common law, acceptance must exactly mirror the offer—any
difference in terms constitutes a rejection and a counteroffer. Under the UCC, if an offeree’s response
indicates a definite acceptance, a contract is formed, even if the acceptance includes terms in addition to
or different from the offer. The response does not constitute an acceptance if the modifications are
conditional on the offeror’s assent. (For example, accepting an offer to sell 1,000 pounds of beef by
saying, ―I accept, and I want that evidenced by a city scale weight certificate,‖ would make a contract,
but responding by saying, ―I accept on condition that the weight is evidenced by a city scale weight
certificate‖ would not, unless the offeror agreed.)

3. What is the United Nations Convention on Contracts for the International Sale of Goods (CISG)? The
CISG is the international version of Article 2 of the Uniform Commercial Code and governs international
sales transactions. If the parties involved in an international sales transaction fail to specify in writing the
terms of a contract (price, delivery, form of payment, etc.), the CISG will be applied. Although the CISG
and UCC share many common features, there are also significant differences between them. In the event
the CISG and the UCC conflict, the CISG will apply because it is a treaty of the national government and is
therefore supreme.
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o UCC: Obligations of Buyer and Seller
o UCC Battle of the Forms: Additional Terms
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.

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5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 18:
Title and Risk of Loss

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 169
Cengage Supplements.................................................................................................................................................. 169

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List of Student Downloads ....................................................................................................................................... 169

Chapter Objectives ....................................................................................................................................................... 169
Key Terms ........................................................................................................................................................................ 169
What's New in This Chapter ........................................................................................................................................ 170
Chapter Outline ............................................................................................................................................................. 171
Discussion Questions ...................................................................................................................................................... 174
Appendix......................................................................................................................................................................... 175
Generic Rubrics.......................................................................................................................................................... 175
Standard Writing Rubric ......................................................................................................................................... 175
Standard Discussion Rubric ...................................................................................................................................... 176

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Purpose and Perspective of the Chapter

The purpose of this chapter is to review the concepts of title and risk of loss as they relate to the transfer of
goods. Further, it introduces the concept of insurable interest which is explored again in later chapters.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

69. Explain the concept of identification

70. Describe the effects of imperfect title on sales of goods

71. Discuss the concept of risk of loss

72. Identify insurable interest in goods

Key Terms
Bailment: A situation in which the personal property of one person (a bailor) is entrusted to another (a
bailee), who is obligated to return the bailed property to the bailor or dispose of it as directed.
buyer in the ordinary course of business: A buyer who, in good faith and without knowledge that the
sale violates the ownership rights or security interest of a third party in the goods, purchases goods in the
ordinary course of business from a person in the business of selling goods of that kind.
destination contract: A contract in which the seller is required to ship the goods by carrier and deliver
them at a particular destination. The seller assumes liability for any losses or damage to the goods until
they are tendered at the destination specified in the contract.
document of title: A writing exchanged in the regular course of business that evidences the right to
possession of goods (for example, a bill of lading or a warehouse receipt). entrustment rule: A rule
under which entrusting goods to a merchant who deals in goods of
that kind gives the merchant the power to transfer all rights to a buyer in the ordinary course of business.

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fungible goods: Goods that are alike by physical nature, by agreement, or by trade usage.
Examples are wheat, oil, and wine that are identical in type and quality.
good faith purchaser: A purchaser who buys without notice of any circumstance that would put a person
of ordinary prudence on inquiry as to whether the seller has valid title to the goodsbeing sold.
identification: In a sale of goods, the express designation of the specific goods provided for in the
contract.
insolvent: Under the Uniform Commercial Code, a term describing a person who ceases to pay
―his debts in the ordinary course of business or cannot pay his debts as they become due or is insolvent
within the meaning of federal bankruptcy law‖ [UCC 1–201(23)].
insurable interest: (1) In contract law, a property interest in goods being sold or leased that is
sufficiently substantial to permit a party to insure against damage to the goods. (2) In the context of
insurance, an interest in a person’s life or well-being that is sufficiently substantial
that insuring against the person’s death or injury does not amount to a mere wagering contract. sale on
approval: A type of conditional sale in which the buyer may take the goods on a trial basis. The sale
becomes absolute only when the buyer approves of (or is satisfied with) the goods being sold.
sale or return: A type of conditional sale in which title and possession pass from the seller to the buyer;
however, the buyer retains the option to return the goods during a specified period, even though the
goods conform to the contract.
sales contract: A contract for the sale of goods under which the ownership of goods is transferred from a
seller to a buyer for a price.
shipment contract: A contract in which the seller is required to ship the goods by carrier. The buyer
assumes liability for any losses or damage to the goods after they are delivered to the carrier.
Generally, a contract is assumed to be a shipment contract if nothing to the contrary is stated in the
contract.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 Retained and Updated Managerial Strategy feature—
o Commercial Use of Drones (Updated with section on new FAA regulations covering use
of commercial drones and a new example based on a 2017 case.)
 1 New Case:
o Case Analysis 21.1: BMW Group, LLC v. Castle Oil Corp. (2016)—on goods that arepart
of a larger mass.
o New Case 21.2: Louisiana Department of Revenue v. Apeck Construction, LLC (2018)—
on a dispute over when title to certain goods passed between a sellerand a buyer.
o Spotlight Case: 21.3: Lindholm v. Brant (2007)—a dispute over the title of a
famous Andy Warhol painting.

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 1 New Case Problem (based on 2017 case)

 1 New ―A Question of Ethics‖ using all-new IDDR Approach on title (based on 2018 case)
 Updated Limited-Time Group Assignment with two new activities.
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Chapter Outline
I. Identification- Before an interest in goods can pass from seller to buyer, the goods must exist, and
they must be identified to the contract [UCC 2–105(2)]. Identification gives a buyer the right to obtain
insurance on goods and the right to recover from third parties who damage goods.
a) Existing Goods- If a sale involves specific goods already in existence, identification occurs when
the contract is made.
b) Future Goods
i) If a sale involves unborn animals to be born within twelve months, identificationoccurs
when the animals are conceived.
ii) If a sale involves crops to be harvested within twelve months, identification occurswhen the
crops are planted or begin to grow.
iii) Identification of other future goods occurs when they are shipped, marked, orotherwise
designated as the contract goods.
c) Goods That Are Part of a Larger Mass- Problems may occur when goods exist in a larger mass, in
which case identification can often be made only by separating the goods from the mass. If owners
hold fungible goods in common, title and risk can pass without separation [UCC 2–105(4)].
d) Think Pair Share Activity: 5-10 minutes total. Ask the students to form pairs or small groups and
consider the following scenario: A cheese maker agrees to purchase all of the milk output of a
dairy farm for the next twelve months. As the milk is produced, the dairy farm stores it in large
vats on the farm until it is picked up every other day by tanker trucks and delivered to the cheese
maker.
i) Is the milk an existing good or future good? (or both)
ii) What if the milk was taken by a tanker truck to a pasteurizing facility used by other dairy
farms before being taken to the cheese maker? When and how would identification of the
goods take place?

II. When Title Passes- If the parties do not expressly agree to when and under what conditions title
passes, it passes at the time and place at which the seller delivers the goods [UCC 2– 401(2)],
according to the delivery terms.
a) Shipment and Destination Contracts- Under a shipment contract, title passes at the time and
place of shipment. Under a destination contract, title passes when goods are tendered at the
destination.
b) Knowledge Check: 1 minute total. Tests students’ understanding of destination contracts
c) Delivery without Movement of the Goods

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i) When a Title Document Is Required- When a buyer is to pick up goods and adocument
of title is required, title passes when and where the document is delivered.
ii) When a Title Document Is Not Required- When a document of title is not requiredand the
buyer is to pick up goods—
(1) If the goods have been identified, title passes at the time and place ofcontracting.
(2) If goods have not been identified, title passes on identification [UCC 2–401(3)].
d) Sales or Leases by Nonowners
(1) Void Title- If a seller or lessor is a thief, his or her title is void, the buyer or lesseeacquires
no title, and the owner can reclaim the goods.
(2) Voidable Title- A seller or lessor has voidable title if the goods were—
 Obtained by fraud.
 Paid for with a check that is later dishonored.
 Bought on credit when the seller or lessor was insolvent.
(a) Good Faith Purchasers- A seller with voidable title can transfer good title to a good
faith purchaser for value—and the owner cannot recover the goods [UCC 2–403(1)].
(b) Voidable Title and Leases- A seller with voidable title can transfer good title to a
good faith lessee for value. The owner can recover the proceeds from the lease and
the lessor’s interest in the return of the goods [UCC 2–403(1)].
(c) The Entrustment Rule- Entrusting goods to a merchant who deals in goods of the kind
gives the merchant power to transfer all rights to a buyer or sublessee in the ordinary
course of business [UCC 2–403(2), 2A–305(2)].
(3) Knowledge Check: 1 minute total. Tests students’ understanding of whether a transaction
resulted in good title.
III. Risk of Loss- By agreement, parties can generally control when risk of loss passes from seller to
buyer.
a) Delivery with Movement of the Goods—Carrier Cases
(1) Shipment Contracts- Under a shipment contract, risk passes when goods are delivered to
a carrier [UCC 2–509(1)(a), 2A–219(2)(a)]. Generally, all contracts are assumed to be
shipment contracts if nothing to the contrary is stated in the contract.
(2) Destination Contracts- Under a destination contract, risk passes when goods are tendered
to a buyer or lessee at the specified destination [UCC 2–509(1)(b), 2A– 219(2)(b)].
b) Delivery without Movement of the Goods
(1) Goods Held by the Seller
(a) Non-Merchants- If a seller is a non-merchant, risk passes on the seller’stender
of delivery [UCC 2–509(3)].
(b) Merchants- If a seller is a merchant, risk passes only on a buyer’s taking
possession of the goods [UCC 2–509(3)].
(c) Leases- The same rules apply to lessors (or suppliers under finance leases)and
lessees [UCC 2A–219(c)].
(2) Goods Held by a Bailee

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(a) Negotiability of Title Document- A document of title can be negotiable—in which

case its recipient obtains it free of any claims of the party that issued it. If the
document is nonnegotiable, its recipient obtains only those rights that its transferee
had, subject to prior claims.
(b) When Risk of Loss Passes- If a bailee holds goods for a seller and the goods are to
be delivered without being moved, risk passes when—
(i) The buyer receives a negotiable document of title for the goods.
(ii) The bailee acknowledges the buyer’s right to possess the goods.
(iii) The buyer receives a nonnegotiable document of title and has had a reasonable
time to present the document to the bailee and demand the goods [UCC 2–
509(2), 2–503(4)(b)].
1. If a bailee holds goods for a lessor and the goods are to be delivered
without being moved, risk passes when the bailee acknowledges the lessee’s
right to possess the goods [UCC 2A–219(2)(b)].
c) Conditional Sales
(1) Sale on Approval- Under a sale on approval, until the buyer accepts, the seller retains
title and risk of loss (from causes beyond the buyer’s control). Acceptance can be made
expressly or by any act inconsistent with the trial purpose or seller’s ownership (such as the
buyer’s election not to return the goods within the trial period) [UCC 2–327(1)].
(2) Sale or Return- Under a sale or return, when the buyer receives possession of the goods,
title and risk pass, and they remain with the buyer until he or she returns the goods. If the
buyer does not return the goods within a specified time (because they are sold or lost), the
sale is finalized.
d) Risk of Loss When a Sales or Lease Contract Is Breached
(1) When the Seller or Lessor Breaches- If goods are so nonconforming that a buyer or lessee
has the right to reject them, risk of loss will not pass until—
(a) The defects are cured.
(b) The buyer or lessee accepts the defective goods [UCC 2–510], 2A–220(1)(a).
(2) When Acceptance Is Revoked- If a buyer or lessee accepts and later discovers a latent
defect, acceptance can be revoked. Revocation passes the risk back to the seller, at least
to the extent that the buyer’s insurance does not cover the loss [UCC 2–510(2)].
(a) Leases- Article 2A provides a similar rule for leases [UCC 2A–220(1)(b)].
(3) When the Buyer or Lessee Breaches- When a buyer or lessee breaches, the risk
immediately shifts to the buyer or lessee—
(a) If the seller or lessor has identified the goods under the contract.
(b) But the buyer or lessee bears the risk for only a commercially reasonable time after
the seller or lessor learns of the breach.
(c) And the buyer or lessee is liable only to the extent of any deficiency in the seller’s or
lessor’s insurance [UCC 2–510(3), 2A–220(2)].
(d) Discussion Activity: 5-10 minutes total. As a class, discuss the following: A
warehouse is holding 3,000 crates of paperclips on behalf of Big Box Office Supply,
Inc., 600 palettes of lipstick for Lucia Cosmetics, along with many

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other items for other companies. It is standard language in the contracts between the
warehouse owner and these companies that the warehouse will be shipped out (or
picked up by delivery drivers) at the order of these companies. If the warehouse burns
down, who bears the risk of loss?

IV. Insurable Interest- With an insurable interest, a party can buy insurance to protect against the loss of
goods.
a) Insurable Interest of the Buyer or Lessee- A buyer or lessee has an insurable interest in goods the
moment they are identified to the contract by the seller or lessor [UCC 2– 501(1), 2A–218(1)].
b) Insurable Interest of the Seller or Lessor- A seller or lessor has an insurable interest in goods as
long as he or she has title. After title passes, a seller who has a security interest in goods retains an
insurable interest [UCC 2–501(2)]. A lessor retains an insurable interest until an option to buy is
exercised by the lessee and the risk is passed [UCC 2A– 218(3)].

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What title does a buyer acquire from a seller with voidable title? A buyer of goods acquires the title
that the seller had or had the power to transfer, and a buyer of a limited interest acquires rights only to
the extent of the interest bought. Nevertheless, a seller with voidable title can transfer good title to a good
faith purchaser for value because an owner cannot recover goods from a good faith purchaser for value
(for example, if a buyer pays for a watch with a bad check and then sells the watch to an unsuspecting
third party, the owner—the original seller—cannot recover the watch from that third party).

2. For purposes of the entrustment rule, what is ―a buyer in the ordinary course of business?‖
A buyer in the ordinary course is a person who buys in good faith from a person who deals in goods of
that kind. The buyer cannot know that the sale violates the ownership rights of a third person. (For
example, a customer who unknowingly buys another customer’s bike from a bicycle shop gets good title to
the bike against the original owner.) A good faith buyer obtains only those rights held by the person who
entrusted the goods. (In the above example, if the other customer had stolen the bike, the buyer would
have acquired title good only against the thief, not against the original owner.)

3. Who bears the risk of loss when a contract is breached? Generally, the party in breach bears the
risk. If a seller breaches by delivering goods so nonconforming that a buyer has the right to reject them
(red flags instead of yellow ones, for example), risk will not pass until the

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defects are cured or the buyer accepts the defective goods. (If a buyer accepts and later discovers a
latent defect, acceptance can be revoked, at which time risk passes back to the seller, to the extent that the
buyer’s insurance does not cover the loss.) When a buyer breaches, risk immediately shifts to the buyer if
the seller has identified the goods. (The buyer bears the risk for only a commercially reasonable time
after the seller learns of the breach, however, but the buyer is liable to the extent of any deficiency in the
seller’s insurance.)

4. When does a buyer have an insurable interest in goods? A buyer has an insurable interest in goods
the moment they are identified to the contract by the seller. (For example, a crop is identified to a contract
when it is planted or begins to grow, and thus, a buyer who contracts in March to buy a crop to be
harvested in October obtains an insurable interest in the crop when it is planted in April.)
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic

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literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other include peer reviewed
other scholarly work. scholarly work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 19:
Performance and Breach

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Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 178
Cengage Supplements.................................................................................................................................................. 178
List of Student Downloads ....................................................................................................................................... 178
Chapter Objectives ....................................................................................................................................................... 178
Key Terms ........................................................................................................................................................................ 178
What's New in This Chapter ........................................................................................................................................ 179
Chapter Outline ............................................................................................................................................................. 179
Discussion Questions ...................................................................................................................................................... 184
Additional Activities and Assignments ....................................................................................................................... 184
Additional Resources ..................................................................................................................................................... 185
Cengage Video Resources ...................................................................................................................................... 185
Appendix......................................................................................................................................................................... 185
Generic Rubrics.......................................................................................................................................................... 185
Standard Writing Rubric ......................................................................................................................................... 186
Standard Discussion Rubric ...................................................................................................................................... 187

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Purpose and Perspective of the Chapter

The purpose of this chapter is to continue the conversation about sales contracts and the rules of the
Uniform Commercial Code. Specifically, it continues to explore the topics of performance and breach.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

73. Explain the seller’s or lessor’s contractual obligations

74. Identify the buyer’s or lessee’s contractual obligations

75. List the seller’s or lessor’s remedies when the buyer is in breach

76. State the buyer’s or lessee’s remedies when the seller is in breach

Key Terms
conforming goods: Goods that conform to contract specifications.
cover: A buyer’s or lessee’s purchase on the open market of goods to substitute for those promised but
never delivered by the seller or lessor. Under the Uniform Commercial Code, if the cost of cover exceeds
the cost of the contract goods, the buyer or lessee can recover the difference, plus incidental and
consequential damages.
cure: Under the Uniform Commercial Code, the right of a party who tenders nonconforming
performance to correct his or her performance within the contract period.
installment contract: Under the Uniform Commercial Code, a contract that requires or authorizes delivery
in two or more separate lots to be accepted and paid for separately.
letter of credit: A written instrument, usually issued by a bank on behalf of a customer or other party, in
which the issuer promises to honor drafts or other demands for payment by third parties in accordance
with the terms of the instrument.
perfect tender rule: A common law rule under which a seller was required to deliver to the buyer goods
that conformed perfectly to the requirements stipulated in the sales contract. A tender of nonconforming
goods would automatically constitute a breach of contract. Under the Uniform Commercial Code, the rule
has been greatly modified.

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replevin: (pronounced rih-pleh-vin) An action to recover specific goods in the hands of a partywho is
wrongfully with- holding them from the other party.
tender of delivery: Under the Uniform Commercial Code, a seller’s or lessor’s act of placing conforming
goods at the disposal of the buyer or lessee and giving the buyer or lessee whatevernotification is
reasonably necessary to enable the buyer or lessee to take delivery.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case:
o New Case 22.1: All the Way Towing, LLC v. Bucks County, International, Inc.
(2018)—on the perfect tender rule in the sale of a custom-made truck.
o Case Analysis 22.2: Genesis Health Clubs, Inc. v. LED Solar & Light Co. (2016)—on
revocation of acceptance and the duty to return goods.
o Spotlight Case 22.3: Fitl v. Strek (2015)—on the right to recover for accepted
goods.
 1 New Case in Point
o 2017 case on acceptance by the buyer or lessee
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on buyer’s remedies (basedon 2017
case)
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Chapter Outline
I. Obligations of the Seller or Lessor- A seller or lessor is obligated to deliver or tender delivery of
conforming goods [UCC 2–301, 2A–516(1)].
a. Tender of Delivery- Tender must be at a reasonable time and in a reasonable manner
[UCC 2–503(1)(a)]. The seller or lessor must give the buyer or lessee notice [UCC 2–
503(1), 2A–58(1)]. Goods must be tendered in a single delivery unless the parties agree
otherwise [UCC 2–612, 2A–510] or the circumstances are such that either party can
rightfully request delivery in lots [UCC 2–307].
b. Place of Delivery
i. Seller’s business—When a contract does not specify a place of delivery, and
the buyer is to pick up the goods [UCC 2–308].
ii. Seller’s residence—When a contract does not specify a place of delivery, the
buyer is to pick up the goods, and the seller has no place of business [UCC 2–
308].
iii. Location of the goods—When a contract involves identified goods, and the parties
know that the goods are somewhere other than the seller’s business [UCC 2–308].
Delivery may then occur by document of title or a bailee’s acknowledgment that
the buyer is entitled to possession.
iv. Delivery via Carrier

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1. Shipment Contracts- Under a shipment contract, a seller must—

a. Put goods into the hands of a carrier.
b. Contract for their transport.
c. Give the buyer any documents necessary to get possession of the
goods from the carrier.
d. Tell the buyer that shipment has been made [UCC 2–504].
2. Destination Contracts- Under a destination contract, a seller must tender
goods at a reasonable hour and hold them at the buyer’s disposal for a
reasonable length of time, giving appropriate notice. The seller must also
give the buyer any documents of title necessary for the buyer to obtain
delivery.
c. The Perfect Tender Rule- A seller or lessor must deliver goods in conformity with a
contract in every detail [UCC 2–601, 2A–509]. The corollary is that the buyer then has
no right to reject the goods.
i. Exceptions to the Perfect Tender Rule
1. Agreement of the Parties- If parties agree, that defective goods will not
be rejected if the seller is able to repair or replace them within a
reasonable time, the rule does not apply.
2. Cure- A seller or lessor may repair, adjust, or replace nonconforming
goods [UCC 2–508, 2A–513], providing he or she tells the buyer and
cures within the contract time for performance.
3. Substitution of Carriers- If an agreed manner of delivery becomes
impracticable or unavailable through no fault of either party, and a
commercially reasonable substitute is available, the substitute is sufficient
[UCC 2–614(1)].
4. Installment Contracts- A buyer or lessee can reject an installmentonly if a
nonconformity substantially impairs the value of the installment and cannot
be cured [UCC 2–612(2), 2–307, 2A–510(1)]. The contract is breached
only if one or more nonconforming installments substantially impair the
value of the whole contract. The cases generally concern the issue of what
constitutes a substantial impairment.
5. Commercial Impracticability
a. When events unforeseen at the time of contracting make
performance commercially impracticable, the rule of perfect
tender does not apply [UCC 2–615(a), 2A–405(a)]. The seller
must notify the buyer that there will be a delay or non-delivery.
b. The doctrine does not extend to problems that could have been
foreseen, such as cost increases due to inflation.
6. Destruction of Identified Goods
a. When goods are destroyed through no fault of either party and
before risk passes to the buyer or lessee, the parties are
excused from performance [UCC 2–613, 2A–221].

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b. If goods are only partially destroyed, the buyer or lessee can

treat the contract as void or accept the goods with a price
allowance.
7. Assurance and Cooperation
a. If a party has reasonable grounds to believe that another will not
perform, he or she may demand in writing an assurance of
performance. While waiting for a response, the party may
suspend his or her own performance. If an assurance is not given
within thirty days, this can be considered repudiation of the
contract [UCC 2–609, 2A– 401].
b. The same rule applies if cooperation is needed and not given
[UCC 2–311(3)(b)]].
d. Knowledge Check: 1 minute total. Tests a students’ understanding of the perfect tender.

II. Obligations of the Buyer or Lesser- The main obligation of a buyer or lessee is to pay for goods
tendered in accord with their contract.
a. Payment- When a sale is on credit, a buyer must pay according to the terms, not when the
goods are received [UCC 2–310]. Payment can be by any method generally acceptable
in the commercial world].
b. Right of Inspection- A buyer’s right to inspect the goods is absolute (except for
C.O.D. shipments [UCC 2–513(3)]). If the goods are not what were ordered, there is no
duty to pay. Inspection can be at any reasonable place and time and in any reasonable
manner (determined by custom of the trade, past practices of the parties, and the like).
c. Revoction of Acceptance- A buyer or lessee can accept by—
i. Accepting a shipment by words or conduct [UCC 2–606(1)(a), 2A–515(1)(a)].
ii. Failing to reject within a reasonable time [UCC 2–606(1)(b), 2–602(1), 2A–
515(1)(b)].
iii. Performing any act inconsistent with the seller’s ownership [UCC 2–606(1)(c)].
iv. Acceptance can be revoked if a nonconformity substanitally impairs thevalue of
the unit or lot and if one of the following factors is present.
1. Acceptance was based on reasonable assumption that the nonconformity
would be cured and it has not been cured within a reasonable time
2. Buyer or lessee did not discover the nonconformity until after acceptance
(the failure of which was the result of a difficulty in detecting the
nonconformity before acceptance)
d. Anticipatory Repudiation- This occurs if, before the time for contract performance, one
party communicates to the other an intent not to perform. This is, of course, a breach of the
contract.

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i. Suspension of Performance Obligations- The non-breaching party may then

suspend his or her own performance and—
1. Await performance by the repudiating party [UCC 2–610, 2A–402].
2. Resort to any remedy for breach.
ii. A Repudiation May Be Retracted- The breaching party may retract his or her
repudiation if the innocent party has not canceled the contract, materially
changed position, or otherwise indicated that the repudiation is final [UCC 2–611,
2A–403].

III. Remedies of the Seller or Lessor

a. When the Goods Are in the Possession of the Seller or Lessor- Before goods are
delivered to the buyer or lessee, the seller or lessor has the following remedies.
i. The Right to Withhold Delivery- This remedy is available when a buyer or lessee
wrongfully rejects or revokes acceptance of the goods, fails to pay, or repudiates
part of the contract [UCC 2–703(a), 2A–523(1)(c)]. If the breach results from the
buyer or the lessee’s insolvency, the seller or lessor can refuse to deliver unless
the buyer or lessee pays in cash [UCC 2–702(1), 2A–525(1)].
ii. The Right to Resell or Dispose of the Goods- The seller or lessor can hold the
buyer or lessee liable for any loss [UCC 2–703(d), 2–706(1), 2A– 523(1)(e), 2A–
527(1)]. The seller must timely notify the buyer unless the goods are perishable or
will rapidly decline in value [UCC 2–706(2), (3)].
1. If the goods are unfinished at the time of the breach, the seller or lessor
can either stop or complete their manufacture before reselling (or re-
leasing) them.
2. The buyer or lessee is responsible for the difference between the contract
and resale (or re-lease) prices, as well as incidental damages [UCC 2–
706(1), 2–710, 2A–527(2)].
iii. The Right to Recover the Purchase Price or Lease Payments Due- This remedy is
available if the seller or lessor is unable to resell or dispose of the goods [UCC 2–
709(1), 2A–529(1)].
iv. The Right to Recover Damages for the Buyer’s Nonacceptance
1. If a buyer or lessee repudiates a contract or wrongfully refuses to accept
the goods, the amount of damages is usually the difference between the
contract price or lease payments and the market price (at the time
and place of tender), plus incidental damages [UCC 2–708(1), 2A–
528(1)].
2. If the difference is too small to place the seller or lessor in the position
that he or she would have been in if the buyer or lessee had fully
performed, damages may include lost profits [UCC 2– 708(2), 2A–
528(2)].

IV. Remedies of the Buyer or Lessee

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a. The Right to Reject the Goods- If the goods or tender fail to conform in any respect, the
buyer or lessee can reject them, in whole or in part [UCC 2–601, 2A– 509]. The buyer or
lessee can then cover or cancel.
i. Timeliness and Reason for Rejection Are Required- Rejection must be within a
reasonable time, and the seller or lessor must be notified and told of the defect
[UCC 2–602(1), 2–605, 2A–509(2), 2A–514].
ii. Duties of Merchant-Buyers and Lessees When Goods Are Rejected- If the buyer
or lessee is a merchant, he or she must follow the instructions of the seller or
lessor in regard to the goods, or store or reship them, unless they are perishable
or threaten to decline rapidly in value, in which case they can be resold [UCC 2–
603, 2–604, 2A–511 2A–512].
b. The Right to Obtain Specific Performance- A buyer or lessee can obtain specific
performance when goods are unique or when the remedy at law is inadequate [UCC 2–
716(1), 2A–521(1)].
c. The Right of Cover- This remedy is available when a seller or lessor repudiates the
contract or fails to deliver, or when a buyer or lessee rightfully rejects or revokes
acceptance. The buyer or lessee can then recover from the seller or lessor—
i. The difference between the cost of cover and the contract price.
ii. Incidental damages.
iii. Consequential damages, minus expenses saved as a result of the breach [UCC 2–
712, 2–715, 2A–518]. A buyer or lessee who does not cover may not be able to
collect consequential damages.
d. The Right to Recover Damages- If a seller or lessor repudiates the sales contract or fails
to deliver the goods, or the buyer or the lessee has rightfully rejected or revoked
acceptance of the goods, the buyer or lessee can recover—
i. The difference between the contract price and the market price at the place for
delivery, at the time the buyer (or lessee) learned of the breach.
ii. Incidental damages.
iii. Consequential damages, less expenses saved as a result of the breach [UCC 2–
713, 2A–519].
e. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small groups
and consider the potential remedies for each of the following:
i. A contract for the sale of 30 motorized wheelchairs to a reseller from a
manufacturer, in which the seller was only able to produce and ship 25 by the
date of delivery stated in the contract
ii. A contract for the sale of a crate of sunglasses, in which the buyer states
―I’m not going to be able to pay you‖ after the goods have been shipped but
before they have arrived to their destination
iii. A contract for the sale of a famous painting in which the seller changes their mind
before delivery of the painting

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What does the obligation to ―tender delivery‖ require? Tender of delivery requires that a seller or
lessor have and hold conforming goods at a buyer or lessee’s disposal and give whatever notice is
reasonably necessary for the buyer or lessee to take delivery. Tender must be at a reasonable time and
the goods must remain available for a reasonable period. Unless parties agree otherwise or there are
circumstances under which either party can request delivery in lots, goods must be tendered in a single
delivery (for instance, delivery of 1,000 cans of tuna cannot normally be two cans at a time, although the
parties can agree to five shipments of 200 each or whatever else may be commercially reasonable).

2. When is a seller entitled to recover damages? A seller can sue for damages if a buyer repudiates a
contract or wrongfully refuses to accept goods. What is the measure of the damages? The measure of the
damages is the difference between the contract price and the market price (at the time and place of
tender) plus incidental damages. If the market price is less than the contract price, damages include the
seller’s lost profits.

3. What damages can a buyer recover? If a seller fails to deliver goods or repudiates a contract, the
buyer may recover as damages the difference between the contract and market prices of goods when the
buyer learns of the breach. Market price is determined at the place at which the seller was to deliver the
goods. Sometimes a buyer can also recover incidental and consequential damages less expenses saved as
a result of the breach (for instance, if a seller fails to deliver 10,000 bushels of soybeans (ordered at
$5/bu.) on October 1 as promised, when the price of soybeans is $5.50/bu., the buyer can recover
$5,000 plus any expenses the breach caused, less any expenses the breach saved.
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Additional Activities and Assignments

6. Business Case: Sales
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. Considering the passage of title and risk of loss, what would a grain buyeror
sellers’ position on the best way to ship a harvest? Via shipment or destination
contract?
ii. Identify three agreements in this scenario that you think should be covered
by the UCC.
iii. Should Josiah be treated differently (as a merchant) than someone who has a
large garden and sells surplus at a farmer’s market? Why or why not?

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d. Role Play: Divide into groups, where half the group represents Josiah and the other half
represents The Seedling Market. Each group has filed a motion for summary judgment
(the facts are undisputed) in a breach of contract lawsuit and will need to prepare oral
arguments to defend their motion.
The side representing Josiah should list out all of the damages experienced by The
Seedling Market’s substitution of the non-organic GMO seeds and the legal position for
why the substitution was improper.
The Seedling Market should counter the argument by defending their right to make the
substitution and deny their responsibility for damages.
At the end of your allotted preparation time, present your arguments.
a. Writing Assignment: Assume Josiah never paid for the parts from the repair shop, and
they want to sue him for breach of contract. What is the repair shop’s best argument for
why they have a valid claim against Josiah?
b. Ethics Question: Assume the order form with The Seedling Market also stated,
―Buyer agrees as a condition of this contract not to save any seed produced from the
harvest arising out of the planting of the seeds subject to this order.‖ The clause was
designed by The Seedling Market to prevent growers from developing their own stockpile
of seeds, thereby eliminated the need for The Seedling Market’s supply and essentially
becoming a competitor of The Seedling Market. Is this provision unconscionable?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o UCC: Obligations of Buyer and Seller
o Buyer Remedies When a Seller Breaches
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 20:
Warranties and Product Liability

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 189
Cengage Supplements.................................................................................................................................................. 189
List of Student Downloads ....................................................................................................................................... 189
Chapter Objectives ....................................................................................................................................................... 189
Key Terms ........................................................................................................................................................................ 189
What's New in This Chapter ........................................................................................................................................ 190
Chapter Outline ............................................................................................................................................................. 190
Discussion Questions ...................................................................................................................................................... 195
Additional Resources ..................................................................................................................................................... 197

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Cengage Video Resources ...................................................................................................................................... 197

Appendix......................................................................................................................................................................... 197
Generic Rubrics.......................................................................................................................................................... 197
Standard Writing Rubric ......................................................................................................................................... 198
Standard Discussion Rubric ...................................................................................................................................... 198

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Purpose and Perspective of the Chapter

The purpose of this chapter is to take a deep dive into warranties as they relate to the sale of goods.
Both express and implied warranties are covered as well as how warranties can be waived.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

77. Name the three types of warranties of title

78. State when express warranties arise in a sales or lease contract

79. Identify the implied warranties that arise in a sales or lease contract

80. Define a warranty disclaimer

81. List the requirements of strict product liability

Key Terms
express warranty: A seller’s or lessor’s oral or written promise, ancillary to an underlying sales or lease
agreement, as to the quality, description, or performance of the goods being sold or leased.
implied warranty: A warranty that the law derives by implication or inference from the nature of the
transaction or the relative situation or circumstances of the parties.
implied warranty of fitness for a particular purpose: A warranty that goods sold or leased arefit for a
particular purpose. The warranty arises when any seller or lessor knows the particular purpose for which a
buyer or lessee will use the goods and knows that the buyer or lessee is relying on the skill and judgment
of the seller or lessor to select suitable goods.
implied warranty of merchantability: A warranty that goods being sold or leased are reasonably fit for
the ordinary purpose for which they are sold or leased, are properly packaged and labeled, and are of
fair quality. The warranty automatically arises in every sale or lease of goods made by a merchant who
deals in goods of the kind sold or leased.

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privity of contract: The relationship that exists between the promisor and the promisee of a contract.
product liability: The legal liability of manufacturers, sellers, and lessors of goods to consumers, users, and
bystanders for injuries or damages that are caused by the goods.
product misuse: A defense against product liability that may be raised when the plaintiff used aproduct
in a manner not intended by the manufacturer. If the misuse is reasonably foreseeable, the seller will not
escape liability unless measures were taken to guard against the harm that could result from the misuse.
unreasonably dangerous product: In product liability, a product that is defective to the point of
threatening a consumer’s health and safety. A product will be considered unreasonably dangerous if it is
dangerous beyond the expectation of the ordinary consumer or if a less dangerous alternative was
economically feasible for the manufacturer, but the manufacturer failed to produce it.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 2 New Case in Points

o 2017 case on merchantable goods
o 2015 case on express warranties
 1 New Case Problem (based on 2018 case)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on express warranty (basedon 2018
case)
 Updated Limited-Time Group Assignment with a new activity.
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Chapter Outline
I. Warranties of Title- Provisions similar to the following apply to leases [see UCC 2A– 211(1), 2A–
214(4), 2A–516(3)(b), 2A–516(4)(b)]. These warranties can be disclaimed or modified only by
specific language in the contract.
a. Good Title- Generally, sellers warrant that they have good title to the goods theysell and
that the transfer of title is rightful [UCC 2–312(1)(a)].
b. No Liens- Sellers warrant that goods will be delivered free of encumbrances ofwhich a
buyer is unaware at the time of contracting [UCC 2–312(1)(b)].
c. No Infringements- A merchant warrants that goods are free of any thirdperson’s
patent, trademark, or copyright claim [UCC 2–312(3), 2–607(6)].
i. Notice in Sales Contracts- A buyer sued by a party holding a patent, trademark,
or copyright in the goods is obligated to notify the seller to enable the seller to
decide whether to defend against the suit. If the seller

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refuses, the buyer can later recover the expenses of the suit from the seller. Lack
of timely notice forfeits this right.
ii. Notice in Lease Contracts- The same rule applies to a lease except that a
consumer lessee does not lose his or he right to recover despite a lack of notice.

II. Express Warranties

a. Statements That Create Express Warranties- Express warranties arise if a sellerindicates
goods will conform to—
i. An affirmation or promise of fact.
ii. A description.
iii. A sample or model [UCC 2–313, 2A–210].
b. Basis of the Bargain- A reasonable buyer need only regard a representation as part of
the basis of the bargain. Formal words are not necessary.
c. Statements of Opinion and Value- A seller’s statement about the value or worth of
goods or a seller’s statement of opinion (puffing) is not an express warranty.
i. Opinions by Experts- A seller who is an expert and gives an opinion asan
expert to a layperson may create a warranty.
ii. Reasonable Reliance- Clearly improbable claims and oral statements areless
likely to qualify as warranties.
iii. Knowledge Check: 1 minute total. Test students’ knowledge aboutexpress
warranties.

III. Implied Warranties- Merchants impliedly warrant that the goods they sell are merchantable and,
in certain circumstances, fit for a particular purpose. An implied warranty may arise from a course
of dealing or usage of trade.
a. Implied Warranty of Merchantability- This warranty arises in every sale of goods by a
merchant who deals in goods of the kind [UCC 2–314, 2A–212].
i. Merchantable Goods- Goods that are merchantable are ―reasonably fit for
the ordinary purposes for which such goods are used.‖ They must at least—
1. Be of average, fair, or medium-grade quality.
2. Pass without objection in the trade or market for goods of thesame
description.
3. Be adequately packaged and labeled as provided by theagreement.
4. Conform to promises or affirmations of fact made on the container or
label.
ii. Merchantable Food- The serving of food or drink is a sale of goodssubject
to the implied warranty of merchantability [UCC 2–314(1)].
b. Implied Warranty of Fitness for a Particular Purpose- This warranty ariseswhen any
seller knows a particular purpose for which a buyer will use goods and

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that the buyer is relying on the seller’s skill and judgment to select suitable goods [UCC 2–
315, 2A–213].
i. Particular versus Ordinary Purpose- Goods can be suitable for the useto which
such goods are ordinarily put (merchantable) but still not fit for a buyer’s
particular purpose.
ii. Knowledge and Reliance Requirements- The seller or lessor’s actual knowledge
of the buyer’s particular purpose is not required, but the buyer must have relied on
the seller or lessor’s skill or judgment to selectsuitable goods.
c. Warranties Implied from Prior Dealings or Trade Custom- Warranties can arise
from a course of dealing or usage of trade. When the parties know of a well- recognized
trade custom, courts will infer that they intended the custom to apply to their contract [UCC
2–314(3), 2A–212(3)].

IV. Warranty Disclaimers and Limitations on Liability- Courts view warranty disclaimers as
unconscionable, especially when consumers are involved. Federal and state statutes make some
disclaimers unenforceable. A buyer prevented from claiming breach of warranty may be able to
sue successfully on a theory of negligence or strict liability.
a. Express Warranties- A seller’s best protection from being held accountable for
affirmations of fact or promises is not to make them in the first place. Express warranties
can be negated or limited by specific and unambiguous language, if it is done in a way
that protects a buyer from surprise [UCC 2–316(1), 2A–214(1)].
b. Implied Warranties- Implied warranties can be disclaimed by the expression ―as is,‖ or
―with all faults,‖ or some other similar phrase [UCC 2–316, 2A–214].
i. Disclaimer of the Implied Warranty of Merchantability- A merchantability
disclaimer must mention merchantability; it need not be written, but if it is, the
writing must be conspicuous.
ii. Disclaimer of the Implied Warranty of Fitness- To disclaim an implied warranty
of fitness for a particular purpose, a disclaimer must be written and be
conspicuous (but the word fitness does not need to be used).
c. Buyer’s or Lessee’s Examination or Refusal to Inspect- If a buyer refuses to examine
goods or if a buyer examines goods as fully as desired before contracting, there is no
implied warranty with respect to defects that a reasonable examination will reveal.
d. Magnuson-Moss Warranty Act
i. Applies Only to Consumer Transactions- Under this federal act, a seller need
not give a written warranty for consumer goods, but if he or she does and the
price of goods is more than $25, the warranty must be labeled as either full or
limited.
1. Full warranty—Requires free repair or replacement of a defective part.
If repair cannot be done within a reasonable time, a buyer can choose
a refund or replacement without charge.

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2. Limited warranty—Limits buyers’ recourse. Generally, it must be

conspicuous.
ii. Requires Certain Disclosures- Certain information must be disclosed in
―readily understood language.‖
V. Product Liability
n. Based on Negligence
i. Due Care Must be Exercised- Due care must be exercised in—
1. Designing products.
2. Selecting materials.
3. Producing products.
4. Assembling and testing products.
5. Warning users of dangers of which an ordinary person might notbe
aware.
6. Inspecting and testing components that a manufacturer buys for use in
the final product
i. Privity of Contract Not Required- An action based on negligence does not
require privity of contract).
o. Misrepresentation- When fraudulent misrepresentation to a user or consumer
results in injury, it may serve as a basis of liability. A bad ad or label can show
intent, but the injured party must have relied on it.
p. Knowledge Check Activity: 1 minute total. Tests the students’
recollection of the elements of negligence.
c. Strict Product Liability – Imposed since the 1960s in many states, strict product liability
does not require privity of contract, or proof of fault or the lack of reasonable care. Most
states recognize strict liability. Some states limit its application to situations involving
personal injury. Strict liability is based on the public-policy assumptions that—
i. Consumers should be protected against unsafe products.
ii. Manufacturers and distributors should not escape liability simply becausethey
are not in privity of contract with the ultimate users of the products.
iii. Manufacturers, sellers, and lessors are in the best position to bear the costs of
injuries caused by their products, with the costs recouped in the form of higher
prices.
i. The Requirements for Strict Product Liability- For a cause of action instrict product
liability against a manufacturer—
iv. A product must be in a defective condition when the manufacturer sells it.
v. The manufacturer must be normally engaged in the business of selling it.
vi. The product must be unreasonably dangerous to a user or consumer because
of its defective condition (not required in all states).
vii. Proving a Defective Condition- It need not be shown why or how a product
became defective, but it must be shown that at the time of the injury, the
product’s condition was essentially the same as it was in the hands of the
manufacturer or seller.

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viii. Unreasonably Dangerous Products - A product is reasonably dangerous if—

1. It is dangerous beyond the reasonable expectations of the
ordinary consumer.
2. A less dangerous alternative was economically feasible but the
manufacturer failed to produce it.
3. A plaintiff must incur physical harm to self or property by use
or consumption of the product.
4. The defective condition must proximately cause the injury or
damage.
5. The product must not have been substantially changed from
the time it was sold to the time of the injury.
b. Product Defects- The Restatement (Third) of Torts: Products Liability categorizesproduct
defects into the following types:
ix. Manufacturing Defect- A product ―contains a manufacturing defect when the
product departs from its intended design even though all possible care was
exercised in the preparation and marketing of the
product.‖ This includes products that are physically flawed, damaged, or
incorrectly assembled.
1. Quality Control- Liability is imposed regartdless of
whether quality control efforts were ―reasonable.‖
2. Expert Testimony- Cases involving allegations of a
manufacturing defect are often decided based on the
opinions and testimony of experts.
x. Design Defect- A product ―is defective in design when the foreseeable risks of
harm posed by the product could have been reduced or avoided by the
adoption of a reasonable alternative design by the seller or other distributor, or
a predecessor in the commercial chain of distribution, and the omission of the
alternative design renders the product not reasonably safe.‖
1. Test for Design Defects- To determine whether a producthas a
design defect, the focus is on its actual design and the
reasonableness of that design. To succeed on this theory, a
plaintiff has to show—
2. A reasonable alternative design.
3. The defendant’s failure to adopt the design made the
product not reasonably safe. A defendant is liable only
when the harm was reasonably preventable.
xi. Factors to be Considered:
1. Risk-Utility Analysis- Most courts engage in a risk-utility
analysis, determining whether the risk of harm from the product
as designed outweighs its utility to the user and tothe public.

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2. Consumer-Expectations Test- Under this test, a product is

unreasonably dangerous when it fails to perform in the manner
reasonably to be expected by the ordinary consumer.
xii. Inadequate Warnings- A product ―is defective because of inadequate instructions
or warnings when the foreseeable risks of harm posed by the product could have
been reduced or avoided by the provision of reasonable instructions or warnings
by the seller or other distributor, or apredecessor in the commercial chain of
distribution, and the omission of the instructions or warnings renders the product
not reasonably safe.‖
1. Content of Warnings- Important factors include the
―content and comprehensibility‖ and ―intensity of
expression‖ of warnings and instructions, and the
―characteristics of expected user groups.
2. Obvious Risks- There is no duty to warn about risks thatare
obvious or commonly known. But there is a duty to warn of
harm that can result from foreseeable misuse.
3. State Laws and Constitutionality- An action alleging thata
product is defective due to an inadequate label can be based
on state law, but that law must not violate the U.S. Constitution.
c. Defenses to Product Liability – One defense is that there is no basis for the claim because the
plaintiff has not proved its elements

g. Assumption of Risk- Some states do not allow assumption of risk as a defense in strict product
liability cases. In other states, the following elements must be shown—
a. The plaintiff voluntarily engaged in the risk while realizing the potential
danger.
b. The plaintiff knew and appreciated the risk created by the defect.
c. The plaintiff’s decision to undertake the known risk was unreasonable.
h. Product Misuse- If a party used a product for something for which it was not designed, the party
may not be able to recover in strict liability (some courts hold, however, that if a misuse is
reasonably foreseeable, a seller must take measures to guard against it).
i. Comparative Negligence- Most courts consider a plaintiff’s negligence in apportioning liability.
Some courts will consider only a plaintiff’s intentional conduct, however.
j. Commonly Known Dangers- If a plaintiff’s injury resulted from a commonly known danger,
the defendant will not be liable.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. What is the difference between express warranties and puffing? A seller’s statement about the value
or worth of goods (―they’re priceless‖) or a seller’s statement of opinion (―this is the best used car to come
along in years‖) is not an express warranty but puffing, which creates no warranty. A seller who is an
expert can create a warranty by giving an opinion as an expert (an art dealer, for instance, who is an
expert in twentieth-century paintings, who tells a buyer that a print is a Warhol warrants the accuracy of
the opinion). What constitutes an express warranty and what constitutes puffing is often controlled by the
reasonableness of a buyer’s reliance (statements on which no reasonable person would rely are puffing).
Whether a statement is made orally or in writing and its specificity can be relevant to reasonableness.

2. What is the difference between the implied warranty of merchantability and the implied warranty
of fitness for a particular purpose? Implied warranty of merchantability. An implied warranty of
merchantability arises in every sale of goods by a merchant who deals in goods of the kind.
Merchantable goods are ―reasonably fit for the ordinary purposes for which such goods are used.‖ They
must at least: (1) be of average, fair, or medium-grade quality; (2) pass without objection in the trade or
market for goods of the same description; (3) be adequately packaged and labeled as provided by the
parties’ contract; (4) conform to promises or affirmations of fact made on any container or label; and (5)
be of an even quality and quantity in each unit and among all units. In an action based on breach of this
warranty, it must be shown that the warranty existed, that it was breached, and that the breach was the
proximate cause of the injury or damage. Implied warranty of fitness for a particular purpose. An implied
warranty of fitness for a particular purpose arises when the seller knows the particular purpose for which
the buyer will use goods and that the buyer is relying on the seller’s skill and judgment to select suitable
goods. Goods can be merchantable without being fit for the buyer’s particular purpose. The seller does not
actually need to know the buyer’s particular purpose, if the seller has reason to know the purpose, but the
buyer must have relied on the seller’s skill or judgment in selecting or furnishing suitable goods for this
warranty to arise.

3. If warranties are inconsistent, what are the priorities? If express and implied warranties are
inconsistent: (1) express warranties displace implied warranties except implied warranties of fitness for a
particular purpose (an express warranty in a contract for a short-wave radio, for example, stating that the
radio will receive signals from 4,000 miles away displaces an implied warranty of fitness that a short-
wave radio will pick up signals from any distance, but telling a buyer that the radio will receive signals
from 8,000 miles, for which reason the buyer buys the radio, may violate a warranty of fitness for a
particular purpose, which prevails over express warranties); (2) samples displace general descriptions; and
(3) technical specifications displace samples or general descriptions.

4. What effect does a buyer’s examination of the goods before contracting have on implied
warranties? If a buyer examines goods or refuses to examine goods (or a sample or

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model) as much as he or she wants before contracting, there is no implied warranty with respect to defects
that a reasonable examination will reveal (and the seller will not be liable for breach of warranty if the
defects lead to an injury). A failure to examine goods available for inspection is not the same as a refusal
to examine them; a refusal can occur only if a seller demands that a buyer examine the goods. A seller
remains liable for latent (hidden) defects that a normal inspection would not reveal. What an examination
should reveal depends on a buyer’s skill and method of examination (for example, an auto mechanic
buying a car should discover defectsthat a non-expert would not be expected to find).

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Magnuson-Moss Warranty Act
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

198
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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete

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Participation Submits or participates in Does not participate or Does not participate in

discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 21:
Consumer Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 201
Cengage Supplements.................................................................................................................................................. 201
List of Student Downloads ....................................................................................................................................... 201
Chapter Objectives ....................................................................................................................................................... 201
Key Terms ........................................................................................................................................................................ 201
What's New in This Chapter ........................................................................................................................................ 202
Chapter Outline ............................................................................................................................................................. 202
Discussion Questions ...................................................................................................................................................... 207
Additional Activities and Assignments ....................................................................................................................... 208
Additional Resources ..................................................................................................................................................... 209
Cengage Video Resources ...................................................................................................................................... 209

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Appendix......................................................................................................................................................................... 210
Generic Rubrics.......................................................................................................................................................... 210
Standard Writing Rubric ......................................................................................................................................... 210
Standard Discussion Rubric ...................................................................................................................................... 211

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further examine various laws which help protect consumers’ rights,
including financial protections as well as protection from defective products or false advertising.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

82. Define deceptive advertising

83. Recognize what information must be included on labels

84. State the Truth-in-Lending Act Requirements

85. Describe health and safety protection

Key Terms
bait-and-switch advertising: Advertising a product at an attractive price and then telling the consumer
that the advertised product is not available or is of poor quality and encouraging her or him to purchase
a more expensive item.
cease-and-desist order: An administrative or judicial order prohibiting a person or businessfirm from
conducting activities that an agency or court has deemed illegal.
consumer law: The body of statutes, agency rules, and judicial decisions protecting consumers of goods
and services from dangerous manufacturing techniques, mislabeling, unfair credit practices, deceptive
advertising, and other such practices.
―cooling-off‖ laws: Laws that allow buyers of goods sold in certain transactions to cancel their contracts
within three business days.
Counteradvertising: New advertising that is undertaken to correct earlier false claims that were made
about a product.
deceptive advertising: Advertising that misleads consumers, either by making unjustified claims about a
product’s performance or by omitting a material fact concerning the product’s composition or
performance.

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multiple product order: An order requiring a firm that has engaged in deceptive advertising to cease and
desist from false advertising in regard to all the firm’s products.
Regulation Z: A set of rules issued by the Federal Reserve Board of Governors to implement the provisions
of the Truth- in-Lending Act.
validation notice: An initial notice to a debtor from a collection agency informing the debtor that he or
she has thirty days to challenge the debt and request verification.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 Added new subsection on ―State Laws Concerning False Advertising‖
 1 New Case
o Case 44.1: POM Wonderful, LLC v. Federal Trade Commission (2015)—on deceptive
advertising, involving an advertising claim based on limited scientific evidence.
o New Case 44.2: Haywood v. Massage Envy Franchising, LLC (2018)—on whether the
plaintiff’s false advertising claim under Illinois’s consumer fraud statute was valid or not.
o Case Analysis 44.3: Santangelo v. Comcast Corp. (2016)—on the Fair Credit Reporting
Act and whether an Internet service provider had a legitimate purpose in obtaining a
customer’s credit report.
 Retained and Updated Digital Update feature—
o Regulating ―Native‖ Ads on the Internet (added new subsection titled, ―More Than 33
Percent of Native Ads Are Not Compliant‖)
 3 New Case in Points
o 2017 case on deceptive advertising
o 2015 case on fraudulent telemarketing
o 2017 case on remedies for violations of the Fair Credit Reporting Act
 2 New Case Problems
o 2017 case on debt collection under the Fair Debt Collection Practices Act
o 2018 case on false advertising
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on consumer protection(based on
2018 case)
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Chapter Outline
I. Advertising, Marketing, and Sales- Sources of consumer protection include federaland state
laws, private organizations, and so on. Courts and other mechanisms (free legal

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services, small claims courts, recovery of attorneys’ fees in class actions, and others) encourage
consumer action.
a. Deceptive Advertising
 Deceptive advertising is generally defined as advertising that may be interpreted
as false or misleading.
 Deceptive advertising occurs if a reasonable consumer would be misled by the
ad. Puffery—vague generalities and obvious exaggerations—ispermissible.
i. Claims That Appear to Be Based on Factual Evidence- Ads that appear to be
based on factual evidence but in fact are not are deemed deceptive.
ii. Claims Based on Half-Truths- Ads that appear to be based on factual evidence
but in fact are not are deemed deceptive.
b. Bait-and-Switch Advertising- Federal Trade Commission (FTC) rules define and prohibit
bait-and-switch advertising, which includes—
i. Refusing to show an advertised item.
ii. Failing to have in stock a reasonable quantity of the item.
iii. Failing to promise to deliver the advertised item within a reasonable time.
iv. Discouraging employees from selling an advertised item.
v. Knowledge Check: 1 minute total. Tests students’ understanding ofbait-and-
switch advertising.
c. Online Deceptive Advertising- The FTC Advertising and Marketing on the Internet: Rules
of the Road guidelines of 2000 describe how existing laws apply to online ads.
Generally—
i. Ads must be truthful and not misleading).
ii. Claims must be substantiated.
iii. Ads must not be unfair (causing a substantial injury that a consumer cannot avoid
and that is not outweighed by a benefit to consumers or competition.
iv. Ads must disclose relevant limitations and qualifying information underlying claims
v. There must be ―clear and conspicuous‖ disclosure of qualifying or limiting
information. Burying this information on an internal Web page and linking to it is
not recommended.
d. Federal Trade Commission Actions- An FTC action against those who are accused of
deceptive advertising begins with an investigation, often after aconsumer complaint.
i. Formal Complaint- The investigation may lead to a formal complaint. If the
alleged offender does not agree to settle, a hearing is held before an
administrative law judge.
ii. FTC Orders and Remedies- A cease-and-desist order, an order requiring
counteradvertising, or a multiple-product order may be sought.
iii. Damages When Consumers Are Injured- The FTC may seek damages if an ad
involves wrongful charges to consumers.

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iv. Restitution Possible- The FTC may seek restitution if an ad involves wrongful
payments by consumers.
e. False Advertising Claims under the Lanham Act- Under the Lanham Act, to state a
successful claim for false advertising a business must establish—
A. An injury to a commercial interest in reputation or sales.
B. Direct causation of the injury by false or deceptive advertising.
C. A loss of business from consumers or other buyers who were deceived by
the advertising.
II. Labeling and Packaging Laws- Laws dealing with labels and packages require—
 Accurate information about products.
 Use of language easily understood by the ordinary consumer.
 Disclosure of a product’s ingredients—such as cotton in a garment—in some
instances.
 Warnings of potential dangers in some instances.
a. Food Labeling- Labels are required on, among other products, fresh meats, fruits, and
vegetables to indicate where the food originated. The Fair Packaging and Labeling Act
of 1966 requires that product labels identify—
i. The product.
ii. The net quantity of contents; and the size of a serving if the number ofservings
is stated.
iii. The manufacturer.
iv. The packager or distributor.
b. Nutritional Content of Food Products - Food products must bear labels detailing
nutrition, including how much and what type of fat a product contains. The U.S. Food and
Drug Administration and the U.S. Department of Agriculture are the chief agencies that
issue regulations on food labeling.
III. Consumer Sales
a. Telephone and Mail-Order Sales- The FTC’s Mail or Telephone Order Merchandise Rule
requiring merchants to ship orders within the time promised or notify consumers when
orders cannot be shipped on time.
b. TCPA and TRACED Acts- Telephone Consumer Protection Act prohibits telephone
solicitations using an automatic telephone dialing system, but has long since been
considered lack when it comes to spam and robocalls.
IV. Credit Protection- The Consumer Financial Protection Bureau oversees the practices of banks,
mortgage lenders, and credit-card companies.
a. The Truth-in-Lending Act - The Truth-in-Lending Act (TILA) of 1968, which is administered
by the Federal Reserve Board, requires sellers and lenders to disclose credit or loan
terms to debtors so that the latter may shop around for the best available financing
terms.
i. Application- Creditors who, in the ordinary course of business, lend money or sell
goods on credit to consumers, or arrange for credit for consumers, are subject to
the TILA.
ii. Disclosure Requirements- Under Regulation Z, in any transaction involving a
sales contract in which payment is to be made in more than

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four installments, a lender must disclose all the credit terms clearly and
conspicuously. This includes—
A. Installment loans.
B. Retail and installment sales.
C. Car loans.
D. Home improvement loans.
E. Real estate loans when the amount financed is less than $25,000.
iii. Equal Credit Opportunity- The Equal Credit Opportunity Act of 1974
prohibits—
A. Denial of credit on the basis of race, religion, national origin, color,sex,
marital status, or age.
B. Credit discrimination based on whether an individual receivescertain
forms of income.
iv. Credit-Card Rules- Liability of a cardholder is $50 per card for unauthorized
charges made before the issuer is notified the card is lost. An issuer cannot bill
for unauthorized charges if a card was improperly issued. To withhold payment
for a faulty product, a cardholder must use specific procedures.
v. Amendments to Credit-Card Rules- Other, more recent provisions—
A. Protect consumers from retroactive increases in interest rates on existing
card balances unless the account is sixty days delinquent.
B. Require companies to provide forty-five days’ notice to consumers before
changing credit-card terms.
C. Require companies to send out monthly bills to cardholders twenty-one
days before the due date.
D. Prevent companies from increasing the interest rate on a customer’s credit-
card balance except in certain situations such as the expiration of a
promotional rate.
E. Prevent companies from charging over-limit fees except in certain
situations.
F. Require companies to apply payments in excess of the minimum amount
due to the customer’s highest-interest balance first when the borrower has
balances with different rates.
G. Prevent companies from computing finance charges based on the previous
billing cycle.
b. The Fair Credit Reporting Act - Under the Fair Credit Reporting Act of 1970, consumer
credit reporting agencies may issue credit reports only for certain purposes (extension of
credit, etc.). Under the act, consumers must be notified when information is being given
out by a credit agency about their creditstanding.
i. Consumer Notification and Inaccurate Information- A consumer who is denied
credit, or is charged more than others would be, on the basis of a report must be
notified of the fact and of the agency that issued the report. Consumers must be
allowed to correct any misinformation.

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Inaccurate information must be deleted within a reasonable period of time.

ii. Remedies for Violations- A credit agency may be liable for actual damages and
additional damages up to $1,000, plus attorneys’ fees. Creditors and others,
including insurance companies, that use credit information may also be liable.
c. The Fair and Accurate Credit Transactions Act
i. The Fair and Accurate Credit Transactions Act (FACT Act) of 2003 established a
national ―fraud alert‖ system so that consumers who suspect identity theft can
place an alert on their credit files.
ii. The FACT Act requires credit-reporting agencies to provide consumers with free
copies of their reports and to stop reporting allegedly fraudulent information once
a consumer shows that identify theft occurred.
iii. Businesses are required to include shortened (―truncated‖) account numbers on
credit card receipts.
iv. Businesses are also required to provide consumers with copies of records that help
prove an account or transaction was fraudulent.
d. The Fair Debt Collection Practices Act - The Fair Debt Collection Practices Act (FDCPA)
of 1977 regulates the practices of collection agencies collecting consumer debts. It
applies only to debt-collection agencies that, usually for a percentage of the amount
owed, attempt to collect debts on behalf of someone else.
i. Requirements of the Act- The FDCPA prohibits—
A. Contacting the debtor at the debtor’s place of employment if the
employer objects.
B. Contacting the debtor during inconvenient times or at any time ifan
attorney represents the debtor.
C. Contacting third parties other than the debtor’s parents, spouse,or
financial advisor about payment unless a court agrees.
D. Using harassment, or false and misleading information.
E. Contacting the debtor any time after the debtor refuses to pay the debt,
except to advise the debtor of further action to be taken.
F. Collection agencies must give a debtor a validation notice that states he
or she has thirty days to dispute the debt and request written verification
of it.
ii. Enforcement of the Act- The FTC enforces the act. Penalties include actual
damages, additional damages not to exceed $1,000, and attorneys’ fees. Debt
collectors are not liable if they can show that a violation was unintentional and
the result of a ―bona fide error‖ despite following procedures designed to
avoid such errors.
V. Protection of Health and Safety
a. The Federal Food, Drug, and Cosmetic Act The Pure Food and Drug Act of 1906, as
amended in 1938, is today’s Federal Food, Drug, and Cosmetic Act

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(FDCPA). Most of the enforcement of the FDCPA is by the Food and Drug
Administration. The act sets out—
i. Food standards.
ii. Safe levels of potentially hazardous additives.
iii. Classifications of advertising.
iv. A food registry.
v. Record-keeping requirements.
vi. Provisions for inspections.
b. The Consumer Product Safety Act Consumer product safety legislation dates back at
least forty years. The Consumer Product Safety Act of 1972, among other things,
established authority over consumer safety under the Consumer Product Safety
Commission (CPSC).
i. The CPSC’s Authority- The CPSC—
A. Conducts research on product safety.
B. Maintains a clearinghouse on the risks associated with someproducts.
C. Sets safety standards for consumer products.
D. Bans the manufacture or importation and sale of products that are
potentially hazardous to consumers.
E. Removes from the market any products imminently hazardous.
F. Requires manufacturers to report on products sold or intended forsale
that proved to be hazardous.
G. Administers other product safety legislation.
ii. Notification Requirements- The Consumer Product Safety Act requires
manufacturers to report on any products already sold or intended for sale if the
products have proved to be hazardous.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. How does a bait-and-switch advertisement work? Bait-and-switch advertising involves displaying a
low price in a store window, for example, of a particular item that will likely be unavailable to the
consumer, who will then be encouraged to purchase a more expensive item. The low price is the ―bait‖ to
lure the consumer into the store. The salesperson is instructed to
―switch‖ the consumer to a different item. Under the FTC guidelines, bait-and-switch advertising occurs if
the seller refuses to show the advertised item, fails to have in stock a reasonable quantity of the item, fails
to promise to deliver the advertised item within a reasonable time, or discourages employees from selling
the item.

2. What are some of the actions that may be taken by the FTC against deceptive advertising
practices? Assuming that the FTC investigation indicates that further action is

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warranted by the government, the FTC may issue a cease-and-desist order requiring that the company
cease and desist its advertising practices. Moreover, the FTC may order affirmative advertising (which
requires the company to provide specific information about its advertisement so as to prevent consumers
from being misled), counteradvertising (in which the company admits that prior claims about its product
were untrue) or multiple product orders (which require a firm to cease and desist from false advertising
not only in regard to the product that was the subject of the action but also in regard to all of the firm’s
other products).

3. Should the Internet make it easier or more difficult to insure that the information provided to and
by credit reporting agencies is accurate? Why? The Internet may make it easier to insure the accuracy of
credit information by speeding its delivery and simplifying the methods of verification, issuance, and
correction. The Internet may make the same quality more difficult in part due to these same
considerations—what can be corrected easily can also be
―miscorrected‖ easily.

4. Should laws against bait-and-switch advertising be abolished? Yes—no consumer is ever forced to
buy anything. Just because an advertised item is not available when a consumer goes to buy it does not
mean that sellers should be prevented from ―up-selling.‖ That is to say, sellers should be free to offer
higher-priced version of unavailable lower-priced advertised items. After all, in a free society, consumers
can just say no. No—if sellers want to dupe consumers, they can always offer low-priced items but only
have in stock higher-priced versions of the same items. Consumers take time to visit stores that
advertise, so once in the stores these consumers may end up paying for higher-priced versions of the same
products. Retailers must be prevented from using such unethical tactics.

[return to top]

Additional Activities and Assignments

7. Business Case: Consumer Protection
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. What are some of the consumer protection issues that are present here?
2. Has the legislature crafted the laws in a way that protects consumers even at the
detriment of business, or is there a balance struck between forcing a businessand
consumers to act reasonably?
3. Are consumers sufficiently aware of their rights under consumer protection laws?

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4. If not, what could be done to help educate consumers?

5. Would it be ―safer‖ for businesses not to offer any warranty rather than risk being
out of compliance with the Magnuson-Moss Warranty Act?
6. How do warranties, in general, improve or hurt business profitability?
d. Role Play: Break into small groups and imagine you are the owners of DeSantis
Cabinets. You have received a summons and a complaint from the family claiming the
varnish you use on all of your cabinets led to their house fire. Skeptical about the
flammability of the varnish, you consult with a chemist who tells you that under normal
conditions the product is not flammable once it has dried. However, cabinets that were
recently installed may be at a greater risk for fire if the varnish had not completely
cured by the time of installation, especially cabinets installed above a gas stovetop.
What steps should DeSantis Cabinets take to ensure consumer safety and reduce
litigation costs while maintaining profitability going forward? Assume kitchen cabinets are
not covered under the Consumer Product Safety Act. Should you report the increased risk
to you customers? If so, at what point in the ordering or installation process should they be
notified?
e. Writing Assignment: Was Harry entitled to cancel his cabinet order based on rules
established by the FTC? If so, what point in the transaction was the right triggered and
why? If not, why not?
f. Ethics Question: DeSantis Cabinets wants to create a new advertising campaign to
bolster its reputation in response to what it believes is an unfounded lawsuit. The
company feels strongly that its cabinets are safe, and the customer suing it was, in fact,
negligent while cooking leading to a fire. An employee of DeSantis suggests that she can
pretend to be a customer and start tweeting about how happy she is because, after a
small grease fire on her stove, her cabinets never caught fire. She suggests that other
employees create similar tweets touting how great DeSantis Cabinets are. Are these
tweets ethical? Do they violate any consumer protection law or are they merely puffery?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Difference Between Puffery and Deception
o Credit Reporting and Debt Collection Laws
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 22:
Negotiable Instruments

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 213
Cengage Supplements.................................................................................................................................................. 213
List of Student Downloads ....................................................................................................................................... 213
Chapter Objectives ....................................................................................................................................................... 213
Key Terms ........................................................................................................................................................................ 213
What's New in This Chapter ........................................................................................................................................ 214
Chapter Outline ............................................................................................................................................................. 214

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Discussion Questions ...................................................................................................................................................... 218

Additional Resources ..................................................................................................................................................... 219
Cengage Video Resources ...................................................................................................................................... 219
Appendix......................................................................................................................................................................... 219
Generic Rubrics.......................................................................................................................................................... 219
Standard Writing Rubric ......................................................................................................................................... 220
Standard Discussion Rubric ...................................................................................................................................... 222

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further explore the Uniform Commercial Code and sales contracts.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

86. Identify the basic types of negotiable instruments

87. List the requirements of a negotiable instrument

88. Distinguish between an order and a bearer instrument

89. Describe a transfer by negotiation

Key Terms
acceptance: (1) In contract law, the offeree’s notification to the offeror that the offeree agrees to be
bound by the terms of the offeror’s proposal. (2) In negotiable instruments law, the drawee’s signed
agreement to pay a draft when presented.
acceptor: The person (the drawee) who accepts a draft and who agrees to be primarily
responsible for its payment.
bearer: A person in the possession of an instrument payable to bearer or indorsed in blank. bearer
instrument: Any instrument that is not payable to a specific person, including instruments payable to
the bearer or to ―cash.‖
certificate of deposit (CD): A note of a bank in which the bank acknowledges a receipt of money from a
party and promises to repay the money, with interest, to the party on a specified date.
check: A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain
amount of money to the holder on demand.
draft: Any instrument (such as a check) drawn on a drawee (such as a bank) that orders the drawee to
pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future
time.

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drawee: The party that is ordered to pay a draft or check. With a check, a financial institution is always
the drawee.
drawer: The party that initiates a draft (writes a check, for example), thereby ordering the drawee
to pay.
holder: Any person in the possession of an instrument drawn, issued, or indorsed to him or her, to his or her
order, to bearer, or in blank.
issue: In negotiable instruments law, the first transfer, or delivery, of an instrument to a holder. maker:
One who promises to pay a certain sum to the holder of a promissory note or certificateof deposit (CD).
negotiable instrument: A signed writing that contains an unconditional promise or order to pay an exact
sum of money, on demand or at an exact future time, to a specific person or order, or to bearer.
order instrument: A negotiable instrument that is payable ―to the order of an identified person‖ or ―to an
identified person or order.‖
payee: A person to whom an instrument is made payable.
presentment: The act of presenting an instrument to the party liable on the instrument to collect
payment; the act of presenting an instrument to a drawee for acceptance. promissory note: A written
promise made by one person (the maker) to pay a fixed sum of
money to another person (the payee or a subsequent holder) on demand or on a specified date.signature:
Under the Uniform Commercial Code, ―any symbol executed or adopted by a party with a present
intention to authenticate a writing.‖
trade acceptance: A draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of
money to the seller, usually at a stated time in the future. The buyer accepts the draft by signing the face of
the draft, thus creating an enforceable obligation to pay the draft when it comes due. On a trade
acceptance, the seller is both the drawer and the payee.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New ―A Question of Ethics‖ using all-new IDDR Approach on an unconditional promiseor order to
pay (based on 2017 case)
 Updated Limited-Time Group Assignment with a new activity.
[return to top]

Chapter Outline
I. Types of Negotiable Instruments
a. Drafts and Checks (Orders to Pay)- A draft (bill of exchange) is an unconditional written
order.
1) Time Drafts and Sight Drafts- A time draft is payable at a definitefuture
time. A sight (or demand) draft is payable on sight.
2) Checks- A check is a draft, drawn on a bank and payable on demand.

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3)
Trade Acceptances- A trade acceptance is a draft often used in sales ofgoods.
The seller is both the drawer and the payee, and the draft orders the buyer to
pay a specified sum of money to the seller, usually at a stated time in the
future.
b. Promissory Notes (Promises to Pay)- A promissory note (or simply note) is a written
promise between two parties. Notes are used in a number of credit transactions and are
commonly assigned from one lender or payee to another.
c. Certificates of Deposit (Promises to Pay)- A certificate of deposit (CD) is a type of note
issued by a bank.

II. Requirements for Negotiability- For an instrument to be negotiable, it must—

 Be in writing.
 Be signed by the maker or the drawer.
 Be an unconditional promise or order to pay.
 State a fixed amount of money.
 Be payable on demand or at a definite time.
 Be payable to order or to bearer, unless it is a check.

a. Written Form- Negotiable instruments must be in written form [UCC 3– 103(a)(6)].

1) The writing must be on material that lends itself to permanence.
2) The writing must have portability.
b. Signatures- For an instrument to be negotiable, it must be signed by the maker if it is a
note or by the drawer if it is a draft [UCC 3–103(a)(3)].
1) Signature Requirements
2) Initials, an X, a thumbprint, a rubber stamp, and a trade name or an assumed
name (even if false) will suffice [UCC 1–201(39), 3–401(b)].
3) Placement of the Signature- The location of the signature on the document is
not important. A handwritten statement such as ―I, Jane Doe, promise to pay
to the order of John Doe‖ can constitute Jane’s signature.
c. Unconditional Promise or Order to Pay
1) Promises- To be negotiable, an instrument must contain an express order or
promise to pay [UCC 3–104(a)]. An I.O.U. does not qualify, unless such words
as ―due on demand‖ are added. A certificate of de- posit is an exception—
the bank’s acknowledgment of the deposit and the other terms of the instrument
clearly indicate a promise [UCC 3– 104(j)].
2) Orders- An order is associated with three-party instruments, such as checks,
drafts, and trade acceptances, and directs a third party to pay

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the instrument as drawn. An order may be addressed to one person or to more

than one person, jointly or alternatively [UCC 3–103(a)(6)].
3) Unconditionality of Promise or Order- Only unconditional promises or orders
are negotiable [UCC 3–104(1)(b)]. Reference to another agreement or to the
security for the instrument does not affect negotiability. An instrument is
negotiable even if its payment is to be made only out of a particular fund
[UCC 3–106(b)(ii)].
d. A Fixed Amount of Money- To be negotiable, an instrument must state with certainty a
fixed amount of money to be paid when the instrument is payable [UCC 3–104(a)].
1) Fixed Amount- To be fixed, an amount must be ascertainable from the face of
an instrument. The amount of interest or its rate may be determined with
reference to information not contained in the instrument but ascertainable from
a formula or source described in the instrument [UCC 3–112(b)]. Variable
interest rate notes are negotiable.
2) Payable in Money- Money is ―a medium of exchange authorized or
adopted by a domestic or foreign government as a part of its currency‖ [UCC
1–201(24)].
e. Payable on Demand or at a Definite Time
1) Payable on Demand- Instruments payable on demand include those that
contain the words ―payable at sight‖ or ―payable upon
presentment,‖ those that say nothing about when payment is due, and checks
[UCC 3–104(f)].
2) Payable at a Definite Time- An instrument is payable at a definite time if
it states that it is payable—
1. On a specified date.
2. Within a definite period of time after sight or acceptance.
3. On a date or time readily ascertainable at the time the promise or order
is issued [UCC 3–108(b)].
3) Acceleration Clause- Instruments that include acceleration clauses are
negotiable.
4) Extension Clause- Instruments that include extension clauses are negotiable
when the right to extend is given to the maker, if theinterval of the extension is
specified. If only the holder of the instrument can extend it, the maturity date
does not have to be specified.
f. Payable to Order or to Bearer
1) Order Instruments- An order instrument is payable (1) ―to the order of an
identified person‖ or (2) ―to an identified person or order‖ [UCC 3– 109(b)].
An identified person is the person ―to whom the instrument is initially payable‖
as determined by the maker or drawer’s intent [UCC 3–110(a)].
2) Bearer Instruments A bearer instrument does not designate a specific payee
[UCC 3–109(a)]. A bearer is a person in possession of an

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instrument that is payable to bearer or indorsed in blank [UCC 1– 201(5); 3–

109(a), (c)]. Any instrument containing the following terms is a bearer
instrument—
1. ―Payable to the order of bearer‖
2. ―Payable to James Jarrot or bearer‖
3. ―Payable to bearer‖
4. ―Pay cash‖
5. ―Pay to the order of cash‖
3) Can Be Payable to Nonexistent Person- An instrument that ―indicates that it is
not payable to an identified person‖ (―X‖ or ―Captain America‖) is a bearer
instrument [UCC 3–109(a)(3)].
4) Cannot Be Payable to Nonexistent Organization- An instrument issued to a
nonexistent organization would not qualify as negotiable [UCC 3–109,
Comment 2].
g. Knowledge Check Activity: 1 minute total. Tests students’ understanding of
what constitutes bearer paper.
h. Think Pair Share Activity: 10 minutes total. Have students form pairs or small groups and
discuss the various scenarios presented on negotiability:
1) A promissory note which was written on a napkin at a restaurant
2) A person who is physically impaired who uses a thumbprint to ―sign‖ a
note
3) A promissory note which states ―I promise to pay Kyra $1,000 for a crate
of hand sanitizer, if the COVID-19 vaccine is not available before June.‖
4) A promissory note which states ―Alpha promises to pay Beta $100 plus
interest, in gold.‖

III. Transfer of Instruments

a. Assignment- A transfer by assignment gives the assignee only those rights that the
assignor had and follows contract law. Any defenses that can be raised against the
assignor normally can be raised against the assignee.
b. Negotiation- When a transfer is by negotiation, the transferee can become a holder in
due course and acquire greater rights than the transferor had [UCC 3– 203(b), 3–305].
i. Negotiating Order Instruments- An order instrument is negotiated by delivery
with any necessary indorsements.
ii. Negotiating Bearer Instruments- A bearer instrument is negotiated by delivery
alone.
c. Indorsements- (LO 2) By indorsing, an indorser promises to pay the holder or any
subsequent indorser the amount of the instrument if the drawer or maker defaults [UCC 3–
415(b)]. An instrument is most often indorsed on the back, but if there is no room, an
indorsement can be written on a separate piece of paper (an allonge) ―firmly affixed‖ to
the instrument [UCC 3–204(a)].

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iii. Blank Indorsements- A blank indorsement specifies no particular indorsee and

can be a mere signature [UCC 3–205(b)].
iv. Special Indorsements- A special indorsement names the indorsee [UCC 3–205(a)].
An instrument indorsed in this way is an order instrument. A blank indorsement
converted to a special indorsement converts a bearer instrument into an order
instrument.
v. Qualified Indorsements- Most indorsements are unqualified. A qualified
indorsement disclaims an indorser’s liability.
1. The Effect of Qualified Indorsements- The notation ―without
recourse‖ is commonly used, often by persons acting in a
representative capacity.
2. Special v. Blank Qualified Indorsements- A qualified indorsement is
accompanied by a special or blank indorsement that determines
further negotiation.
3. A special qualified indorsement creates an order instrument, and
indorsement and delivery are required for negotiation.
4. A blank qualified indorsement creates a bearer instrument, andonly
delivery is required for negotiation.
vi. Restrictive Indorsements- Restrictive indorsements require indorsees tocomply
with certain instructions.
1. Indorsements to Pay Only a Named Payee- An indorsement prohibiting
further indorsement does not affect negotiation but hasthe same effect as
a special indorsement [UCC 3–206(a)].
b. Knowledge Check Activity: 1 minute total. Tests students’ understanding of
what types of indorsements.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What are the primary functions of negotiable instruments? A negotiable instrument has two
functions—to serve as a substitute for money and as a credit device. Debtors sometimes use currency, but
for convenience and safety they often use negotiable instruments as a cash- substitute. Using a check to
pay a debt is one example of how a negotiable instrument is used as a cash-substitute. Drafts, promissory
notes, and certificates of deposit that are payable either on demand or on some specified date in the
future are other examples of negotiable instruments that may be used in place of cash. Negotiable
instruments may represent an extension of credit. If a buyer gives a seller a promissory note, the terms of
which provide that it is payable within sixty days, then the seller has essentially extended sixty days of
credit (usually with interest) to the buyer. The holder of a promissory note payable in sixty days, for
example, may sell this instrument to a third party for cash. Banks often buy such instruments and wait

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until their maturity date to receive payment. Because there is always some risk that the party obligated to
pay the amount specified in the promissory note will be unable to do so at maturity, such
instruments are usually purchased at a discount of 5, 10, or 15 percent of the face amount. In effect, the
bank pays less than the amount it will eventually collect as a way of making a profit.

2. What are some of the practical limitations concerning the writing evidencing a negotiable
instrument and the substance on which it is placed? The writing must be on material that lends itself to
permanence. Paper satisfies the necessary requirement that the writing be permanent although one could
presumably use other materials such as cloth or even stone tablets. Yet the permanence requirement is
qualified because the writing must also be portable. The portability of a writing will be construed in terms
of existing commercial practices so that even if the object on which the writing is placed (such as the hide
of a cow) can be moved, it may be unsatisfactory because it is commercially impractical.
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Draft Instruments
o Negotiable Instruments
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

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Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 23:
Negotiable Instruments: Transfer and Liability

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 224
Cengage Supplements.................................................................................................................................................. 224
List of Student Downloads ....................................................................................................................................... 224
Chapter Objectives ....................................................................................................................................................... 224
Key Terms ........................................................................................................................................................................ 224
What's New in This Chapter ........................................................................................................................................ 225
Chapter Outline ............................................................................................................................................................. 226
Discussion Questions ...................................................................................................................................................... 232
Additional Resources ..................................................................................................................................................... 233

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Cengage Video Resources ...................................................................................................................................... 233

Appendix......................................................................................................................................................................... 233
Generic Rubrics.......................................................................................................................................................... 233
Standard Writing Rubric ......................................................................................................................................... 234
Standard Discussion Rubric ...................................................................................................................................... 235

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Purpose and Perspective of the Chapter

The purpose of this chapter is to take a deeper dive into negotiable instruments. Specifically, examining
the rights of holders in due course, signature and warranty liability, various defenses that can be raised,
and how negotiable instruments can be discharged.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

90. List the requirements for holder-in-due-course status

91. Describe signature liability

92. Identify transfer warranties

93. Understand the defenses against the payment of negotiable instruments

Key Terms
antecedent claim: A preexisting claim. In negotiable instruments law, taking an instrument in satisfaction
of an antecedent claim is taking the instrument for value.
blank indorsement: An indorsement that specifies no particular indorsee and can consist of a mere
signature. An order instrument that is indorsed in blank becomes a bearer instrument. holder in due
course (HDC): A holder who acquires a negotiable instrument for value; in good faith; and without notice
that the instrument is overdue, that it has been dishonored, that any person has a defense against it or a
claim to it, or that the instrument contains unauthorized signatures, alterations, or is so irregular or
incomplete as to call into question its authenticity. negotiation: In regard to dispute settlement, a process
in which parties attempt to settle their dispute without going to court, with or without attorneys to
represent them. In regard to negotiable instruments, the transfer of an instrument in such a way that the
transferee (the person to whom the instrument is transferred) becomes a holder.
accommodation party: A person who signs an instrument for the purpose of lending his or her name as
credit to another party on the instrument.

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fictitious payee: A payee on a negotiable instrument whom the maker or drawer does not intend to have
an interest in the instrument. Indorsements by fictitious payees are not treated as unauthorized under Article
3 of the Uniform Commercial Code.
imposter: One who, by use of the mail, telephone, or personal appearance, induces a maker or drawer
to issue an instrument in the name of an impersonated payee. Indorsements by imposters are not treated
as unauthorized under Article 3 of the Uniform Commercial Code. personal defense: A defense that can
be used to avoid payment to an ordinary holder of a negotiable instrument but not a holder in due
course (HDC) or a holder with the rights of an HDC. Personal defenses are also called limited defenses.
presentment warranty: Implied warranty made by any person who presents an instrument forpayment
or acceptance that (1) he or she is entitled to enforce the instrument or authorized to obtain payment or
acceptance on behalf of a person who is entitled, (2) the instrument has not been altered, and (3) he or
she has no knowledge that the signature of the drawer is unauthorized.
transfer warranty: Implied warranty made by any person who transfers an instrument for consideration to
subsequent transferees and holders who take the instrument in good faith that
(1) the transferor is entitled to enforce the instrument, (2) all signatures are authentic and authorized, (3)
the instrument has not been altered, (4) the instrument is not subject to a defense or claim of any party
that can be asserted against the transferor, and (5) the transferor has no knowledge of any insolvency
proceedings against the maker, the acceptor, or the drawer of the instrument.
universal defense: A defense that is valid against all holders of a negotiable instrument, including
holders in due course (HDCs) and holders with the rights of HDCs. Universal defenses are also called real
defenses.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case:
o Case 26.1: In re Bass (2013)—on whether an instrument that requires an
indorsement for negotiation needs to contain the written signature of an
individual’s name?
o Case Analysis 26.2: AP Peleus, LLC v. Success, Inc. (2016)—on whether an
indorsement and supporting evidence was sufficient to establish holder’s standing
to enforce the note.
o New Case 26.3: Jarrell v. Conerly (2018)—on HDC requirement of taking withoutnotice.
 1 New Case in Point
o 2008 case on taking in good faith
 1 New Case Problem (based on 2018 case)

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 1 New ―A Question of Ethics‖ using all-new IDDR Approach on holder in due course(based on
2017 case)
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Chapter Outline
II. Holder in Due Course (HDC)
a. Holder v. Holder in Due Course- A holder has the status of an assignee of a contract
right. A holder obtains only those rights that the transferor had in the instrument and is
normally subject to the same defenses. An HDC takes an in- strument free of most defenses
against payment on it or claims to it.
b. Requirements for HDC Status- First, the instrument must be negotiable, and whoever seeks
HDC status must be a holder. Then, the following requirements must be met [UCC 3–302].
i. Taking for Value- A gift or inheritance does not meet the requirement of value for
HDC status, nor does a promise to give value in the future. A holder takes an
instrument for value by—
1. Performing the promise for which the instrument was issued or
transferred.
2. Acquiring a security interest or other lien in the instrument, excepta lien
obtained by a judicial proceeding.
3. Taking an instrument in payment of or as security for anantecedent
debt.
4. Giving a negotiable instrument as payment.
5. Giving an irrevocable commitment as payment [UCC 3–303(a)].
c. Taking in Good Faith- The holder must have acted honestly in the process of acquiring the
instrument. Good faith is ―honesty in fact and the observance of reasonable
commercial standards of fair dealing‖ [UCC 3–103(a)(4)]. This requirement applies only
to the holder.
d. Taking without Notice- A person will not be afforded HDC protection if he or she knew
or should have known at the time the instrument was acquired that it was defective
because—
1. It was overdue.
2. It had been dishonored.
3. There was an uncorrected default with respect to anotherinstrument
issued as part of the same series.
4. The instrument contains an unauthorized signature or has beenaltered.
5. There is a defense against it or a claim to it.
6. The instrument is so irregular as to call into question itsauthenticity.
ii. What Constitutes Notice? A person has notice of a fact when he or shehas—

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1. Actual knowledge of the fact.

2. Receipt of notice of the fact.
3. Reason to know that the fact exists, given all the facts and circumstances
known at the time [UCC 1–201(25)].
iii. Overdue Demand Instruments- A demand instrument is overdue if it is taken after
demand has been made or an unreasonable time after its issue (ninety days in the
case of a check) [UCC 3–304(a)].
iv. Overdue Time Instruments- A time instrument is overdue if it is taken after its
expressed due date [UCC 3–304(b)]. If, on an installment note or on a series of
notes, the maker has defaulted on an installment or one of the notes, a buyer
cannot take as an HDC [UCC 3–304(b)].
v. Dishonored Instruments- A holder has notice if he or she knows an instrument has
been dishonored, or knows of facts that would lead him or her to suspect that an
instrument has been dishonored [UCC 3–302(a)(2)].

III. Signature Liability- Every party—except a qualified indorser—who signs a negotiable instrument
is either primarily or secondarily liable for payment of the instrument when it comes due.
a. Primary Liability- A person who is primarily liable is required to pay the instrument,
subject to certain defenses [UCC 3–305]. Only makers, issuers, and acceptors are
primarily liable.
i. Makers- If an instrument is incomplete when the maker signs it, then the maker’s
obligation is to pay it as completed [UCC 3–115, 3–407(a), 3–412].
ii. Acceptors- An acceptor is a drawee who has, by signing an instrument, agreed
to pay it when it is presented for payment [UCC 3–409(a)]. (A drawee who
does not accept dishonors the instrument.)
b. Secondary Liability- Drawers and indorsers have secondary liability. On a draft, a
drawer’s liability arises if the drawee fails to pay or to accept the instrument. On a note,
an indorser’s liability arises if the maker defaults [UCC 3–412, 3–415]. To trigger this
liability—
 The instrument must be properly and timely presented.
 It must be dishonored.
 Notice of dishonor must be given in a timely manner to the secondarily liable
party.
i. Proper Presentment- A note or certificate of deposit must be presented to the
maker for payment; a draft to the drawee for acceptance, payment, or both.
ii. Timely Presentment
1. A holder of a check must present it for payment or collection within thirty
days of its date to hold the drawer secondarily liable. A holder must
present a check within thirty days after its indorsement to hold the indorser
secondarily liable [UCC 3–414(f), 3–415(e)].

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2. Failure to present on time is the most common reason for the discharge of
unqualified indorsers.
iii. Dishonor- Dishonor can occur when acceptance or payment is refused, cannot be
obtained, or is excused and the instrument is not accepted or paid [UCC 3–
502(c)]. Delay or refusal to pay is not dishonor when—
1. Presentment is made after an established cut-off hour and payment is
postponed until the following business day [UCC 3– 501(b)(4)].
2. The holder refuses to show the instrument, provide reasonable
identification, or sign a receipt, and the bank refuses to pay [UCC 3–
501(b)(2)].
3. An instrument lacks a proper indorsement and is returned [UCC 3–
501(b)(3)(i)].
iv. Proper Notice of Dishonor- A bank must give notice, which may be given in any
reasonable manner, before its midnight deadline. All others must give notice within
thirty days [UCC 3–503].
c. Unauthorized Signatures
i. The General Rule- A forged or an unauthorized signature does not bind the
person whose name is forged.
ii. Exceptions to the General Rule
1. Ratification—If the person whose name is signed ratifies the signature, he
or she is bound [UCC 3–403(a)].
2. Negligence—If the person whose name is signed was negligent, and this
negligence substantially contributed to the forgery, he or she is bound
[UCC 3–115, 3–406, 4–401(d)(2)].
iii. When the Holder is an HDC- An unauthorized signature operates as the signature
of the unauthorized signer in favor of an HDC [UCC 3–403(a)].
d. Special Rules for Unauthorized Indorsements- When there is a forged or unauthorized
indorsement, the burden of loss usually falls on the first party to take the instrument with
the forged indorsement (because a forged indorsement does not transfer title, and thus,
whoever takes on a forged indorsement cannot become a holder.
i. Imposter Rule- A loss falls on a drawer or maker when an imposter induces the
maker or drawer to issue an instrument to the imposter [UCC 3–404(a)].
1. Focus Is on the Maker’s or Drawer’s Intent- The imposter’s indorsement
will be effective if the maker or drawer believes the imposter to be the
named payee at the time of issue [UCC 3– 404(a)].
2. Comparative Negligence Applies- If a bank fails to exercise ordinary
care in cashing a check made out to an imposter, the drawer may be able
to recover a portion of the loss from the bank.
ii. Fictitious Payees

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1. A payee’s indorsement is not treated as a forgery, and the loss falls on a

drawer or maker when a person causes an instrument to be issued to a
payee who has no interest in it [UCC 3–404(b); 3–405].
2. A common context for this situation is employment—a dishonest employee
deceiving his or employer.
IV. Warranty Liability- Transfer warranties arise even when a transferor does not indorse the
instrument [UCC 3–416, 3–417].
e. Transfer Warranties- Any person who transfers an instrument for consideration warrants to
all subsequent transferees and holders who take the instrument in good faith—
 The transferor is entitled to enforce the instrument.
 All signatures are authentic and authorized.
 The instrument has not been altered.
 The instrument is not subject to the defense or claim of any partythat can
be asserted against the transferor.
 The transferor has no knowledge of any insolvency proceedings
against the maker, the acceptor, or the drawer.
i. Parties to Whom Warranty Liability Extends- Transfer by indorsement and
delivery of an order instrument extends warranty liability to any subsequent
holder who takes the instrument in good faith. The warranties of a person who
transfers without indorsement extend only to the immediate transferee [UCC 3–
416(a)].
ii. Recovery for Breach of Warranty- Notice of a claim for breach of warranty must
be given within thirty days‖ [UCC 3–416(c)]. These warranties can be disclaimed
on any instrument except a check.
f. Presentment Warranties- Any person who seeks payment or acceptance of an instrument
impliedly warrants to any other person who in good faith pays or accepts the instrument
that—
1. The party is entitled to enforce the instrument or is authorized to obtain
payment or acceptance on behalf of a person who is entitled to enforce
the instrument.
2. The instrument has not been altered.
3. The party has no knowledge that the issuer’s signature is unau- thorized
[UCC 3–417(a), (d)].
ii. Protect the Transferee- Liability is shifted to the party in the best position to
prevent the wrongdoing.
iii. Limitations- The second and third warranties do not apply to makers, acceptors,
and drawers Notice of a claim for breach of warranty must be given within thirty
days‖ [UCC 3–417(e)]. These warranties can be disclaimed on checks.

V. Defenses

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g. Universal Defenses- Universal defenses, which are good against all holders, including
HDCs and holders who take through HDCs, include—
i. Forgery of a Maker’s or Drawer’s Signature [UCC 3–403(a)]
ii. Fraud in the Execution- This defense cannot be raised when a reasonable
inquiry would have revealed the nature and terms of the instrument. Important
factors include the signer’s age, experience, and intelligence.
iii. Material Alteration
1. A Complete or Partial Defense- Material alteration is only a partial
defense against an HDC, who can enforce the instrument against the
maker or drawer according to the original terms.
2. An HDC Can Enforce an Incomplete Instrument That Was Subsequently
Altered- If the instrument was originallyincomplete, the HDC can enforce it
as completed [UCC 3–407(b)].
iv. Discharge in Bankruptcy- This is an absolute defense against all parties because
the purpose of bankruptcy is to settle all of the insolvent party’s debts [UCC 3–
305(1)(a)].
v. Minority- This is a universal defense only to the extent that state law recognizes it
[UCC 3–305(a)(1)(i)].
vi. Illegality- If a statute makes an illegal transaction void, this defense is universal. If
the transaction is only voidable, this is a personal defense [UCC 3–305(a)(1)(ii)].
vii. Mental Incapacity- Any instrument issued by a mentally incompetent person is
void if a court has declared the person mentally incompetent [UCC 3–
305(a)(1)(ii)]. If not, the defense is personal.
viii. Extreme Duress [UCC 3–305(a)(1)(ii)]
h. Personal Defenses- Personal defenses, which can be used to avoid payment to ordinary
holders, not HDCs or holders through HDCs, include—
i. Breach of Contract or Breach of Warranty
ii. Lack or Failure of Consideration [UCC 3–303(b), 3–305(a)(2)]
iii. Fraud in the Inducement (Ordinary Fraud)
iv. Illegality- If a statute makes an illegal transaction voidable, this is a personal
defense
v. Mental Incapacity- As a personal defense, any instrument issued by a mentally
incompetent person before a court has declared this status is voidable [UCC 3–
305(a)(1)(ii)].
vi. Ordinary Duress
i. Federal Limitations on the Rights of HDCs- A Federal Trade Commission (FTC) rule (16
C.F.R. Part 433)—‖Rule 433‖—effectively abolished the HDC doctrine in consumer
transactions.
i. FTC Rule 433- The rule applies to any seller or lessor of goods or services who
takes or receives a consumer credit contract. The rule also applies to a seller or
lessor who accepts as full or partial payment for a sale or lease the proceeds of
any purchase-money loan made in connection with any

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consumer credit contract. Under the rule, these parties must include inthe
consumer contract the following provision—
NOTICE
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT
TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT
AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED
PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY
HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID
BY THE DEBTOR HEREUNDER.
1. Effect of the Rule- A consumer who is party to a transaction that includes a
contract with this notice can bring any defense he or she has against the
seller against any subsequent holder. An instrument that contains this
notice or a similar statement required by law may be negotiable, but
there cannot be an HDC [UCC 3– 106(d)].

VI. Discharge
j. Discharge by Payment of Tender of Payment- All parties to an instrument are
discharged when—
 The party primarily liable on it pays to a holder the amount due in full[UCC
3–602, 3–603].
 The drawee of an unaccepted draft or check makes payment in good faithto the
holder.
i. Payment by any other party discharges only that party and subsequent
parties.
ii. Good Faith Required- Payment on an instrument will not discharge a party who
knowingly—in bad faith—pays a holder who acquired an instrument by theft or
who obtained it from another who acquired it by theft [UCC 3–602(b)(2)], unless
the party has the rights of an HDC.
iii. Tender of Payment- Indorsers and accommodation parties are discharged to the
extent tender of payment is made to a person entitled to enforce an instrument,
and the tender is refused [UCC 3–603(b)].
k. Discharge by Cancellation or Surrender- With the intent to cancel, a holder can discharge
any party by cancellation [UCC 3–604]. Sufficient acts include—
i. Writing ―Paid‖ across the face of an instrument.
ii. Intentionally tearing up an instrument.
iii. Crossing out a party’s indorsement cancels that party’s liability and the liability of
subsequent indorsers who have already indorsed the instrument.
iv. Surrendering an instrument to the party to be discharged.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What kinds of defects in an instrument will prevent a holder knowing about those defects from
acquiring HDC status? A person will not be afforded HDC protection if he or she acquires an instrument
knowing, or having reason to know, that it is defective because [UCC 3– 302(a)(2)(iii), (iv), (v), (vi)]: (1) it is
overdue, (2) it has been dishonored, (3) there is an uncured (uncorrected) default with respect to another
instrument issued as part of the same series, (4) the instrument contains an unauthorized signature or has
been altered, (5) there is a defense against the instrument, or claim to the instrument, or (6) the instrument
is so irregular or incomplete as to call into question its authenticity.

2. What are some of the circumstances that, as a matter of law, constitute notice of a particular fact in
commercial law? A holder has notice of a defective instrument if he or she has (1) actual knowledge of
the defect; (2) receipt of a notice about a defect; or (3) reason to know that a defect exists, given all the
facts and circumstances known at the time in question [UCC 1–201(25)]. The holder must also have
received the notice ―at a time and in a manner that gives a reasonable opportunity to act on it‖ [UCC 3–
302(f)].

3. Compare the concepts of primary and secondary liability under a contract theory of law. In a
promissory note, the maker directly promises to pay the payee or holder of the note a certain sum of
money. Similarly, when a bank accepts a negotiable instrument, it engages or promises unconditionally to
pay the holder of the instrument. This primary obligation of a maker and an acceptor is described as
primary liability. Drawers and indorsers of negotiable instruments are also contractually liable (based on
their signatures), but their liability is conditional. Under the UCC, the drawer of a draft is deemed to have
contracted that on dishonor of the draft and any necessary notification of such dishonor, he or she (the
indorser) will pay the amount of the instrument to the holder. This type of contractual liability is secondary
and arises as a result of the drawer’s or indorser’s signature on the instrument. Finally, an
accommodation party—one who signs on behalf of a party to an instrument, takes on the contractual
liability of the party for whom he or she signed.

4. When may a person whose forged signature appears on a negotiable instrument be liable on that
instrument? In general, a person is not normally liable to pay on a negotiable instrument in which his
signature has been forged. But there are exceptions to this rule. A signature made by an agent exceeding
the scope of his or her authority can be ratified by the principal; the principal’s failure to repudiate an
unauthorized signature in a timely manner may also constitute ratification. In addition, a person who signs
blank checks that are subsequently

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stolen by a thief and cashed may be estopped on the basis of negligence from denying liability for
payment of the checks. Finally, an unauthorized signature operates as the signature of the unauthorized
signer in favor of a holder in due course, thus causing the one who signed the instrument to become
personally liable just as if he had signed his own name.

5. Who assumes the burden of loss when there is a forged or unauthorized indorsement? In general,
the burden of loss falls on the first party to take the forged indorsement because a forged indorsement
does not transfer title. (Consequently, the party taking an instrument with a forged indorsement cannot
become a holder.) The loss resulting from a forged indorsement will fall on the drawer or maker in two
situations: (1) when an imposter induces the maker or drawer of an instrument to issue it to the imposter;
or (2) when a person signs as or on behalf of a maker or drawer, intending that the payee have no
interest in the instrument (the fictitious payee rule).

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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Indorsements
o Holders in Due Course
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 24:
Banking

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 237
Cengage Supplements.................................................................................................................................................. 237
List of Student Downloads ....................................................................................................................................... 237
Chapter Objectives ....................................................................................................................................................... 237
Key Terms ........................................................................................................................................................................ 237
What's New in This Chapter ........................................................................................................................................ 238
Chapter Outline ............................................................................................................................................................. 238
Discussion Questions ...................................................................................................................................................... 243
Additional Activities and Assignments ....................................................................................................................... 244

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Additional Resources ..................................................................................................................................................... 245

Cengage Video Resources ...................................................................................................................................... 245
Appendix......................................................................................................................................................................... 245
Generic Rubrics.......................................................................................................................................................... 245
Standard Writing Rubric ......................................................................................................................................... 246
Standard Discussion Rubric ...................................................................................................................................... 246

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine foundational concepts in banking. Students will be introduced
to the duties under the UCC related to check processing for both customers and banks, as well as to
EFTs.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

94. List the types of relationships between banks and customers

95. Discuss liability for forged drawers’ signatures

96. Outline a bank’s duty to accept deposits

97. Define an electronic fund transfer

98. Describe the role of artificial intelligence (AI) in digital lending

Key Terms
cashier’s check: A check drawn by a bank on itself.
certified check: A check that has been accepted by the bank on which it is drawn. Essentially, the bank,
by certifying (accepting) the check, promises to pay the check at the time the check ispresented.
check: A draft drawn by a drawer ordering the drawee bank or financial institution to pay acertain
amount of money to the holder on demand.
clearinghouse: A system or place where banks exchange checks and drafts drawn on each other and settle
daily balances.
collecting bank: Any bank handling an item for collection, except the payor bank.
depositary bank: The first bank to receive a check for payment.
digital cash: Funds contained on computer software, in the form of secure programs stored on microchips
and other computer devices.
electronic fund transfer (EFT): A transfer of funds through the use of an electronic terminal, atelephone,
a computer, or magnetic tape.

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e-money: Prepaid funds recorded on a computer or a card.

Federal Reserve System: A network of twelve central banks, located throughout the United States and
headed by the Federal Reserve Board of Governors. Most banks in the United States have Federal
Reserve accounts.
intermediary bank: Any bank to which an item is transferred in the course of collection, except the
depositary or payor bank.
overdraft: A check written on a checking account in which there are insufficient funds to cover the amount
of the check.
payor bank: The bank on which a check is drawn (the drawee bank).
stale check: A check, other than a certified check, that is presented for payment more than sixmonths
after its date.
stop-payment order: An order by a bank customer to his or her bank not to pay or certify a certain
check.
substitute check: A negotiable instrument that is a paper reproduction of the front and back of an original
check and contains all of the same information required on checks for automated processing.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case:
o Case Analysis 28.1: Legg v. West Bank (2016)—on a bank’s duty to honor checksand
overdrafts when it changes its sequencing process.
o New Case 28.2: Horton v. JPMorgan Chase Bank, N.A. (2018)—on a bank’s liabilityto
re-credit for an unauthorized withdrawal from a joint checking account.
o Case 28.3: Shahin v. Delaware Federal Credit Union (2015)—on a bank’s duty to accept
checks and a credit union that placed a hold on a customer’s check without notifying the
customer.
 1 New Case in Point
o 2014 case on the contractual relationship between a bank and a customer
 1 New Numbered Example
o on the collection between customers of the same bank
 1 New Case Problem (based on 2018 case)
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on unauthorized items(based on
2017 case)
 New Unit-Ending Task-Based Simulation feature
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Chapter Outline
I. Checks and the Bank-Customer Relationship

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a. Checks A check is a draft drawn on a bank [UCC 3–104(f)]. If any institution other than a
bank, as defined in UCC 4–105(l), handles a check for payment or collection, the check is
not covered by Article 4.
i. Cashier’s Checks- A cashier’s check is a check drawn by a bank on itself. The
bank assumes responsibility for its payment, effectively making it more
readily acceptable as a substitute for cash. It is negotiable on issue [UCC 3–
104(g)]. If wrongfully dishonored, a holder can recover all expenses, interest, and
consequential damages incurred.
ii. Certified Checks- A certified check is a check accepted by the bank on which it is
drawn [UCC 3–409(d)]. When a bank certifies a check, it immediately charges
the drawer’s account and transfers those funds to its own account. This discharges
the drawer and prior indorsers [UCC 3– 414(c), 3–415(d)].
b. The Bank-Customer Relationship
i. Creditor-Debtor Relationship- A creditor-debtor relationship is created between
a customer and a bank when, for instance, the customer deposits cash in a checking
account or when final payment is received for checks drawn on other banks.
ii. Agency Relationship- A principal-agent relationship underlies the check collection
process.
iii. Contractual Relationship- The rights and duties of a bank and its customer are
contractual and depend on the nature of the transaction.
iv. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider the following: Royal Hospital required all corporate checks
to be signed by two of the three corporate officers. All three are signatories on
the Hospital’s Capital One Bank account and the terms of the account included the
two-signature requirement. Royal Hospital deposits a check for $500,000 into its
account. Two weeks later, one of the corporate officers wrote a check from the
account for
$100,000. No other officer signed the check. Who are the creditors and debtors
in this relationship? Who is an agent in this relationship? What contractual
relationship has been established by the parties?

II. Honoring Checks

a. Check Dishonor- When a drawee bank wrongfully fails to honor a check, it is liable to its
customer for damages resulting from the refusal [UCC 4–402]. But the bank’s duty is not
absolute—if the bank properly dishonors a check for insufficient funds, it has no liability to
the customer.
b. Overdrafts
i. A bank may dishonor a check that, if it were cashed, would create an overdraft in
the customer’s account [UCC 4–401(a)]. When a check bounces, the holder can
resubmit it (he or she should, however, notify prior indorsers of the dishonor, or
they will be discharged).

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ii. A bank may alternatively agree to honor overdrafts, and charge a customer’s
account for the amount of an overdraft (providing that the customer has agreed in
advance) [UCC 4–401(a)].
c. Stale Checks- A bank is not obligated to pay an uncertified check presentedmore
than six months from its date, but it has that option [UCC 4–404].
d. Incompetence or Death of a Customer- If, when a check is issued or its collection has
been undertaken, a bank does not know of an adjudication of incompetence, it can pay
the check without liability. Once a bank knows of a death, for ten days after the date of
death, it can pay or certify checks drawn on or before the date of death (unless a
person claiming an interest in that accountorders the bank to stop) [UCC 4–405].
e. Stop-Payment Orders
 Only a customer can order his or her bank to pay a check, and only a customer
can order payment stopped, although there are time limits [UCC 4–403(a)].
 The customer must have a valid legal ground for ordering a stop payment, or the
holder can sue the drawer for the amount of the check and consequential
damages.
i. Reasonable Time and Manner- The customer must issue the stop- payment order
within a reasonable time and in a reasonable manner for the bank to act on it
[UCC 4–403(a)]. A written order is effective for six months. An oral order is
effective for fourteen days.
ii. Bank’s Liability for Wrongful Payment- If the bank pays the check over the
customer’s order, the bank is liable to the customer for the amount of any actual
loss [UCC 4–403(c)].
f. Forged Drawers’ Signatures
i. The General Rule
1. A forged signature on a check has no legal effect as the signature of a
drawer [UCC 3–403(a)]. If the bank pays on a forged signature, it must
re-credit the customer’s account unless the customer’s negligence
substantially contributes to the forgery [UCC 3–406(a).
2. The bank is responsible for determining whether the signature is genuine.
The parties may agree that the customer is responsible for losses related
to the forgery of ―non-manual‖ signatures.
ii. Customer Negligence- The customer’s liability may be reduced by any loss
caused by negligence on the part of a person paying the instrument or taking it
for value (if the negligence substantially contributed to the loss) [UCC 3-406(b)].
1. Timely Examination of Bank Statements Required- A customer must
examine monthly statements and canceled checks and report any forged
signatures promptly [UCC 4–406(a), (b)]. (If a bank does not send the
checks, it must keep them, or copies of them, for seven years.) If a
customer fails to do this, he or she is liable for any loss to the bank [UCC
4–406(d)].

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2. Consequences of Failure to Detect Forgeries- To recover for a series of

forgeries of the same signature by the same wrongdoer, a customer must
report the first item to the bank within thirty calendar days of receipt of
the bank statement [UCC 4–406(d)(2)].
3. One-Year Time Limit- A customer who fails to report his or her forged
signature within a year of the date that the statement was available for
inspection loses the right to have the bank re-credit his or her account
[UCC 4–406(f)].
iii. Negligence and the Bank’s Duty of Care- If the bank is also negligent, the bank
is also liable on a comparative negligence basis [UCC 4–406(e)]. It is not
negligence to fail to examine every signature on every check [UCC 3–103(a)(7)].
g. Checks Bearing Forged Indorsements
i. A bank that pays a customer’s check bearing a forged indorsement must re-credit
the customer’s account or be liable to the customer for breach of contract (unless
the customer fails to report the forgery within three years after the item with it
was available to the customer [UCC 4–111]).
ii. The bank in turn can recover from the bank that sent it the check, and so on up the
line to the first party who took the check with the forgery.
h. Discussion Activity: 10 minutes total. As a class discuss the scenario presented: Kim works
for a company in their payroll department. She has access to checks for the company and
one day steals a check, forges the owner’s signature, and makes it payable to her
brother for $10,000. Her brother does not know about the forgery. He indorses the
check and deposits into his account. Because Kim is also responsible for reviewing bank
statements for the company, she sees the charge come through but never tells the owner.
What is the liability of the bank? The business owner? Kim? The brother?
III. Accepting Deposits
a. The Traditional Collection Process- The bank check collection as it operates under Article
4 is evolving to implement Check 21.
i. Designations of Banks- These include depositary bank, collecting bank, payor
bank, and intermediary bank. Any bank can be a depositary bank, a collecting
bank, a payor bank, and an intermediary bank at the same time.
ii. Check Collection between Customers of the Same Bank- An item payable by
the depositary (payor) bank that receives it—an ―on-us item‖—that is not
dishonored by the opening of the second banking day following its receipt is
considered paid [UCC 4–215(c)(2)].
iii. Check Collection between Customers of Different Banks
1. Each bank in the collection chain must pass a check on before midnight of
the next banking day following its receipt [UCC 4– 202(b), 4–302, 4–
108].
2. Posting after an established cut-off hour—deferred posting—is permitted,
and may push a check’s posted receipt to the next banking day [UCC 4–
108].

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iv. The Role of the Federal Reserve System- The Federal Reserve System simplifies
the check-collection process.
v. Electronic Check Presentment- Most checks are encoded with relevant
information, which is thereby warranted as correct to any subsequent bank or
payor, and processed electronically.
b. Check Clearing and the Check 21 Act- The Check Clearing in the 21st Century Act
facilitates the use of electronic check processing.
i. Substitute Checks- A substitute check (a paper copy of a check) can be created
from a digital image. The originals can be destroyed (which saves space and
prevents more than one payment on a check).
ii. Faster Access to Funds- Banks can exchange checks digitally (which speeds
collection). As check-processing speeds up, the Federal Reserve Board will revise
the availability schedule for funds from deposited checks to correspond to
reductions in processing time.
IV. Electronic Fund Transfers (EFTs)
a. Types of EFT Systems- There are four principal types of EFT systems—
i. Automated teller machines.
ii. Point-of-sale systems.
iii. Systems handling direct deposits and withdrawals of funds.
iv. Internet payment systems.
b. Consumer Fund Transfers
 The Electronic Fund Transfer Act (EFTA) of 1978 governs consumer electronic fund
transfers, covering financial institutions that offer EFTs for customer asset accounts
established for personal, family, or household purposes.
 The Federal Reserve Board administers the act through Regulation E.

V. Banking in the Digital Age

a. Online banking services include bill consolidation and payment, transferring funds among
accounts, and applying for loans and credit cards. Mobile apps facilitate deposits and
online purchases.
b. Digital cash, or e-money, consists of funds stored on chips in laptops, phones, tablets,
and other devices, replacing physical cash with virtual cash.
c. Electronic payment systems
d. Artificial Intelligence in Fintech
i. Digital Lending- AI is taught the parameters of a financial institutions lending
practices and uses an algorithm to determine whether a loan is warranted and at
what terms
ii. Neobanks- banks that exist only as digital entities

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. When does a check become stale under the UCC? A check outstanding for longer than six months is a
stale check. The UCC gives the bank the option of paying or not paying on a stale check. A bank will
usually consult with the customer before paying on a stale check but a bank that pays in good faith without
consulting its customer normally has the right to charge the customer’s account for the amount of the check.

2. What role does the Federal Reserve System play in clearing checks? The Federal Reserve System
serves as the central bank of the nation by transferring funds, handling government deposits, and
supervising and regulating banks. The twelve Federal Reserve banks act as clearinghouses and agents in
the collection of checks and other instruments, thus greatlysimplifying the clearing of checks (the methods by
which checks deposited in one bank are transferred to the banks on which they were written).

3. How might Check 21 affect the potential for banking fraud? Fraud may be more difficult to
accomplish, in part because the ―float,‖ which contributes to the effective commission of a
―check-kiting‖ scheme, is eliminated. Fraud may be no more difficult to commit, however, because
much ―bank fraud‖ consists of forgeries that occur before items are presented to banks for payment. Are
there circumstances in which y a copy of an original canceled paper check could be demanded? No.
After the effective date of the Check Clearing in the 21st Century Act (Check 21), as noted in the feature,
financial institution customers can no longer successfully demand an original canceled check. They are
entitled to receive a ―substitute check‖ only.

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4. Are there legal safeguards for the privacy of a user of e-money against the issuer? An issuer of e-
money may be subject to the Right to Financial Privacy Act of 1978. Although it is yet unclear if this act
applies to e-money issuers (credit-card issuers and other financial institutions are covered), this act may
apply if the issuer is deemed to be (1) a bank by virtue of its holding customer funds or (2) an entity that
issues a physical card similar to a credit or debit card. Also, the Financial Services Modernization Act
(Gramm-Leach-Bliley Act) of 1999 may apply to an issuer of e-money. Under this act, all financial
institutions must provide their customers with information on their privacy policies and practices. This act
proscribes the disclosure of financial institutions’ customer data without notice and an opt-out opportunity.

5. Should only banks and regulated financial institutions be allowed to issue ATM cards? Yes,
because limiting the issuers of ATM cards to regulated financial institutions reduces the number of methods
by which terrorists and other criminals can anonymously transfer money or launder illegally obtained funds.
No, the financial-reporting provisions should be extended to currently unregulated entities, because doing
otherwise would only offer an opportunity to develop other methods for criminals and terrorists to conceal
their activities. How might the government regulate digital funds to reduce the potential for
cyberlaundering? Laws could be passed to cover the current and future owners and operators of financial
exchanges of all types.

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Additional Activities and Assignments

8. Business Case: Banking
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. What are the pros and cons of using cryptocurrency systems as opposedto
traditional bank services?
ii. In a time where people expect transactions to happen instantaneously, are there
any benefits to using paper checks for a business as opposed to electronic
payments?
iii. Legal rules aside, who should bear the financial burden of a bank failing to
detect a forged signature or endorsement on a paper check?
d. Role Play: Break into small groups of 3-5 students and complete the followingactivity.
Assume that there is a federal law which prohibits any business from aiding and abetting
criminal activity, the consequence of which could be loss of the business. Also, assume that
the sale and use of marijuana is a federal crime, but has been

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decriminalized in the state. If you are on the board of directors of a state-

chartered bank what stance would you take on the following and why:
1. Allowing Cannabis Culture to deposit funds (cash) into your bank
2. Allowing employees of Cannabis Culture to deposit funds (cash) into your bank
3. Providing small business loans to marijuana dispensaries
e. Writing Assignment: Knowing the facts of each transaction in and out of CannaWeb’s
bank account, identify each legal issue and determine who will befinancially liable for
the transaction.
f. Ethics Question: When Parker post-dated the check, it was because he had a hesitation
about the purchase. Believing that if he changed his mind, he could just stop payment on
the check and avoid going through with the transaction. Assuming the supplier would not
have shipped any of the product without having received payment (therefore they
would not be financially harmed in the transaction) what are the ethical implications of
conducting business in this manner?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Electronic Funds Transfer Act
o The Check Collection Process
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.

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deadlines. Follows all posted deadlines. Does not 0 points

assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 25
Agency Relationships

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 249
Cengage Supplements.................................................................................................................................................. 249
List of Student Downloads ....................................................................................................................................... 249
Chapter Objectives ....................................................................................................................................................... 249
Key Terms ........................................................................................................................................................................ 249
What's New in This Chapter ........................................................................................................................................ 250
Chapter Outline ............................................................................................................................................................. 251
Discussion Questions ...................................................................................................................................................... 256
Appendix......................................................................................................................................................................... 257
Generic Rubrics.......................................................................................................................................................... 257
Standard Writing Rubric ......................................................................................................................................... 257
Standard Discussion Rubric ...................................................................................................................................... 258

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Purpose and Perspective of the Chapter

The purpose of this chapter is to introduce the concept of agency. It explains how agencies are formed
and explores the duties owed by agents and principals to each other as well as the potential liabilities
each face.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to completethe activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

99. Describe how an agency relationship is created

100. List the duties of agents and principals

101. Define the scope of an agent’s authority

102. Explain how an agency relationship is terminated

Key Terms
Agency: A relationship between two parties in which one party (the agent) agrees to represent or act for
the other (the principal).
fiduciary: As a noun, a person having a duty created by his or her undertaking to act primarily for
another’s benefit in matters connected with the undertaking. As an adjective, a relationship founded on
trust and confidence.
independent contractor: One who works for, and receives payment from, an employer but whose
working conditions and methods are not controlled by the employer. An independent contractor is not
an employee but may be an agent.
agency coupled with an interest: An agency, created for the benefit of the agent, in which the agent has
some legal right (interest) in the property that is the subject of the agency.
apparent authority: Authority that is only apparent, not real. An agent’s apparent authority arises
when the principal causes a third party to believe that the agent has authority, even though she or he
does not.
disclosed principal: A principal whose identity is known to a third party at the time the agent makes a
contract with the third party.

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equal dignity rule: A rule requiring that an agent’s authority be in writing if the contract to be made on
behalf of the principal must be in writing.
express authority: Authority expressly given by one party to another. In agency law, an agent has
express authority to act for a principal if both parties agree, orally or in writing, that an agency
relationship exists in which the agent has the power (authority) to act in the place of, and on behalf of, the
principal.
implied authority: Authority that is created not by an explicit oral or written agreement but by
implication or inference. In agency law, implied authority of the agent can arise from custom, from the
position the agent occupies, or from being reasonably necessary to carry out express authority.
partially disclosed principal: A principal whose identity is unknown by a third party, but the third party
knows that the agent is or may be acting for a principal at the time the agent and the third party form a
contract.
ratification: The act of accepting and giving legal force to an obligation that previously was not
enforceable.
respondeat superior: A doctrine under which a principal- employer is liable for any harm caused to a
third party by an agent-employee in the course or scope of employment. undisclosed principal: A
principal whose identity is unknown by a third party, and that party has no knowledge that the agent is
acting for a principal at the time the agent and the third party form a contract.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case:
o New Case 32.1: Reidel v. Akron General Health System (2018)—on formation of
agency by estoppel.
o Spotlight on Taser Case 32.2: Taser International, Inc. v. Ward (2010)—on whethera
former employee breached the duty of loyalty by planning a competing business while
still working for the company.
o Case Analysis 32.3: NRT New England, LLC v. Jones (2016)—on the duty of
cooperation in an exclusive agency agreement between buyers and realtors.
 1 New Case in Point
o 2013 case on the criteria for independent contractor status
 1 New Case Problem
o 2018 case on agency relationships
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on agency relationships(based
on 2019 case)

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 Updated Limited-Time Group Assignment with a new activity.

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Chapter Outline
I. Agency Relationships- In an agency relationship between two parties, one party (the agent)
agrees to represent or act for the other (the principal). The relationship is fiduciary, involving a
duty, based on trust and confidence, to act primarily for another’s benefit in certain matters.
A. Employer-Employee Relationships
i. An employee is one whose physical conduct is controlled, or subject to control, by
an employer. The key feature is the employer’s right to control the employee in
the performance of tasks involved in the employment.
ii. An employee can be an agent if the employee has an appointment or contract for
hire with authority to represent the employer.
B. Employer-Independent Contractor Relationships
i. Independent contractors are not employees, because the person for whom they
have agreed to perform has no control over the physical conduct of their
performance. Generally, the less control an employer has over the work, the more
likely that the worker is an independent contractor.
ii. An independent contractor may or may not be an agent.
C. Determination of Employee Status- Certain factors can determine whether a person is an
employee or an independent contractor.
i. Criteria Used by the Courts- To decide whether an individual is an employee or
independent contractor, courts consider—
1. How much control does the employer have over details of thework
(most important factor)?
2. How distinct are the occupations of the individual and employer?
3. Does the employer supervise the work?
4. Does the employer supply the tools at the place of work?
5. What is the length of the employment?
6. How is the individual paid (periodically or by project)?
7. What skill does the work require?
ii. Criteria Used by the IRS- The IRS considers chiefly the degree of control that an
employer exercises over the work.
iii. Employee Status and ―Works for Hire‖- An employee’s work of
intellectual property belongs to the employer, but an independent contractor’s
similar effort is the employer’s only if the parties agreed to exchange the rights.
iv. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or
small groups and determine whether each of the following is likely and
employee or independent contractor:
1. An Uber driver

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2. A plumber with his own business, hired by a general contractor todo all
the plumbing work in a new home
3. An attorney with their own practice hired to review contracts for a
corporation
4. An attorney hired to review contracts for a corporation who doesnot
keep their own practice

II. Formation of the Agency Relationship

 An agency relationship must be based on an affirmative indication that the agent agrees
to act for the principal and the principal agrees to have the agent so act. It may be
created for any legal purpose. In most states, the principal—but not the agent—must
have contractual capacity.
 An agency agreement need not be in writing.
A. Agency by Agreement- Generally, no formalities are required to create an agency
relationship. Agency can be implied from conduct, or can be created by written contract or oral
agreement.
B. Agency by Ratification- Agency is created by ratification when a principal affirms a contract
made by a person who is not an agent, or a person who is an agent acting outside the scope of his
or her authority.
C. Agency by Estoppel- Agency is created by estoppel when a principal causes a third person
to believe that another is the principal’s agent, and the third person deals withthe other.
1. The Third Party’s Reliance Must Be Reasonable- Facts must show that an
ordinary, prudent person familiar with business practice and custom would
have been justified in concluding that the agent had authority.
2. Created by the Principal’s Conduct- The deeds or statements of the
principal create an agency by estoppel.
D. Agency by Operation of Law- Agency may be created by operation of law. Courts have
granted agents emergency power under unusual circumstances and have held agency to arise in
family relationships.
E. Knowledge Check: 1 minute total. Tests students’ understanding of the various ways an
agency can be formed.

III. Duties of Agents and Principals- An agency relationship is fiduciary.

A. Agent’s Duties to the Principal- An agent’s duties are implied from the agency relationship
whether or not the identity of the principal is disclosed to a third party.
i. Performance
1. Standard of Care- The skill or care required of an agent is that expected
of a reasonable person under similar circumstances (unless the agent
represented himself or herself as possessingspecial skills).

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2. Gratuitous Agents- An agent who does not act for money may be subject
to the same standards of care, but cannot be liable for breach of contract
because there is no contract.
ii. Notification- An agent must notify a principal of matters that come to his or her
attention concerning the subject matter of the agency (the principal is bound even
if the agent says nothing).
iii. Loyalty- An agent cannot represent two principals in the same transaction unless
both know of the dual capacity and consent.
1. Maintain Confidentiality- Knowledge acquired through an agency
relationship is confidential.
2. Actions Must Benefit the Principal- An agent must act solely for the
benefit of the principal.
iv. Obedience- An agent must follow the principal’s instructions (except during an
emergency or when instructions are not clearly stated, in which case an agent must
act in good faith and in a manner reasonable under the circumstances.
v. Accounting- An agent must account for all property and money received and
paid out on behalf of the principal. The agent should keep personal funds
separate.
B. Principal’s Duties to the Agent- A principal’s duties may be express or may be implied by
law.
i. Compensation- Except in a gratuitous agency, a principal must pay an agent for
services rendered and to do so in a timely manner. The amount is the agreed-on
value, the customary value, or, if no amount has been agreed on or established by
custom or law, the reasonable value.
ii. Reimbursement and Indemnification- A principal must reimburse an agent for
sums disbursed at the principal’s request or for necessary expenses in the agent’s
performance of his or her duties. A principal also must indemnify an agent for
liability incurred in accord with the agency.
iii. Cooperation- A principal must cooperate with and assist an agent in performing
his or her duties.

IV. Agent’s Authority

a. Express Authority- Express authority is embodied in what a principal engages an agent to
do.
i. The Equal Dignity Rule- This rule may determine when express authoritymust be
in writing. Exceptions include—
1. A corporate executive doing ordinary business does not needwritten
authority from the corporation.
2. An agent acting in the presence of the principal does not needwritten
authority.
3. When the agent’s act of signing is a formality, written authority isnot
necessary.

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ii. Power of Attorney- A power of attorney is a written document and is usually

notarized.
b. Implied Authority- Implied authority is conferred by custom, inferred from an agent’s
position, or implied by virtue of being reasonably necessary to carry out express
authority.
c. Apparent Authority
i. A Pattern of Conduct- Apparent authority exists when a principal causes a third
party reasonably to believe that an agent has authority. This can occur through a
pattern of conduct.
ii. Apparent Authority and Estoppel- If the third party changes position in reliance
on the principal’s representations, the principal may be estopped from denying
that the agent had authority.
d. Ratification- Ratification is a principal’s affirmation of an agent’s previously unauthorized
act. An entire transaction must be ratified; a principal cannot ratify part and reject the
rest. The requirements for ratification are—
i. The agent acted on behalf of an identified principal who later ratified the
action.
ii. The principal must know all of the material facts. If not, the contract canbe
rescinded.
iii. The principal must affirm the agent’s act in its entirety.
iv. The principal must have the capacity to authorize the transaction when the
agent engages in it and the principal ratifies it. The third party must also have
capacity.
v. The principal’s ratification must occur before the third party withdraws from the
deal.
vi. The principal must follow the same formalities to ratify the contract as would have
been needed to authorize it initially.

V. Liability in Agency Relationships

a. Liability for Agent’s Contracts
i. Disclosed or Partially Disclosed Principal- A disclosed or partially disclosed
principal is liable to a third party for a contract made by an agent acting within
the scope of authority. If a principal is disclosed, an agent is not normally liable.
If, however, a principal is partially disclosed, in most states either principal or
agent may be liable.
ii. Undisclosed Principal- If the principal is undisclosed, the principal and the
agent are bound to the contract.
a. Unauthorized Acts
i. Implied Warranty- If an agent without authority contracts purportedly on
behalf of a disclosed principal, the principal is not liable, but the agent is. If
the third party relies on the agency status, the agent’s liability is based on
the theory of breach of implied warranty of authority.

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ii.Third Party’s Knowledge- If the third party knew that the agent was
mistaken, or the agent indicated uncertainty, about the extent of authority, the
agent is not personally liable.
b. Liability for Agent’s Torts- Under the doctrine of respondeat superior, a principal is
vicariously liable for any harm caused to a third party by an agent acting in the scope of
employment.

VI. Termination of an Agency

a. Termination by Act of the Parties- An agency relationship may be terminatedby—
i. Lapse of time. An agency may terminate if it is limited to a specific timeand the
time passes.
ii. Purpose achieved. An agency may terminate if it is limited to a particular
purpose and the purpose is achieved.
iii. Occurrence of a specific event. An agency may terminate if it is subject toa
specific event that occurs (or doesn’t occur).
iv. Mutual agreement. An agency may terminate if the parties agree to endit.
v. Termination by one party. Either party can terminate an agency—the agent by
renunciation of authority, the principal by revocation of authority. Both parties
have the power, but they may not possess the right.
b. Wrongful Termination- Wrongful termination may subject an agent or principalto a suit
for damages for breach.
c. Agency Coupled with an Interest- An agency that a principal may not revoke isan
agency created for the agent’s benefit, or an agency coupled with an interest.
d. Termination by Operation of Law- An agency relationship may be terminatedby—
i. Death or insanity. Either party’s death or insanity terminates an agency. Some
states require the agent’s knowledge of the principal’s death to terminate the
agency.
ii. Impossibility. If the specific subject matter of an agency is destroyed or lost, the
agency terminates.
iii. Changed circumstances. When an event has such an unusual effect on the subject
matter of an agency that an agent can reasonably infer that the principal
would not want the agency to continue, it terminates.
iv. Bankruptcy. The bankruptcy of either party usually terminates an agency.
v. War. War between a principal’s country and an agent’s country terminates an
agency.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Why is agency law essential to the existence and operation of a corporation? An agent acts for a
principal. Agency law is essential to the existence and operation of a corporate entity, because only
through its agents can a corporation function and enter into contracts. Corporate officers, for example, are
agents.

2. What are the policy reasons for holding a principal liable on a theory of agency by estoppel?
Equity is the foundation for estoppel. If a principal could avoid liability by denying that a party he or she
represented as an agent was not an agent, the principal could choose to fulfill only those obligations that
were to his or her advantage and ignore other obligations. This would undercut the purposes of contract
law.

3. Are there situations in which the duty of loyalty to one’s employer could come into conflict with
other duties? The duty of loyalty is a fundamental duty in an agency relationship (like the duty to act in
good faith), and it is difficult to imagine that it could conflict with other duties. There might be a
circumstance in which an agent would need to choose between this duty and the duty to exercise his or her
special skills, or a conflict might arise in which an agent would have to disobey a principal’s instructions to
follow the duty of loyalty

4. What are some advantages to being an independent contractor? What might be some
disadvantages? The principal advantage of being an independent contractor is probably the degree to
which the independent contractor controls the performance of his or her work. Among the disadvantages is
the financial risk that an independent contractor takes compared to the relative financial security of an
employee.

5. What effect do a principal’s representations giving apparent authority to an agent have on the
principal’s liability? If a third party changes position in reliance on a principal’s representations, the
principal may be estopped from denying that the agent had authority. When a principal goes beyond
mere statements to ―clothe‖ an agent with, for instance, possession and apparent ownership of the
principal’s property, the agent can deal with the property as if he or she were the owner. When land is
involved, possession is not a sufficient indicator of ownership, but if an agent also has a deed to the land
and sells the land against the principal’s wishes to an innocent buyer, the principal ordinarily cannot cancel
the sale or assert aclaim to title.
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two The assignment has three The assignment is
or fewer grammatical and to five grammatical and incomplete or

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spelling errors.5 spelling errors.3 unintelligible.0

points points points
[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 26:
Employment, Immigration, and Labor Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 260
Cengage Supplements.................................................................................................................................................. 260

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List of Student Downloads ....................................................................................................................................... 260

Chapter Objectives ....................................................................................................................................................... 260
Key Terms ........................................................................................................................................................................ 260
What's New in This Chapter ........................................................................................................................................ 261
Chapter Outline ............................................................................................................................................................. 262
Discussion Questions ...................................................................................................................................................... 268
Additional Resources ..................................................................................................................................................... 269
Cengage Video Resources ...................................................................................................................................... 269
Appendix......................................................................................................................................................................... 271
Generic Rubrics.......................................................................................................................................................... 271
Standard Writing Rubric ......................................................................................................................................... 271
Standard Discussion Rubric ...................................................................................................................................... 271

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the ways in which the law protects employees in theworkplace.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

103. State exceptions to the employment-at-will doctrine

104. Describe the major provisions of the Fair Labor Standards Act

105. Identify the benefits of the Social Security Act

106. Name the two most important federal statutes governing immigration

107. Identify the federal law allowing workers to organize unions and to engage in
collective bargaining

Key Terms
authorization card: A card signed by an employee that gives a union permission to act on his or her
behalf in negotiations with management.
cease-and-desist order: An administrative or judicial order prohibiting a person or business firm from
conducting activities that an agency or court has deemed illegal.
closed shop: A firm that requires union membership on the part of its workers as a condition of
employment.
collective bargaining: The process by which labor and management negotiate the terms and conditions
of employment, including working hours and workplace conditions.
employment at will: A common law doctrine under which either party may terminate an employment
relationship at any time for any reason, unless a contract specifies otherwise.
hot-cargo agreements: An illegal agreement in which employers voluntarily agree with unions not to
handle, use, or deal in the nonunion-produced goods of other employers.
I-551 Alien Registration Receipt: A document, known as a ―green card,‖ that shows that a foreign-
born individual can legally work in the United States.

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I-9 verifications: The process of verifying the employment eligibility and identity of a new
immigrant worker. It must be completed within three days after the worker commences employment.
Lockout: An action in which an employer shuts down to prevent employees from working,
typically because it cannot reach a collective bargaining agreement with the employees’ union.
minimum wage: The lowest wage, either by government regulation or by union contract, that an
employer may pay an hourly worker.
right-to-work laws: A state law providing that employees may not be required to join a union as a
condition of retaining employment.
secondary boycott: A union’s refusal to work for, purchase from, or handle the products of a secondary
employer, with whom the union has no dispute, for the purpose of forcing that employer to stop doing
business with the primary employer, with whom the union has a labor dispute.
strike: An action undertaken by unionized workers when collective bargaining fails. The workers leave their
jobs, refuse to work, and (typically) picket the employer’s workplace.
union shop: A firm that requires all workers, once employed, to become union members within a specified
period of time as a condition of their continued employment.
vesting: The creation of an absolute or unconditional right or power.
whistleblowing: An employee’s disclosure to government authorities, upper-level managers, orthe media
that the employer is engaged in unsafe or illegal activities.
workers’ compensation laws: A state statute establishing an administrative procedure for compensating
workers for injuries that arise out of, or in the course of, their employment, regardless of fault. Instead of
suing the employer, an injured worker files a claim with the stateagency or board that administers local
workers’ compensation claims.
wrongful discharge: An employer’s termination of an employee’s employment in violation of the law or
an employment contract.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New chapter-opening scenario on a manager who is injured on the job and various
employment laws that apply.
 2 New Cases
o New Case 34.1: Caterpillar Inc. v. Sudlow (2016)—on whether the employment-at-will
doctrine could be applied to support the discharge of an employee who brought a
firearm to work and then left the handgun locked in his vehicle—in plain sight.
o New Case 34.2: Encino Motorcars, LLC v. Navarro (2018)—on whether service
advisors at auto dealerships fit within the FLSA overtime-pay exemption
requirements.

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o Case Analysis 34.3: Contemporary Cars, Inc. v. National Labor Relations Board
(2016)—on whether an employer violated its employees’ rights under the National
Labor Relations Act during a union election campaign.
 Retained and Updated Ethics Today feature
o Case examples based on 2017 cases.
 1 New Numbered Example
o on requirements for receiving workers’ compensation
 3 New Case in Points
o 2017 case on the Whistleblower Protection Act
o 2017 case on the interaction of state and federal wage and overtime laws
o 2017 case on federal OSHA regulations to protect workers at a nuclear plant
 1 New Case Problem
o 2018 case regarding FMLA
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on immigration law (basedon 2017
case)
 Updated Limited-Time Group Assignment with a new activity.
[return to top]

Chapter Outline
I. Employment at Will- Under the at-will employment doctrine, employers can fire workers for
good, bad, or no reasons.
a. Statutory Exceptions- Federal statutes and state court rulings provide exceptions to the
at-will doctrine in actions based on a wrongful-discharge theory. Punitive damages have
been awarded against employers. For example: whistleblowing.
b. Contract Based Exceptions- Some courts have held, based on employees’ reasonable
expectations, that an implied contract exists between employer and employee under an
employer’s handbook, personnel bulletin, or the like that workers will be dismissed only for
good cause.
c. Exceptions Based on Public Policy- Under the most widespread common law exception to
the at-will doctrine, an employer may not fire a worker in violation of a fundamental
public policy. The policy must be clearly expressed in statutory law. Firing workers who
refuse to perform illegal acts violates public policy.
d. Knowledge Check: 1 minute total. Tests students’ understanding of when the termination
of employment may be considered wrongful.

II. Worker Protections

a. State Workers’ Compensation Laws- These laws establish state procedures for
compensating most workers, including minors, injured on the job. A state agency or board
administers workers’ compensation claims.

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i.
Requirements for Receiving Workers’ Compensation- Recovery is predicated
on an injury being accidental (not intentional) and occurring on the job or in the
course of employment.
ii. Workers’ Compensation versus Litigation- In return, workers cannot sue for
the injuries, even if caused by an employer’s negligence (and employers cannot
argue standard negligence defenses).
iii. Noncompensable injuries- self-injury is not considered accidental and hence
not covered. Neither is an injury incurred while an employee is commuting to or
from work.
iv. Knowledge Check: 1 minute total. Test students’ understanding of workers’
compensation laws.
b. The Occupational Safety and Health Act- The Occupational Safety and Health Act of
1970 provides for workplace safety standards with oversight by the Occupational Safety
and Health Administration (OSHA). Employers have a general duty to keep the workplace
safe. OSHA establishes specific safety standards.
c. Family and Medical Leave- The Family and Medical Leave Act (FMLA) of 1993 protects
employees who need time off work for family or medical reasons. Most states have similar
laws.
i. Coverage and Applicability- The FMLA covers employers (public and private)
with fifty or more employees who have worked for their employers for at least
a year. An eligible employee may take up to twelve weeks of leave within a
twelve-month period—
ii. To care for new children.
iii. To care for an adopted or foster child within one year of the child’s placement.
iv. To care for a seriously ill spouse, child, or parent.
v. To care for themselves if a serious health condition prevents performing
essential job functions.
vi. To deal with any nonmedical emergency arising out of the fact that the
employee’s spouse, son, daughter, or parent is a covered military member on
active duty.
vii. An eligible employee may take up to twenty-six weeks of leave within a
twelve-month period to care for a family member with a serious injury or illness
incurred as a result of military duty.
viii. Knowledge Check: 1 minute total. Test students’ recollection of the benefits of
the FMLA.
d. Wages, Hours, and Layoffs
 The Davis-Bacon Act requires federal contractors to pay ―prevailing wages‖ to their
employees.
 The Walsh-Healey Act requires manufacturers and suppliers to federal agencies to pay
a minimum wage, as well as overtime at 1.5 times regular pay, to their employees.

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 The Fair Labor Standards Act (FLSA) of 1938 covers employers engaged in interstate
commerce and regulates child labor, maximum hours, and minimum wages.
i. Child Labor- Children under fourteen can work in only limited occupations,
children under sixteen cannot work full-time except for a parent under certain
circumstances, and children under eighteen cannot work in hazardous jobs or in
jobs detrimental to their health and well being.
ii. Minimum Wages- Under the FLSA, a minimum wage must be paid to all
covered employees. Most states also require a minimum wage, some higher
than the federal amount.
iii. Overtime Provisions and Exemptions- Employees who agree to work more
than forty hours per week must be paid no less than one and a half times their
regular pay for all hours over forty. Excepted from federal overtime
regulations are employees who earn more than a specified amount per week
and devote their efforts to certain duties.
iv. To qualify for this exemption, an employee’s primary duty must be management.
v. To qualify for this exemption, an employee must be paid a salary, perform
managerial or general business functions, and use discretion and independent
judgment on matters of significance.
e. Employee Privacy Rights
i. Lie-Detector Tests- The Employee Polygraph Protection Act (1988) prohibits
the use of lie detectors by most employers (not including the government,
certain security service firms, and companies making and distributing controlled
substances) except when investigating losses attributable to theft.
ii. Drug Testing
iii. Electronic Monitoring- This includes employers’ review of employees’ e-mail,
blogs, instant messages, tweets, social media, smartphone, and Internet use.
Employers may also video employees at work, record and listen to their
telephone conversations and voice mail, and read their text messages and
social media posts.
1. Employee Privacy Protection
2. Privacy rights are protected at common law (invasion of privacy) and
under the U.S. Constitution (First, Third, Fourth, Fifth, and Ninth
Amendments) and state constitutions.
3. Electronic monitoring may violate the Electronic Communications Privacy
Act (ECPA) of 1986, which prohibits employers from intercepting
electronic communications that are personal whenmade on devices and
systems not furnished by the employer.
4. Private employers can use filtering software to block their employees’
access to certain Web sites—the First Amendment’s

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protection of free speech prevents only government employers from

restraining speech by blocking Web sites.
5. Reasonable Expectation of Privacy- Generally, an employer’s interests
are weighed against employees’ reasonable expectations of privacy (if
employees are informed of monitoring, they cannot reasonably expect
privacy).
iv. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and discuss each of the following scenarios and determine whether an
employee would have a reasonable expectation of privacy:
1. Sending a personal email from their Gmail account on a work computer
2. Sending a text message on their personal cell phone for which their
employer reimburses them their cost
3. Posting to an anonymous online forum using their personal cell phone at
work, while inadvertently connected to the company’s free/open wifi
4. Making a negative comment about their employer on social media while
at home using their personal laptop
III. Retirement and Income Security- Government programs are designed to protect employees and
their families by covering the financial impact of retirement, disability, death, hospitalization, and
unemployment.
a. Social Security- The Social Security Act of 1935 provides for old-age retirement,
survivors, disability, and hospital insurance (OASDI). Employers and employees contribute
under the Federal Insurance Contributions Act (FICA).
b. Medicare
i. Medicare is administered by the Social Security Administration for people sixty-
five years of age and older and for some under sixty-five who are disabled.
ii. Medicare offers additional coverage options and a prescription-drug plan.
People with Medicare hospital insurance can obtain additional federal medical
insurance.
c. Private Retirement Plans
i. The Employee Retirement Income Security Act (ERISA) of 1974 regulates private
pension funds. The Pension Benefit Guaranty Corporation provides timely,
uninterrupted payments of voluntary, private-plan benefits through an
employer insurance program.
ii. Employee contributions to private plans vest immediately, and employee rights to
employer contributions vest after five years of employment.
iii. Under ERISA, pension managers must invest pension funds cautiously.
d. Unemployment Insurance- Under the Federal Unemployment Tax Act of 1939,
employers pay into a fund that pays proceeds to unemployed individuals subject to
certain requirements and limits.

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e. Employer-Sponsored Group Health Plans- Under the Health Insurance Portability and
Accountability Act (HIPAA), the collection, use, and disclosure of health information is
regulated, and violations of these provisions are subject to civil and criminal penalties.
f. Affordable Care Act- Under the Affordable Care Act (ACA), most employers with fifty or
more full-time employees are required to offer health-insurance benefits and may receive
tax credits to offset the cost. The cost to an employee must not exceed 9.5 percent of their
income. Violations of these provisions are subject to fines and penalties.
g. COBRA
i. The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 prohibits
the elimination of a worker’s medical, optical, or dental insurance coverage on
the employee’s termination or reduction in hours of the worker’s employment.
ii. Except for those fired for gross misconduct, workers can decide whether to
continue coverage. Coverage must be continued for up to eighteen months
(twenty-nine, if the worker is disabled). A worker who opts to continue
coverage must pay a premium plus an administrative fee.
iii. Penalties for violations include up to 10 percent of the annual cost of the group
plan or $500,000, whichever is less.

IV. Immigration Law

a. The two most important employment-related immigration laws are the Immigration Act of
1990 and the Immigration Reform and Control Act (IRCA) of 1986. The IRCA provided
amnesty to some illegal immigrants and sanctioned employers who hired immigrants
without work authorization.
i. The Immigration Reform and Control Act
1. The IRCA provided amnesty to some illegal immigrants and sanctioned
employers who hired immigrants without work authorization.
2. The IRCA makes it illegal to hire, recruit, or refer for a fee for work in the
United States a person who is not authorized to work here. The
employment of noncitizens—legal or illegal—is controversial.
b. I-9 Employment Verification- The U.S. Citizenship and Immigration Services (CIS)—part
of the U.S. Department of Homeland Security—supplies Form I-9, Employment Eligibility
Verification, which an employer must complete within three days of each employee’s
hiring.
c. The Immigration Act- Persons who immigrate to the United States to work include those
with special skills, or ―extraordinary ability.‖ To hire such individuals, an employer must
petition the CIS. An immigrant employee’s ability to stay in the United States and to switch
jobs here is limited.
V. Labor Unions
a. Federal Labor Laws- Labor legislation outlined briefly in the text includes—

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i. Norris-LaGuardia Act- The Norris-LaGuardia Act of 1932, which protects

peaceful strikes, picketing, and boycotts.
ii. National Labor Relations Act- The National Labor Relations Act (NLRA) of
1935, which established employees’ rights to organize, to engage in collective
bargaining, and to strike.
a. Unfair Labor Practices- The NLRA prohibits employers from
engaging in specific unfair labor practices, including—
2. Interference with employees’ efforts to form, join, or assist labor
organizations or to engage in concerted activities for their mutual aid or
protection.
3. Domination of a labor organization or contribution of financial or other
support.
4. Discrimination in hiring or awarding of tenure to employees based on
union affiliation.
5. Discrimination against employees for filing charges or giving testimony
under the NLRA.
6. Refusal to bargain collectively with employees’ designated
representative.
iii. b. The National Labor Relations Board- The National Labor Relations Board
(NLRB) oversees union elections and prevents employers from engaging in
unfair and illegal union activities and unfair labor practices. The NLRB also
investigates employees’ charges of employers’ unfair labor practices, and can
file a complaint against an employer or issue a cease-and-desist order.
b. Workers Protected by the NLRA- An individual must be an employee or a job applicant
(or a union organizer).
i. Labor-Management Relations Act- The Labor-Management Relations Act (Taft-
Hartley Act) of 1947 allows state right-to-work laws, which makes it illegal to
required union membership for continued employment. The act proscribes
certain union practices, including—
1. A closed shop (which requires union membership as a condition of
employment).
2. A union’s refusal to bargain with an employer.
3. Certain types of picketing.
4. Featherbedding (hiring more employees than necessary).
ii. Labor-Management Reporting and Disclosure Act- The Labor- Management
Reporting and Disclosure Act (Landrum-Griffin Act) of 1959—
1. Established an employee bill of rights and reporting requirements for
union activities.
2. Regulated internal union business procedures.

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3. Outlawed all secondary boycotts (including hot-cargo agreements, in

which employers agree with unions not to handle, use, or deal in non-
union-produced goods).
c. Union Organization- The first step in union organizing is to have the workers sign
authorization cards.
i. Union Elections
a. Appropriate Bargaining Unit- The proposed union must represent
an appropriate bargaining unit (employees whose skills, duties,
and pay are similar).
b. NLRB Rules Expedite Elections- An employer must hold a pre-
election hearing within eight days after receiving a petition for an
organizing election. Before the hearing, the employer must file a
―statement of position‖ setting out its anti-union arguments.
c. Voting- The NLRB supervises the election to ensure voter
eligibility and voting secrecy. If, in the election, the union receives
majority support, the NLRB certifies the union as the employees’
bargaining representative.
ii. Union Election Campaigns
1. During an election campaign, the employer can limit campaign activities
on company property during working hours, for a legitimate business
reason, and can campaign against the union.
2. If the employer issued threats or engaged in other unfair labor practices,
the NLRB may certify the union even if it loses theelection.
d. Collective Bargaining- The central legal right of a union is to engage in collective
bargaining on members’ behalf. Wages, hours of work, and other conditions of
employment may be discussed during collective bargaining sessions. Subjects for
negotiation include—
1. Workplace safety.
2. Employee discounts.
3. Health care plans.
4. Pension funds.
5. Apprentice and scholarship programs.
ii. Strikes- When collective bargaining results in an impasse, a union maycall a
strike.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. What are some important provisions of the Fair Labor Standards Act? The Fair Labor Standards Act (FLSA)
of 1938, which covers employers engaged in interstate commerce, regulates child labor, maximum hours,
and minimum wages. Children under sixteen years of age cannot work full-time except for a parent
under certain circumstances. Children between sixteen and eighteen cannot work in hazardous jobs or in
jobs detrimental to their health and wellbeing. Employees who agree to work more than forty hours a
week must be paid no less than one and a half times their regular pay for hours over forty. Certain
employees are exempt. A minimum wage ($4.25 per hour) must be paid to employees in certain industries.
Wage includes the reasonable cost to furnish employees with board, lodging, and other facilities if the
employer customarily furnishes them.

2. Do federal labor laws cover all workers? No. Although coverage of the federal labor laws is broad
and extends to all employers whose business activity either involves or affects interstate commerce.
However, some workers are specifically excluded from these laws due to either the existence of industry-
specific legislation. Other workers such as farm laborers and domestic servants are excluded from most
federal labor laws but are not covered by other legislation.

3. How does the law protect the privacy of employees? The Employee Polygraph Protection Act of 1988
prohibits most employers from requiring, causing, suggesting, or requesting that employees or applicants
take polygraph tests; using, accepting, referring to, or asking about the results of polygraph tests taken by
employees or applicants; and taking or threatening negative employment-related action against
employees or applicants based on results of polygraph tests or refusal to take the tests. (Employers not
covered include the government, certain security service firms, and companies making and distributing
controlled substances. Others may use the tests when investigating losses from theft.) The Constitution
restricts some employers— especially the government—from drug testing, but use of the tests has been
upheld when there was a reasonable basis for suspecting a government employee’s use of drugs or when
drug use in a government job could threaten public safety. Some state constitutions or statutes may apply
to inhibit private employers’ testing, a collective bargaining agreement may provide protection against
testing, or in some cases, employees may bring an action for invasion of privacy. In monitoring employees’
performance generally, the Omnibus Crime Control Act of 1968 or a state statute may prohibit listening to
employees’ telephone conversations. Otherwise, there is little regulation of electronic monitoring of
employees, and an employer may be able to avoid these laws by informing employees that they are
subject to monitoring. An employee may bring an action for invasion of privacy.
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:

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o Wrongful Discharge
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 27:
Employment Discrimination

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 274
Cengage Supplements.................................................................................................................................................. 274
List of Student Downloads ....................................................................................................................................... 274
Chapter Objectives ....................................................................................................................................................... 274
Key Terms ........................................................................................................................................................................ 274
What's New in This Chapter ........................................................................................................................................ 275
Chapter Outline ............................................................................................................................................................. 276
Discussion Questions ...................................................................................................................................................... 280
Additional Activities and Assignments ....................................................................................................................... 281
Appendix......................................................................................................................................................................... 283
Generic Rubrics.......................................................................................................................................................... 283

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Standard Writing Rubric ......................................................................................................................................... 283

Standard Discussion Rubric ...................................................................................................................................... 283

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further explore concepts related to the employer-employee
relationship, especially those which qualify as discriminatory.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

108. Distinguish between disparate-treatment and disparate-impact discrimination

109. Identify the federal act that prohibits age discrimination

110. Explain how employers can avoid liability for disability-based discrimination

111. Identify the defenses to employment discrimination claims

Key Terms
affirmative action: Job-hiring policies that give special consideration to members of protectedclasses in
an effort to overcome present effects of past discrimination.
bona fide occupational qualification (BFOQ): An identifiable characteristic reasonably necessary to the
normal operation of a particular business. Such characteristics can includegender, national origin, and
religion, but not race.
business necessity: A defense to an allegation of employment discrimination in which the employer
demonstrates that an employment practice that discriminates against members of a protected class is
related to job performance.
constructive discharge: A termination of employment brought about by making the
employee’s working conditions so intolerable that the employee reasonably feels compelled to leave.
disparate-impact discrimination: Discrimination that results from certain employer practices or procedures
that, although not discriminatory on their face, have a discriminatory effect. disparate-treatment
discrimination: A form of employment discrimination that results when an employer intentionally
discriminates against employees who are members of protected classes.

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employment discrimination: Unequal treatment of employees or job applicants on the basis of race, color,
national origin, religion, gender, age, or disability; prohibited by federal statutes. prima facie case: A case
in which the plaintiff has produced sufficient evidence of his or her claim that the case will be decided for
the plaintiff unless the defendant produces evidence to rebut it.
protected class: A group of persons protected by specific laws because of the group’s defining
characteristics, including race, color, religion, national origin, gender, age, and disability. seniority
system: A system in which those who have worked longest for an employer are first inline for promotions,
salary increases, and other benefits, and are last to be laid off if the workforce must be reduced.
sexual harassment: The demanding of sexual favors in return for job promotions or other benefits, or
language or conduct that is so sexually offensive that it creates a hostile working environment.
tangible employment action: A significant change in employment status or benefits, such as occurs when
an employee is fired, refused a promotion, or reassigned to a lesser position. [return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New chapter-opening scenario on a worker who converted to the Muslim faith and was
eventually fired for poor work performance.
 1 New Case
o Case Analysis 35.1: Bauer v. Lynch (2016)—on whether differing physical fitness
standards for males and females constituted gender discrimination.
o Case 35.2: Young v. United Parcel Service, Inc. (2015)—the employer refused to
accommodate a pregnant employee with a similar restriction. Did this refusal
constitute a violation of the Pregnancy Discrimination Act?
o New Case 35.3: Franchina v. City of Providence (2018)—a female firefighter claimed that
her male co-workers subjected her to a hostile working environmentand that the fire
department knew about the harassment but failed to act.
 Retained and Updated Digital Update feature
o Case examples based on 2016 cases.
 4 New Case in Points
o 2017 case on reverse discrimination
o 2016 case on undue hardship regarding religious discrimination
o 2016 case on post-pregnancy discrimination
o 2017 case on pretext and age discrimination
 1 New Concept Summary—to reflect the Uniformed Services Employment and
Reemployment Rights Act in summary of ―Employment Discrimination Laws‖

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 1 New ―A Question of Ethics‖ using all-new IDDR Approach on unintentional

discrimination (based on 2017 case)
 New Unit-Ending Task-Based Simulation feature
[return to top]

Chapter Outline
I. Title VII of the Civil Rights Act of 1964- Title VII of the Civil Rights Act of 1964 and its
amendments prohibit job discrimination against employees, applicants, and union members on the
basis of race, color, national origin, religion, and gender at any stage of employment. Nearly
any employer with fifteen or more employees is covered.
a. The Equal Employment Opportunity Commission- The Equal Employment Opportunity
Commission (EEOC) issues guidelines interpreting the law. Complaints about violations are
registered first with the EEOC. The EEOC has established a priority as to which cases it will
pursue. If the EEOC is unable to resolve a situation and chooses not to sue to enforce the
law, the victim may sue.
b. Knowledge Check: 1 minute total. Test students’ recollection of what qualifies as a
protected class.
c. Intentional and Unintentional Discrimination
i. Intentional Discrimination
A. Establishing a Prima Facie Case- In a disparate-treatment employment
discrimination case, a plaintiff must initially establish a prima facie case
of discrimination. The elements of a prima faciecase are—
a. He or she is a member of a protected class.
b. He or she applied and was qualified for the job in question.
c. He or she was rejected by the employer.
d. The employer continued to seek applicants for the positionor
filled the position with a person not in a protected class.
B. Burden-Shifting Procedure- After the plaintiff establishes a prima facie
case, the employer can offer a defense. If the employer offers a
legitimate defense, the plaintiff, to succeed, must show that it is a pretext
and that discriminatory intent was the real motivation.
ii. Unintentional Discrimination- If a plaintiff challenging an employment practice
or procedure having a discriminatory impact on a protected class can show a
connection between the practice and the impact, he or she makes out a prima
facie case, and no evidence of discriminatory intent is necessary. The burden shifts
to the employer to show that the practice or procedure is justified.
A. Pool of Applicants- A plaintiff can prove disparate impact by
comparing the employer’s work force to the pool of qualified members
of a protected class available in the local labor market

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and relating any disparity to the employer’s practice or procedure.

B. Rate of Hiring- A plaintiff can also prove disparate impact by
comparing the employer’s hiring rates for members of the majority class
and members of a protected class. Disparate impact is shown if the rate
for the latter is less than four-fifths of the rate for the former.
d. Discrimination Based on Race, Color, and National Origin
i. Race includes the ancestry or ethnic characteristics of a group of persons. National
origin refers to the country of a person’s birth or their ancestry or culture.
ii. If a company’s standards or policies for selecting or promoting employees have
the effect of discriminating against employees or job applicants on the basis of
race, color, or national origin, a presumption of illegal discrimination arises.
iii. The employer must show that the standards or policies have a substantial,
demonstrable relationship to realistic qualifications for the job in question.
iv. Discrimination against these protected classes in regard to employment conditions
and benefits is also illegal.
e. Discrimination Based on Religion- Title VII prohibits government employers, private
employers, and unions from discriminating against persons because of their religion.
f. Discrimination Based on Gender- Employers may not discriminate against employees on
the basis of gender.
i. Gender Must Be a Determining Factor- In a gender discrimination suit, a plaintiff
must show that gender was a determining factor in an employer’s decision to hire,
fire, or promote.
ii. Pregnancy Discrimination- The Pregnancy Discrimination Act of 1978 expanded
Title VII. An employer must treat an employee temporarily unable to perform her
job due to a pregnancy-related condition the same way as the employer would
treat others similar in ability to work.
iii. Post-Pregnancy Discrimination- An employer must continue to reasonably
accommodate an employee’s medical conditions related to pregnancy and
childbirth after a pregnancy has ended.
iv. Wage Discrimination
A. The Equal Pay Act of 1963 prohibits gender-based discrimination in
wages paid for equal work when a job requires equal skill, effort, and
responsibility under similar conditions.
B. Under the Lily Ledbetter Fair Pay Act of 2009, each time a person is
paid discriminatory wages, benefits, or compensation, a cause of action
arises and the victim has 180 days to file a complaint.

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g. Discrimination against Transgender Persons- A growing number of federal courts are

holding that Title VII’s protection against gender discrimination applies to transgender
persons.
h. Constructive Discharge- Constructive discharge occurs when an employer causes working
conditions to be so intolerable that a reasonable person in an employee's position would
feel compelled to quit.
i. Proving Constructive Discharge- An employee must show that the employer
caused the intolerable conditions, and knew, or had reason to know, of the
conditions and failed to correct them within a reasonable time.
ii. Applies to All Title VII Discrimination- An employee can seek damages for loss of
income, including back pay.
i. Sexual Harassment- Sexual harassment can take two forms—
i. Quid pro quo harassment occurs when job opportunities, promotions, and the like
are doled out on the basis of sexual favors.
ii. Hostile-environment harassment occurs when an employee is subjected to sexual
comments, jokes, or physical contact perceived to be offensive.
iii. Harassment by Supervisors- To be liable for sexual harassment, an employer
must have taken a tangible employment action against an employee. Employers
have an affirmative defense if—
A. They took ―reasonable care to prevent and correct promptly any
sexually harassing behavior‖ (such as establishing effective harassment
policies and complaint procedures).
B. The employee suing for harassment failed to follow these policies and
procedures.
iv. Online Harassment- Employers may avoid liability if they take prompt remedial
action. Privacy rights must be considered if the action includes electronic
monitoring of employees.
j. Retaliation by Employers- Title VII prohibits retaliation for complaining about a Title VII
violation, including sexual harassment.
k. Remedies under Title VII- A plaintiff may obtain reinstatement, back pay, retroactive
promotions, and damages. Compensatory damages are available only in cases of
intentional discrimination. Punitive damages may be recovered in some cases, but the sum
of compensatory and punitive damages is limited to specific amounts against specific
employers.

II. Discrimination Based on Age

 The Age Discrimination in Employment Act (ADEA) of 1967 prohibits employment
discrimination on the basis of age against individuals forty years of age or older. The
ADEA also covers claims of retaliation for complaining about agediscrimination.
 The ADEA applies to federal and private employers engaged in interstate commerce with
twenty or more employees. The EEOC administers the act.

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a. Procedures under the ADEA- A plaintiff must show that unlawful agediscrimination
was the reason for an adverse employment action.
b. Prima Facie Age Discrimination- To establish a prima facie case under theADEA, a
plaintiff must show that—
i. He or she is a member of a protected age group.
ii. He or she is qualified for the position from which he or she wasdischarged.
iii. He or she was discharged because of age discrimination.
c. Pretext- If the employer offers a legitimate defense, the plaintiff, to succeed, must
show that it is a pretext.
d. Replacing Older Workers with Younger Workers- Termination of an older employee
might arguably be for cost-cutting, not discriminatory, reasons.
e. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small groups
and consider the following: A week after Bella turns 40 years old, she is fired from her
job and is replaced by Kim who is 22 and just graduated from college. Determine
whether each of the following is an appropriate defense for the employer for a claim of
age discrimination.
i. Kim can be paid less, because he has less experience.
ii. Kim is the son of the company’s owner and he wants Bella’s job.
iii. Bella has too many family obligations that cause her to miss workfrequently.
iv. Bella has only been achieving ―satisfactory‖ scores on her performance
reports and the company would like a ―high achiever‖ in the role.
v. Because of Kim’s youth, he has a better understanding of the targeted
demographic of the company, important to the role.

III. Discrimination Based on Disability- The Americans with Disabilities Act (ADA) of 1990 was
designed to eliminate discriminatory hiring and firing practices that prevent otherwise qualified
disabled workers from fully participating in the national labor force. Essentially, an employer must
reasonably accommodate disabled persons unless to do so would constitute an undue hardship.
a. What Is a Disability?- A plaintiff must prove that he or she has a disability. Some
conditions (kleptomania) are specifically excluded. The ADA defines a disability generally
as an impairment that ―substantially limits‖ major life activities. More specifically, a
disability in an individual is—
i. A physical or mental impairment that substantially limits one or moremajor
life activities.
ii. A record of such an impairment.
iii. Being regarded as having such an impairment.
iv. Conditions that have been considered disabilities include AIDS, blindness, cancer,
diabetes, and morbid obesity. The ADA also covers adverse employment actions
against individuals who associate with persons with disabilities.

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b. Procedures under the ADA- A plaintiff must first pursue a claim for discrimination based
on disability through the EEOC. If the EEOC decides not to sue, the plaintiff can bring a
suit. Remedies are similar to those under Title VII (reinstatement, back pay, and
compensatory and punitive damages. Criminal fines are also possible. To succeed in an
ADA case a plaintiff must initially show—
i. He or she has a disability.
ii. He or she is otherwise qualified for the job in question.
iii. He or she was excluded by the employer solely because of the disability.
c. Reasonable Accommodation- An employer cannot refuse to hire a disabled person who
is otherwise qualified for a particular position. That the employer may have to make
some reasonable accommodation, such as installing ramps for a wheelchair, will not cause
an applicant to be unqualified. Employers should consider employees’ preferences in
determining accommodations.
i. Undue Hardship- Employers who do not wish to make such accommodations must
show that the accommodations will cause ―undue hardship.‖ This is subject to a
case-by-case determination.
d. Knowledge Check: 1 minute total. Tests students understanding of the Americans with
Disabilities Act.

IV. Defenses to Employment Discrimination- Defenses to charges of employment discrimination

include the following.
a. Business Necessity- An employer may defend against a claim of disparate- impact
discrimination by asserting that a practice that has a discriminatory effect is a business
necessity. If there is a definite connection between the practice and business, the practice
may stand. The text provides an example of a high-school diploma (the lack of which may
effectively discriminate against some minorities).
b. Bona Fide Occupational Qualification (BFOQ)- A trait must be essential to a job to
qualify as a BFOQ if discriminating against those who do not have the trait amounts to
otherwise illegal employment discrimination.
c. Seniority Systems- If no present intent to discriminate is shown, and promotions or other
job benefits are distributed according to a fair seniority system, an employer has a good
defense against some employment-discrimination suits, including those brought under the
ADA.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is sexual harassment and under what circumstances might an employer be liable? Sexual
harassment happens when promotions and so on are parceled out for sexual favors or when, in an
employment environment, a worker must put up with comments or physical contact

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that is perceived as sexually offensive. An employer may be liable when an employee does the harassing,
if the employer knew, or should have known, about the harassment and failed to take corrective action, or
if the employee was in a supervisory position.

2. What steps should employers take within an organization to reduce the likelihood that supervisors
will make negative comments concerning workers’ ages? Employers must have in place effective anti-
discrimination policies that go beyond just asserting that the firm is in compliance with existing rules. The
focus is on acts in the workplace. Hence, discriminatory comments cannot be tolerated. It must be made
clear to all workers that such comments are not acceptable and are grounds for dismissal. Even more,
supervisors must be trained about the requirements of Title VII and other relevant statutes that impact the
workplace.

3. How is it possible for jurors and judges to overcome their own prejudices in deciding cases in
which gender or another protected trait plays a key role? Bias can be subtle, unconsciously influencing the
decisions of even the most professedly unbiased decision makers. It is the task that these individuals are
given, after undergoing questioning to determine and challenge their biases and being reminded not to let
prejudice sway their judgment. Jurors can be given instructions that set out considerations for them to
evaluate the circumstances of a case and avoid undue prejudices. Is it possible to fully protect
employees from discrimination in the workplace? No, because bias can be subtle, unconsciously
influencing the actions of even the most avowedly unbiased individuals. Also, ―fully protect‖ is a somewhat
vague notion. Yes, if it remains a legal and moral goal, because over time, people are capable of
overcoming even the most entrenched, rationalized prejudices.

4. Equal employment opportunity is not a universal policy, and some countries restrict the role of
women in employment. Should a U.S. firm doing business is those countries respect this position? In
some instances, failing to respect the restrictive nations’ political, social, religious, and cultural traditions
could undercut a U.S. firm’s ability to do business in those countries. In other circumstances, supporting
different policies might effect important changes to the status of women and foster increased economic ties.
In most cases, deciding which course to pursue can be a subjective determination, based in part on ethical
guidelines.

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Additional Activities and Assignments

9. Business Case: Employment Law
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. What are the laws/regulations that will help Jamie and the hotel’s management
determine whether or not they can terminate Pierre?
2. Should appearance or weight be considered protected classes for employees?

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3. What about food choices outside of work? What about high cholesterol?
4. Does the hotel have a valid business reason for developing a policy whichlimits
employee body mass index?
5. What about high cholesterol or fast-food consumption?
6. Should the policy apply companywide or only to certain jobs within the hotel?
7. Does it matter what is listed for the duties on an employee’s job description?
d. Role Play: Break into small groups. Imagine you are the owners of a new hotel and are
interested in developing an employee manual and a hiring guide for your HR department.
In consideration of your business needs (from a financial perspective, a safety
perspective, and a corporate-social responsibility perspective), how should your company
regulate off-duty, but legal, behavior (such as eating fast food, being overweight,
skydiving, or smoking) if it will save the company money? Develop recommendations for
HR on how to hire within those parameters while still following the law (such as
appropriate interview questions, relevant language for a job description, and/or
language for an employee handbook). Would your answers change if this were a
company that has an interest in modeling healthy behavior, such as a hospital?
e. Writing Assignment: Assume that while operating the shuttle one day after the
publication of the new policy, Pierre had a heart attack, causing the shuttle to
crash and the three guests inside to be injured. As part of the guests’ lawsuit against the
company for negligence, they allege that the company knew or should have known that
Pierre was physically unfit to operate a shuttle, was at high risk for a heart attack, and
should have taken steps to ensure their safety. What responsibilities did the company
have (1) to protect customer safety and (2)to ensure they are not liable for discriminatory
conduct? Do you think the
company should legally be responsible for the guests’ injuries before crafting the policy?
What about after crafting the policy? Explain why or why not.
f. Ethics Question: Assume that the company provides the medical evaluations of its
employees to the health insurance carrier for a premium adjustment. Upon submission, the
health insurance carrier tells the company that if it were to eliminate its three unhealthiest
people, it would notice a significant drop in premiums. As the CEO, you calculate that the
money you save in those premiumswould be significant. In fact, if you terminated the three
unhealthy people, their salaries could be used to hire three healthy people, plus a fourth
person could behired from the cost savings of the reduced premium. What decision do
you makeand why?

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 28:
Types of Business Organizations

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 286
Cengage Supplements.................................................................................................................................................. 286
List of Student Downloads ....................................................................................................................................... 286
Chapter Objectives ....................................................................................................................................................... 286
Key Terms ........................................................................................................................................................................ 286
What's New in This Chapter ........................................................................................................................................ 287
Chapter Outline ............................................................................................................................................................. 288
Discussion Questions ...................................................................................................................................................... 294
Additional Activities and Assignments ....................................................................................................................... 295
Appendix......................................................................................................................................................................... 296
Generic Rubrics.......................................................................................................................................................... 296

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Standard Writing Rubric ......................................................................................................................................... 296

Standard Discussion Rubric ...................................................................................................................................... 297

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Purpose and Perspective of the Chapter

The purpose of this chapter is examine the benefits and drawbacks of sole proprietorships. Further, it
explores partnerships and limited liability companies.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

112. Describe a sole proprietorship

113. Identify the features of a general partnership

114. Outline the elements of a limited partner

115. List the advantages of a limited liability company

Key Terms
Sole proprietorship: The simplest form of business organization, in which the owner is the business. The
owner reports business income on his or her personal income tax return and is legally responsible for
all debts and obligations incurred by the business.
articles of partnership: A written agreement that sets forth each partner’s rights and
obligations with respect to the partnership.
dissociation: The severance of the relationship between a partner and a partnership or between a
member and a limited liability company.
dissolution: The formal disbanding of a partnership, corporation, or other business entity. For instance,
partnerships can be dissolved by acts of the partners, by operation of law, or by judicial decree.
general partner: In a limited partnership, a partner who assumes responsibility for the
management of the partnership and has full liability for all partnership debts.
joint and several liability: In partnership law, a doctrine under which a plaintiff may sue all of the
partners together (jointly) or one or more of the partners separately (severally, or individually).
joint liability: In partnership law, a doctrine under which a plaintiff must sue all of the partners as a
group, but each partner can be held liable for the full amount.

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limited liability partnership (LLP): A hybrid form of business organization that is used mainlyby
professionals who normally do business in a partnership. An LLP is
a pass-through entity for tax purposes, but a partner’s personal liability for the malpractice of other
partners is limited.
limited partner: In a limited partnership, a partner who contributes capital to the partnership but has no
right to participate in its management and has no liability for partnership debts beyond the amount of
her or his investment.
limited partnership (LP): A partnership consisting of one or more general partners and one ormore
limited partners.
partnership: An agreement by two or more persons to carry on, as co-owners, a business forprofit.
partnership by estoppel: A partnership imposed by a court when nonpartners have held themselves
out to be partners, or have allowed themselves to be held out as partners, and others have
detrimentally relied on their misrepresentations.
pass-through entity: A business entity that has no tax liability. The entity’s income is passed through to
the owners, and they pay taxes on the income.
winding up: The second of two stages in the termination of a partnership or corporation, in which the
firm’s assets are collected, liquidated, and distributed, and liabilities are discharged. articles of
organization: The document that is filed with the appropriate state official, usually the secretary of
state, when a limited liability company is formed.
limited liability company (LLC): A hybrid form of business enterprise that offers the limited liability of
a corporation and the tax advantages of a partnership.
member: A person who has an ownership interest in a limited liability company.
operating agreement: An agreement in which the members of a limited liability company set forth the
details of how the business will be managed and operated.

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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case
o Case Analysis 36.1: A. Gadley Enterprises, Inc. v. Department of Labor and Industry Office
of Unemployment Compensation Tax Services (2016)—on whether liability for the unpaid
unemployment compensation taxes of a sole proprietorship remained with the seller of
the business or must be assumed by the buyer.
o New Case 36.2: S&P Brake Supply, Inc. v. Daimler Trucks North America, LLC (2018)—
a franchisee contended that its franchisor did not have good cause to terminate the
franchise.
o Spotlight Case 36.3: Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. (2011)—the
importance of good faith and fair dealing in a franchise relationship is underscored by
the consequences of the franchisor’s acts.

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 1 New Case in Point

o 2013 case on the disadvantages of a sole proprietorship
 1 New Case Problem
o 2018 case on location of the franchise
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on sole proprietorships(based
on 2017 case)
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Chapter Outline
I. Sole Proprietorships- The simplest form of business is a sole proprietorship. Sole proprietorships
constitute over two-thirds of American businesses. They are usually small enterprises—99 percent
of those in the United States earn less than $1 million per year.
a. Advantages of the Sole Proprietorship- Sole proprietorships are the easiest and least
expensive business forms to set up.
i. Taxes- Sole proprietors pay only personal income taxes on business profits.
ii. Flexibility- Sole proprietorships are more flexible to operate than a partnership
or a corporation.
b. Disadvantages of the Sole Proprietorship- The proprietor bears all of the financial risk of
losses and liability, and the ability to raise capital is limited.
i. Personal Assets at Risk- Creditors can satisfy a sole proprietor’s business debts
through his or her personal assets. The liability is unlimited.
ii. Lack of Continuity and Limited Ability to Raise Capital- A sole proprietorship
ends when the owner dies.
c. Knowledge Check: 1 minute total. Tests students’ understanding of the benefits of a sole
proprietorship.
II. Partnerships
a. Agency Concepts and Partnership Law - Partnership law is based on agency law. The
fiduciary ties that bind agent and principal also bind partners. In a non- partnership
agency relationship, the agent usually does not have an ownership interest in the business
nor is the agent obligated to bear a portion of the ordinary business losses.
i. The Uniform Partnership Act- The Uniform Partnership Act (UPA), as adopted
by the states, governs the operation of partnerships in the absence of an
express agreement among the partners to the contrary.
ii. Definition of a Partnership - Under the UPA, a partnership is ―an
association of two or more persons to carry on as co-owners a business for
profit‖ [UPA 101(6)]. Intent is a key element [UPA 401(g)]. The Revised Model
Business Corporation Act and the UPA permit a corporation to be a partner.

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iii.
Essential Elements of a Partnership- Sharing profits alone does not qualify,
but sharing both profits and losses might. The three essential elements implicit in
the definition of partnership are—
1. A sharing of profits or losses.
2. A joint ownership of the business.
3. An equal right in the management of the business.
4. The Sharing of Profits and Losses- Sharing both profits and losses
creates a presumption that a partnership exists unless the profits are
received as payment of— [UPA 202(c)(3)]
a. A debt by installments or interest on a loan.
b. Wages of an employer or for the services of anindependent
contractor.
c. Rent to a landlord.
d. An annuity to a surviving spouse or representative of a
deceased partner.
e. A sale of the goodwill of a business or property.
5. Joint Property Ownership- Joint ownership of property does notalone
create a partnership. The parties’ intentions are key.
iv. Entity v. Aggregate - A partnership is sometimes called a firm or a company,
terms that connote an entity separate and apart from its aggregate members.
Generally, the law treats a partnership as an independent entity.
v. Tax Treatment of Partnerships - For at least one purpose—federal income
taxes—a partnership is regarded as an aggregate of individual partners.
b. Formation and Operation- A partnership statement may (or may not) be filed with the
appropriate state office.
i. The Partnership Agreement- A partnership agreement may be implied unless
its terms require a writing (such as a land transfer). Articles of partnership can
include virtually any terms, as long as they are not illegal or contrary to public
policy [UPA 103]. Absent the partners’ agreement, the law imposes certain
rights and duties.
1. Duration of the Partnership - A partnership for a term ends on a specific
date or the completion of a particular project. Dissolution without consent
of all partners before the end of the term is a breach of the agreement.
If there is no fixed term, a partnership is at will, and any partner can
dissolve the firm at any time.
ii. Partnership by Estoppel
1. Liability Imposed - A person who represents himself or herself to be a
partner in an actual or alleged partnership is liable to any third
person who acts in good faith reliance.
2. Non-partner as Agent- When a partner represents that a non- partner is
a member of the firm, the non-partner is regarded as an agent of the
firm.

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c. Rights of Partners
i. Management Rights - All partners have equal rights in management [UPA
401(f)]. Each partner has one vote, and the majority rules in ordinary matters.
Extraordinary matters may require unanimous consent to [UPA 301(2),
401(j)]—
1. Admit new partners or enter a new business.
2. Amend partnership articles.
3. Enter a new line of business.
ii. Interest in the Partnership- Unless provided otherwise, profits and losses are
shared equally, regardless of the amount of a partner’s capital contribution
[UPA 401(b)].
iii. Compensation- Conducting partnership business is a partner’s duty and
generally not compensable.
iv. Inspection of the Books- Books must be kept at the firm’s principal office.
Every partner, active or inactive, is entitled to inspect all books and records on
demand (and can make copies) [UPA 403]. The personal representative of a
deceased partner’s estate has the same right
v. Accounting of Partnership Assets or Profits- An accounting can be called for
voluntarily or compelled by a court. Formal accounting occurs by right in
connection with dissolution, but a partner also has the right to an accounting in
other circumstances, listed in the text, andin UPA 405(b).
vi. Property Rights- Property acquired in the name of the partnership or a
partner, or with partnership funds, is normally partnership property [UPA 204].
A partner can use partnership property only on the firm’s behalf [UPA 401(g)].
A partner is not a co-owner of this property and has no interest in it that can
be transferred [UPA 501].
d. Duties and Liabilities of Partners- Every act of a partner concerning partnership business
and every contract signed in the partnership name bind the firm [UPA 301(1)].
i. Fiduciary Duties- A partner owes the firm and its partners duties of care and
loyalty [UPA 404].
1. Duty of care—a partner must refrain from ―grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law‖
[UPA 404(c)].
2. Duty of loyalty—a partner must account to the firm for ―any
property, profit, or benefit‖ in the conduct of its business or from a use of
its property, and refrain from dealing with the firm as an adverse party
or competing with it [UPA 404(b)].
3. These duties cannot be waived, and partners must comply with the
obligations of good faith and fair dealing, but a partner may pursue his
or her own interests without automatically violating these duties [UPA
103(b). 404(d)].

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ii.Authority of Partners- Each partner is a general agent of the partnership in

carrying out the usual business of the firm, unless designated otherwise.
1. Limitations on Authority- A partnership may limit a partner’s capacity
to act as the firm’s agent by filing a ―statement of partnership
authority‖ in a designated state office—though this is normally effective
only with respect to third parties who know of it.
2. The Scope of Implied Powers- Partners can exercise all implied powers
reasonably necessary and customary to carry on partnership business,
including the power to contract on its behalf.
iii. Liability of Partners
1. Joint Liability- At one time, partners were jointly liable for partnership
obligations. A creditor had to sue all of the partners as a group, but each
could be liable for the entire judgment. Partnership assets had to be
exhausted before individual partners’ assets could be reached.
2. Joint and Several Liability- Partners are jointly liable and severally
liable for partnership obligations, including contracts, torts, and breaches
of trust [UPA 306(a)]. But a creditor cannot collect a partnership debt
from the partner of a non-bankrupt partnership without first attempting to
collect from the partnership [UPA 307(d)].
3. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs
or small groups and consider the following scenario: Maria and
Mohammed decide to create a dog walking business to help them earn
extra money while in college. They do not fill out any paperwork. They
put fliers around their neighborhood offering dog walking services. There
are no costs to operate the business, and anytime one of them earns
money they deposit it into their own bank account. They have a
few ―regular clients‖ and sometimes Maria will walk the dogs and
sometimes Mohammed does. One day, while Maria is walking one of
those dogs, it gets involved in a fight with another dog and is injured. The
dog owner wants to hold Maria and Mohammed liable. Is Mohammed at
risk for personal liability?
e. Dissociation and Termination- When a partner ceases to be associated in the carrying
on of the partnership business, he or she can have his or her interest bought by the firm,
which otherwise continues to do business.
i. Events That Cause Dissociation- Under UPA 601—
1. A partner may give notice and withdraw.
2. The occurrence of an event specified in the partnership agreementcan
cause dissociation.
3. A partner might be expelled by the firm.
4. A partner might be expelled by a court.

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5. A partner dissociates by declaring bankruptcy, assigning his or her

interest, or through death or incapacity.
ii. Effects of Dissociation
1. Rights and Duties- On dissociation, a partner’s right to participate in the
firm’s business ends [UPA 603]. The duty of loyalty also ends, and the
duty of care continues only with respect to events that occurred before
dissociation, unless the partner participates in winding up.
2. Buyouts- The partner’s interest in the firm must be purchased according to
the rules in UPA 701.
3. Liability to Third Parties- To avoid liability for obligations under a
theory of apparent authority, a partnership should notify its creditors of a
partner’s dissociation and file a statement of dissociation in the
appropriate state office [UPA 704].
f. Partnership Termination
i. Dissolution
1. A partnership may be dissolved by the partners’ agreement or
dissociation of a partner [UPA 801, 802].
2. A partnership for a definite term or undertaking is dissolved whenthe
term expires or the undertaking is accomplished.
3. A partnership is dissolved if an event occurs that makes itimpossible to
continue lawfully [UPA 801(4)].
4. A court may also order dissolution when it deems it impractical forthe firm
to continue.
ii. Winding Up and Distribution of Assets- After dissolution and notice, partners
complete transactions begun and not finished (but they can create no new
obligations).
1. Duties and Compensation- Partnership assets are collected, debts are
paid, the values of partners’ interests in the partnership are accounted
for, and profits and losses distributed. A partner is entitled to
compensation for these efforts.
2. Creditors’ Claims- Under UPA 807, the priorities for the distribution of
partnership assets are payment of debts, return of capital, and
distribution of profits.
g. Limited Partnerships- Most states and the District of Columbia have adopted the
Revised Uniform Limited Partnership Act (RULPA). The key difference between general
and limited partnerships is the limited liability of limited partners.
i. Formation of an LP- Formation of a limited partnership is a public, formal
proceeding: there must be two or more partners (at least one of whom must
be a general partner), and a certificate of limited partnership must be signed
and filed with a designated state official.
ii. Liabilities of Partners in a Limited Partnership

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1. The liability of a limited partner for the firm’s obligations is limitedto the
capital that the partner contributes to the firm [RULPA 502].
2. A limited partner who participates in the management of the firmwill be
as liable as a general partner, however [RULPA 303].
3. If the sole general partner is a corporation, no one is personallyliable
for the firm’s obligations.
iii. Rights and Duties in a Limited Partnership- Limited partners have essentially
the same rights as general partners except for the right to participate in
management.
iv. Discussion Activity: 5-10 minutes total. As a class, discuss the following: A
partnership is winding up its affairs and has approximately
$100,000 in assets. It also has the following:
1. $50,000 in debt owed to suppliers
2. $20,000 in loan debt (from one general partners to the business)
3. The business has 1 general partner whose only financial contribution was
the loan and 3 limited partners who each contributed $15,000 at the
start of the business. There is no partnership agreement.
4. Who gets paid? What amounts? In what order?
h. Limited Liability Partnerships- Family businesses and professional services often use the
limited liability partnership (LLP) form.
i. Formation of an LLP- An LLP is formed in compliance with state statutes by
filing in a central office an initial form and later annual reports. The business
name must include ―limited liability partnership‖ or ―LLP‖ [UPA 1001, 1002].
The statutory rules (UPA) and common law of partnership apply.
ii. Liability in an LLP- An LLP allows professionals to avoid personal liability for
the malpractice of other partners (but of course not their own). The UPA
exempts partners from personal liability for any partnership obligation,
―whether arising in contract, tort, or otherwise‖ [UPA 306(c)].

III. Limited Liability Companies- State statutes govern limited liability companies (LLCs). Some of
these statutes are based on the Uniform Limited Liability Company Act (ULLCA) or the revised
version (Re-ULLCA).
i. Advantages of the LLC
i. Limited Liability- An LLC offers the limited liability of a corporation— the
liability of its members is limited to the amount of their investments.
ii. No limit on number of members
iii. Members can participate in management activities
iv. Flexibility in Taxation

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1. LLCs with two or more members can elect to be taxed as either a

partnership or a corporation. If no choice is made, an LLC is taxed as a
partnership.
2. One-member LLCs are taxed as sole proprietorships unless they elect to
be taxed as corporations.
v. Management and Foreign Investors- Advantages of LLCs include its flexible
operations and management characteristics. Foreign investors can be members.
j. Disadvantages of the LLC- These include the lack of uniformity among state LLC statutes and
case law. Generally, courts apply to a foreign LLC the law of the state in which the LLC
was formed.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. Because the Internet has made it possible for sole proprietorships to do business worldwide without
greatly increasing their costs, should they be considered, for some purposes, the equivalent of other
business forms? Why or why not? Probably not. Most sole proprietorships remain small—what may
constitute large sales for a small one-owner enterprise would be dwarfed by the sales of most
associational business forms. Global distribution capabilities cannot convert a sole proprietorship into a
corporation with its limited liability and other attributes. And to expand the definition of ―corporation‖ to
include sole proprietorships would unrealistically burden the owners in terms of court appearances and in
other situations.

1. What are the three essential elements necessary (but not necessarily sufficient) to form a
partnership? The Uniform Partnership Act defines a partnership as ―an association of two or more
persons to carry on as co-owners a business for profit.‖ In resolving disputes over whether partnership
status exists, courts will look for the following three elements implicit in this definition: (1) a sharing of
profits or losses; (2) a joint ownership of the business; and (3) an equal right in the management of the
business.

2. What consequences result from a limited partner’s attempt to manage the affairs of the limited
partnership? A limited partner is not personally liable for the debts of the partnership so long as he or
she refrains from participating in the management of the partnership. If the limited partner becomes too
heavily involved in running the daily affairs of the partnership, then the limited partner will be personally
liable for any debts arising from his managerial activities.

3. What are the characteristics of a limited liability partnership (LLP)? An LLP is similar to an LLC. The
difference between them is that an LLP is designed more for professionals who normally do business as
partners in a partnership. The major advantage of the LLP is that it allows a partnership to continue as a
pass-through entity for tax purposes but limits thepersonal liability of the partners.

4. Why are LLCs and partnerships attractive to businesspersons? For many businesspersons,

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these business forms combine the tax advantages of partnerships with the limited liability of corporations.
The income of the firm is passed through to the members or the partners, rather than being taxed at the
organization’s level. Even one-member LLCs may realize the tax advantage that accrues from not being
taxed as a corporation (unless the LLC elects otherwise). Also, the members or the partners of the firm are
not usually liable beyond the extent of their investment in the firm for the debts and other obligations of
the firm.
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Additional Activities and Assignments

10. Business Case: Business Organizations
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. What are the challenges associated with a court determining whether a
partnership exists, where the partners never intended to form a business
association?
2. What kinds of behaviors will a court consider to show intent?
3. When would it be fair for a partner to receive less than an equal split of the
profits?
4. Should a partner who puts in only work to the partnership be obligated to pay a
portion of the debt of the partnership at dissolution?
5. Should a partner be liable for debts incurred by the partnership with whichthey do
not agree or did not know about?
d. Role Play: Divide into small groups of three or more with a portion of each group
representing (1) Tristan, (2) Lea, and (3) Vlad. Assume that Tristan has told the group, ―My
daughter just graduated from an MBA program, and I want her to get some real-world
experience. I would like to bring her in as a partner. She has given me $10,000 from her
savings as an investment in the project, and I’ve asked her to review our marketing
strategy.‖ From the perspectives of Tristan, Lea, and Vlad, develop the following
arguments (1) whether Tristan’s daughter should or should not be considered a partner, (2)
how much of the profits she should receive if she is considered a partner, and (3) how her
contribution will benefit or hurt your position in the business.
e. Writing Assignment: Thinking about each of the elements that courts will consider,
does a partnership exists between Tristan, Lea, and Vlad?
f. Ethics Question: After the last email exchange with Lea, Vlad became increasingly
angry and decided to develop a competing next-generation version of the app on his
own. Does Vlad still owe any legal or ethical duty to Tristan and Lea, or is he free to enter
the marketplace on his own?

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 29:
Formation and Ownership of a Corporation

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 299
Cengage Supplements.................................................................................................................................................. 299
List of Student Downloads ....................................................................................................................................... 299
Chapter Objectives ....................................................................................................................................................... 299
Key Terms ........................................................................................................................................................................ 299
What's New in This Chapter ........................................................................................................................................ 300
Chapter Outline ............................................................................................................................................................. 301
Discussion Questions ...................................................................................................................................................... 308
Additional Activities and Assignments ....................................................................................................................... 308

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Additional Resources ..................................................................................................................................................... 309

Cengage Video Resources ...................................................................................................................................... 309
Appendix......................................................................................................................................................................... 310
Generic Rubrics.......................................................................................................................................................... 310
Standard Writing Rubric ......................................................................................................................................... 310
Standard Discussion Rubric ...................................................................................................................................... 310

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Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the formation and financing of a corporation.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

116. Summarize incorporation procedures

117. Describe basic corporate powers

118. Explain the methods of corporate financing

119. Define insider trading

120. Explain how a shareholder’s derivative suit can help a corporation

Key Terms
alien corporation: A corporation formed in another country but doing business in the United States.
articles of incorporation: The document that is filed with the appropriate state official, usually the
secretary of state, when a business is incorporated and that contains basic information about the
corporation.
benefit corporation: A type of for-profit corporation, available by statute in a number of states, that seeks
to have a mate- rial positive impact on society and the environment.
bond: A security that evidences a corporate (or government) debt.
bylaws: The internal rules of management adopted by a corporation at its first organizational meeting.
close corporation: A corporation whose shareholders are limited to a small group of persons,often
family members.
commingle: To put funds or goods together into one mass so that they are mixed to such a degree
that they no longer have separate identities.
common stock: A security that evidences ownership in a corporation. A share of common stockgives the
owner a proportionate interest in the corporation with regard to control, earnings, and

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net assets. Common stock is lowest in priority with respect to payment of dividends and
distribution of the corporation’s assets on dissolution.
crowdfunding: A cooperative activity in which people net- work and pool funds and other resources via
the Internet to assist a cause (such as disaster relief) or invest in a business venture (such as a startup).
dividend: A distribution of corporate profits to the corporation’s shareholders in proportion to the number
of shares held.
domestic corporation: In a given state, a corporation that is organized under the law of that state.
foreign corporation: In a given state, a corporation that does business in that state but is not
incorporated there.
holding company: A company whose business activity is holding shares in another company. piercing
the corporate veil: The action of a court to disregard the corporate entity and hold the shareholders
personally liable for corporate debts and obligations.
preferred stock: A security that entitles the holder to payment of fixed dividends and that has priority
over com- mon stock in the distribution of assets on the corporation’s dissolution.
S corporation: A close business corporation that has most of the attributes of a corporation, including
limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership.
Securities: Generally, stocks, bonds, or other items that rep- resent an ownership interest in a
corporation or a promise of repayment of debt by a corporation.
stock: An ownership (equity) interest in a corporation, measured in units of shares.
ultra vires acts: Acts of a corporation that are beyond its express and implied powers to undertake
(the Latin phrase means ―beyond the powers‖).
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case
o Case 39.1: Drake Manufacturing Co. v. Polyflow, Inc. (2015)—what constitutesdoing
business within a state?
o Case Analysis 39.2: Pantano v. Newark Museum (2016)—on whether a nonprofit
corporation and its members may also be immune from liability for a personal injury
caused by its negligence.
o New Case 39.3: Greenfield v. Mandalay Shores Community Association (2018)—a
benefit corporation took an action that it believed would have a positive impact on those
it was established to serve. Two of those affected by the action disagreed and filed a
suit to challenge the action.
 Retained and Updated Global Insight feature—

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oDoes Cloud Computing Have a Nationality? (Updated with new cases from 2017
involving Google and Microsoft, and a new section the new CLOUD Act that affected
the outcomes in these cases. Includes a new Critical Thinking question.)
 2 New Case in Points
o 2013 case on corporation by estoppel
o 2014 case on piercing the corporate veil
 2 New Case Problems
o 2016 case on piercing the corporate veil
o 2018 case regarding certificate of authority
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on piercing the corporate veil(based on
2019 case)
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Chapter Outline
I. Corporate Formation- The formation of a corporation has two steps: (1) organizational and
promotional efforts, and (2) the legal process of incorporation.
a. Incorporation Procedures
i. Select the State of Incorporation- Some states offer more advantageous tax or
incorporation provisions. Consequently, companies incorporate there. Close
corporations, however, generally incorporate in the state in which their principal
stockholders live and work.
ii. Secure an Appropriate Corporate Name
1. All state require that a name include Corporation, Incorporated, Limited,
Company, or and abbreviation of one of these terms.
2. States review corporate names to avoid duplication and deception. A
name should also be able to serve as a domain name.
iii. Prepare the Articles of Incorporation- The articles serve as a primary source of
authority for the corporation’s future organization and business functions, and
include basic information about the corporation—
1. The name of the corporation.
2. The number of shares the corporation is authorized to issue.
3. The name and street address of the registered agent and office.
4. The name and address of each incorporator.
iv. A corporation has perpetual existence in most states unless the articles state
otherwise.
v. The intended business activities of the corporation may be specified. Stating a
general corporate purpose is usually sufficient.
vi. Management structure and corporate operations can be described inbylaws later.
vii. File the Articles with the State- The articles are sent to the appropriate state
official (usually the secretary of state). Many states issue a certificate of
incorporation authorizing the corporation to do business.

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b. First Organizational Meeting to Adopt Bylaws- After issuance of the certificate, the first
organizational meeting is held. The first board is elected, bylaws are passed, stock is
issued, and so on. What is transacted depends on the state’s incorporation statute, the
nature of the business, the provisions in the articles,and the desires of the promoters.
c. Defects in Corporate Formation- If the procedures for incorporation are not followed
precisely, others may be able to challenge the existence of the corporation. On the basis
of improper incorporation, a plaintiff might successfully hold the would-be shareholders
personally liable.
i. De Facto Corporations- Some states do not apply this doctrine. But in those that
do, the existence of a corporation cannot be challenged by third persons (except
the state) if—
1. There is a statute under which the firm can be incorporated.
2. The parties made a good faith attempt to comply with the statute.
3. The firm has attempted to do business as a corporation.
ii. Corporation by Estoppel- A corporation that holds itself out as being a
corporation, even when it is not, will be estopped from denying corporate status in
a lawsuit by a third party. Corporation by estoppel is limited to a specific
situation and does not extend beyond resolution of the problem at hand.
d. Piercing the Corporate Veil- When corporate owners use the entity to perpetuate a
fraud, circumvent the law, or in some other way accomplish an illegitimate objective, a
court will pierce the corporate veil, exposing shareholders to personal liability.
i. Factors That Lead Courts to Pierce the Corporate Veil- Situations that may cause
a court to disregard the corporate veil include—
1. A party is tricked or misled into dealing with the corporationrather than
the individual.
2. The corporation is set up never to make a profit or always to be
insolvent, or it is too thinly capitalized.
3. The corporation is formed to evade an existing legal obligation.
4. Statutory corporate formalities are not followed.
5. Personal and corporate interests are commingled to the extent that
the corporation has no separate identity. Loans to the firm, for example,
must be in good faith and for fair value.
ii. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider the following: Tom and Jerry form a corporation engaged in
the business of pest control. Because they are the only shareholders, directors,
officers, and workers, they decide not to have any meetings or keep any formal
documentation. The use the business accounts to pay for their work supplies and
cell phones, and at the end of every month they divide between them whatever
profits are in the checking account. What are some of the risks Tom and Jerry
face?
II. Corporate Classifications, Powers, and Liability

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a. Classification of Corporations
i. Domestic, Foreign, and Alien Corporations- A corporation is a domestic
corporation in its home state, a foreign corporation in another state, and alien
corporation in another country. To do business outside its state of incorporation, a
firm must obtain a certificate of authority where it plans to do business.
ii. Public and Private Corporations- A public corporation is formed by the
government to meet a political or governmental purpose. Private corporations are
created for private benefit. Most corporations are private.
iii. Nonprofit Corporations- Corporations formed without a profit-making purpose
are nonprofit corporations. Usually private, these firms include hospitals and
universities.
iv. Close Corporations- A close corporation is one whose shares are held by
relatively few persons (who also often are its directors or officers). Generally,
because the number of shareholders is small, there is no market for the shares.
Some states have special statutes that cover close corporations. Permitting them to
avoid many of the formalities of other corporations [RMBCA 7.32].
v. S Corporations- Certain corporations qualify under Subchapter S of the Internal
Revenue Code to avoid the imposition of income taxes at the corporate level.
vi. Benefit Corporations- These corporations differ from traditional corporation in
purpose, accountability, and transparency.
1. Purpose—Many states have enacted laws allowing for benefit
corporations, which are organized for-profit but seek to have a material
positive impact on society and the environment.
2. Accountability—Shareholders can bring a benefit enforcement
proceeding if the firm fails to create or pursue a public benefit.
3. Transparency—The firm must deliver an annual benefit report to its
shareholders on its social and environmental performance assessed by a
recognized third-party standard.
b. Corporate Powers
i. Express Powers- The express powers of a corporation are found in its articles of
incorporation, in the law of the state of incorporation, and in state and federal
constitutions. The order of priority when conflicts arise among these documents is—
1. The U.S. Constitution.
2. State constitutions.
3. State statutes.
4. The articles of incorporation.
5. Bylaws.
6. Resolutions of the board of directors.

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ii. Implied Powers A corporation has the implied power to perform all acts
reasonably appropriate and necessary to accomplish its corporate purposes
(borrow money, lend money, make charitable contributions). Officers have the
implied power to bind the corporation in matters directly connected with the
ordinary business affairs of the enterprise.
iii. Ultra Vires Doctrine- Earlier cases involved contracts made for unauthorized
purposes. Now, a declining number of cases are brought mostly against nonprofit
or municipal corporations.
iv. Remedies for Ultra Vires Acts- Injunction, dissolution, and damages are among the
remedies available for ultra vires acts.
v. Knowledge Check: 1 minute total. Tests students’ knowledge of ultra vires acts.
c. Liabilities
i. The Limited Liability of Shareholders- The key feature of a corporation is the
limit of its owners’ liability, for corporate obligations, to the amounts of their
investments in the firm. Of course, a lender may require otherwise or a court may
―pierce the corporate veil.‖
ii. Criminal Acts- A corporation may be held liable for the crimes of its agents and
employees, if the punishment can be applied to the corporation. Penalties may
include fines of up to hundreds of millions of dollars, depending on the offense,
the amount of money involved, and the extent to which company officers are
implicated.
iii. Tort Liability- A corporation is liable for the torts committed by its agents or
officers within the course and scope of their employment.

III. Corporate Financing- The principal method of corporate financing is the issuance of bonds (debt)
and stocks (equity).
a. Bonds- Bonds (debentures) represent the borrowing of money by firms. Bonds almost
always have a designated maturity date—the date when the principal is returned to the
investor—and are sometimes referred to as fixed-income securities, because their owners
receive a fixed-dollar interest payment during the period of time prior to maturity.
b. Stocks- Stock represents the purchase of ownership in the firm.
i. Common Stock - Common stock provides an interest with regard to control,
earning capacity, and net assets. A shareholder’s interest is generally in
proportion to the number of shares owned out of the total number issued.
1. Voting rights may apply to holders of common stock.
2. In terms of receiving payment for their investment, holders of common
stock are last.
ii. Preferred Stock- Holders of preferred stock have priority as to dividends and
payment on dissolution of the corporation. Preferred-stock shareholders may or
may not have the right to vote. Preferred stock is similar to a bond in that
shareholders receive periodic dividend payments,

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usually established as a fixed percentage of the face amount of each share.

c. Alternative Financing
i. Venture Capital- Start-up businesses and high-risk enterprises may obtain venture
capital financing (capital from professional investors), as well as managerial or
technical expertise, in exchange for a share of ownership in the firm or control
over its decisions.
ii. Crowdfunding- Crowdfunding—persons networking to pool funds and other
resources via the Internet—can be used to attract investors.
IV. Sale of Securities
a. The Securities Act of 1933- The Securities Act of 1933 was designed to prohibit various
forms of fraud by requiring disclosure of essential information on the issuance of securities.
i. What Is a Security?- The definition includes—
 Instruments and interests commonly known as securities (common stock, etc.).
 Interests commonly associated with instruments and interests known assecurities
(stock options, puts, calls, etc.).
 Notes and other evidence of indebtedness (certificates of deposit, etc.).
 Fractional undivided interests in oil, gas, or other mineral rights.
 Investment contracts (interests in limited partnerships, etc.).
ii. Registration Statement- A security must be registered before it can be offered to
the public. The issuer files a registration statement with the SEC and provides
investors with a prospectus. A prospectus describes—
 The security being sold.
 The financial operations of the issuing corporation.
 The investment or risk in the security.
iii. Exempt Securities- Securities that are exempt from the registrationrequirements
include—
1. Government-issued securities.
2. Bank and financial institution securities.
3. Short-term notes and drafts (maturity does not exceed ninemonths.)
4. Securities of nonprofit, educational, and charitable organizations.
5. Securities issued by common carriers (trucking companies andrailroads).
6. An insurance, endowment, or annuity contract issued by a state-
regulated insurance company.
7. Securities issued in a corporate reorganization in which onesecurity is
exchanged for another or in a bankruptcy proceeding.
8. Securities issued in stock dividends and stock splits.
iv. Exempt Transactions- Securities that can be sold without registrationinclude
those sold in tin the following transactions.

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b. Regulation A Offerings An issuer’s offer of up to $50 million in securities in any twelve-

month period is exempt from registration. The issuer must file with the SEC a notice of the
issue and an offering circular (also provided to investors before the sale), but this is
simpler and less expensive than full registration.
1. There are two types of public offerings under Regulation A—
a. Tier 1—For issues of up to $20 million in a twelve-month period.
b. Tier 2—For issues of up to $50 million in a twelve-month period,
and subject to added requirements, including restricting
purchasers who are not accredited investors to shares that cost no
more than 10 percent of their annual income or net worth.
ii. Changes Made by Regulation A+
1. The cap for Regulation A was previously $5 million. The current version
(Reg A+) and makes it easier for small and mid-sized businesses to raise
capital.
2. Follows the Jumpstart Our Business Startups (JOBS) Act of 2012.
3. Makes it easier for small and mid-sized businesses to raise capital.
4. Decreases the significance of other exemptions.
5. Allows for an increase in online crowdfunding.
c. The Securities Exchange Act of 1934- The Securities Exchange Act of 1934 concerns
primarily the resale of securities, requiring continuous, periodic disclosure, under Section
12, by all corporations with securities on the exchanges and those companies that have
assets in excess of $10 million and five hundred or more shareholders.
i. Insider Trading- Liability extends to officers or directors who use of inside
information in their personal transactions when they know the information is not
available to those with whom they deal.

V. Corporate Ownership -- Shareholders- As a general rule, shareholders have no responsibility for

daily management, and there is no legal relationship between shareholders and creditors of the
corporation (unless, of course, a shareholder is a creditor of the corporation).
a. Shareholders’ Powers- Shareholders—
i. Approve fundamental changes to the corporation before the changesare
effected.
ii. Elect the board.
iii. May remove a director (in some cases, without cause).
b. Shareholders’ Meetings
i. Notice of Meetings- Shareholders must be notified of shareholders’ meetings
[RMBCA 7.05]. Special-meeting notices must include a statement of the purpose
of the meeting; business transacted at a special meeting is limited to that
purpose.
ii. Proxies- Shares are often voted by proxy.

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iii.Shareholder Proposals- Shareholders that own stock worth at least

$1,000 can submit proposals to include with proxy materials.
iv. Rules for Proxies and Shareholder Proposals- Publicly held companies must
post proxy materials (e-proxy) online. If a company wishes to distribute the
materials only online, it must notify shareholders, who can request paper
copies.
c. Rights of Shareholders
i. Voting
ii. Stock Certificates - In jurisdictions that require the issuance of stock certificates,
shareholders can demand a certificate and that their names and addresses be
recorded in the corporate record books.
iii. Preemptive Rights- The articles of incorporation determine the existence and
scope of preemptive rights. Generally, they apply only to additional, newly
issued stock sold for cash and must be exercised within a specified time period.
Preemptive rights are most significant in a close corporation because of the
relatively few number of shares and the substantial interest each shareholder
controls.
iv. Dividends- Dividends can be paid in cash, property, stock of the corporation
that is paying the dividends, or stock of other corporations. The sources of funds
from which dividends may be paid are—
 Retained earnings.
 Current net profits.
 Any surplus.
v. Inspection Rights
1. Proper Purpose- The shareholder’s right of inspection is limited to the
inspection and copying of corporate books and records for a proper
purpose, provided the request is made in advance.
2. Potential for Abuse- A shareholder can be denied access to prevent
harassment or to protect trade secrets or other confidential corporate
information.
vi. Transfer of Shares- Although stock certificates are negotiable and freely
transferable, transfer of stock in closely held corporations isgenerally restricted
by contract, the bylaws, or a restriction stamped on the certificate. Any
restrictions on transferability must be noted on the face of the certificate.
vii. The Shareholder’s Derivative Suit
 If directors fail to sue in the corporate name to redress a wrong suffered by
the corporation, shareholders can bring a shareholder’s derivative suit.
 This right is especially important when the wrong suffered by the corporation
results from the actions of corporate directors or officers.
 Any Damages Awarded Go to Corporation- Any damages recovered by the
suit usually go into the corporation’s treasury.

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d. Duties of Majority Shareholders- Shareholders are not usually personally liable for the
debts of a corporation.
a. Shareholders are not usually personally liable for the debts of a corporation.
b. A majority shareholder has a fiduciary duty to the corporation and to the minority
shareholders when he or she (or a few shareholders acting together) owns enough
shares to exercise de facto control over the corporation.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. How is corporate income double-taxed? Because a corporation is a separate legal entity, corporate
profits are taxed by state and federal governments. Corporations can either retain corporate profits or
pass them on to shareholders in the form of dividends. Dividends are again taxable (except when they
represent distributions of capital) as ordinary income to the shareholder receiving them.

2. Does a corporation have a right to freedom of speech? The First Amendment gives corporations—
similar to individuals—the freedom of speech. In addition to freedom of commercial speech, corporations
may express their political viewpoints on particular issues. The right of corporations to free political speech
has been challenged in the past by those who assert that news publishing corporations should give equal
space to opposing points of view but the Supreme Court has held that no such restrictions should be put on
a corporation’s right of free speech.

3. What is the major advantage of an S corporation? Corporate profits received by S corporations are
not taxed but instead passed through to the shareholders who pay taxes on the amounts received as
personal income. Consequently, S corporation shareholders enjoy all the benefits of limited liability
enjoyed by C corporations but avoid the double taxation of corporate profits.

4. Under what circumstances might an employee’s supervisor, or even a corporate officer or director,
be held liable for the employee’s crime? A supervisor, or a corporate officer or director, could be held
liable for an employee’s crime if the corporate official ordered orotherwise authorized the crime. Directing
an employee to dispose of hazardous waste in an illegal manner, for example, or approving of
questionable accounting practices, would support criminal sanctions against a supervisor or other corporate
party.
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Additional Activities and Assignments

11. Business Case: Corporate Debt and Financing
a. Students can find the full fact pattern for the scenario in their MindTap.

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b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. What are some of the benefits of maintaining a shareholder agreement for aclosely
held corporation?
2. If a corporation maintains both preferred and common equity securities, what are the
asset distribution priorities upon dissolution?
3. What may be some of the restrictions on the payment of dividends?
d. Role Play: Divide into small groups of 3-5 people. Imagine you have been hired as
consultants to AHNuts! to analyze potential financing options and provide a
recommendation to James and Rose. They have provided you a financial audit of their
company which shows they each own 250,000 shares of common stock, they earned just
over $2 million last year which is down 15% from last year (which was also down 10%
from the year prior). They currently have 12% market share,
$100,000 in debt and $300,000 in annual operating costs. Colonel Dijon proposed a
buyout at $4.00 per share. Sardinia Adventures is offering $1 million for a 40% share
ownership. The interest rate of commercial loans is currently at 2.25%. List the goals of
each owner, the available financing options, and the benefits and problems with each
option. Provide a recommendation for one of these options or propose a new solution
based on both the known and unknown information.
e. Writing Assignment: In 7-10 sentences, answer the following: What are the risksand
benefits of Sardinia Adventures becoming a 40% owner of AHNuts! as opposed to simply
becoming a creditor through offering a corporate loan at a specific rate of interest?
Which option would you advise Sardinia Adventures take and why?
f. Ethics Question: If Coco Williams is secretly having a romantic relationship with James,
does she need to disclose it to the board of Colonel Dijon Condiments or to Rose? What
are the ethical and legal implications of the relationship in this situation, if any?
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Piercing the Corporate Veil
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 30:
Management of a Corporation

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 313
Cengage Supplements.................................................................................................................................................. 313
List of Student Downloads ....................................................................................................................................... 313
Chapter Objectives ....................................................................................................................................................... 313
Key Terms ........................................................................................................................................................................ 313
What's New in This Chapter ........................................................................................................................................ 314
Chapter Outline ............................................................................................................................................................. 314
Discussion Questions ...................................................................................................................................................... 316
Additional Resources ..................................................................................................................................................... 317
Cengage Video Resources ...................................................................................................................................... 317
Appendix......................................................................................................................................................................... 317

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Generic Rubrics.......................................................................................................................................................... 317

Standard Writing Rubric ......................................................................................................................................... 318
Standard Discussion Rubric ...................................................................................................................................... 318

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further explore the stakeholders in the operation of a
corporation, including the rights and liabilities of directors and officers.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

121. Discuss corporate directors’ management responsibilities

122. State the primary function of corporate officers

123. Define the business judgment rule

124. Explain director and officer liabilities

Key Terms
business judgment rule: A rule under which courts will not hold corporate officers and directors liable
for honest mistakes of judgment and bad business decisions that were made in good faith.
inside director: A person on a corporation’s board of directors who is also an officer of the
corporation.
outside director: A person on a corporation’s board of directors who does not hold a
management position in the corporation.
preemptive rights: The right of a shareholder in a corporation to have the first opportunity to purchase a
new issue of that corporation’s stock in proportion to the amount of stock already owned by the
shareholder.
proxy: Authorization to represent a corporate shareholder to serve as his or her agent and vote his or her
shares in a certain manner.
quorum: The number of members of a decision-making body that must be present beforebusiness
may be transacted.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o Case 40.1: Oliveira v. Sugarman (2016)—on applying the business judgment ruleto a
board’s decision to reward employees using performance goals and then changing their
mind.
o Classic Case 40.2: Guth v. Loft, Inc. (1939)—on how a conflict can arise between a
corporate official’s personal interests and his or her duty of loyalty.
o New Case 40.3: Hammoud v. Advent Home Medical, Inc. (2018)—on whether a
corporation can deny a shareholder access to its records based on the circumstances
under which the shareholder acquired the shares.
 1 New Case in Point
o 2013 case on quorum requirements
 1 New Case Problem
o 2018 case on duties of directors and officers
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on the duties of directorsand
officers (based on 2017 case)
[return to top]

Chapter Outline
I. Corporate Management- Directors- Directors comprising a corporate board are the ultimate
authority in the firm with responsibility for corporate policy. Each director has one vote. The
board—
 Selects and removes corporate officers.
 Determines the firm’s capital structure.
 Declares dividends.
 Directors act for and on behalf of their corporation, but no individual director can act as
an agent to bind the firm, and directors collectively control a corporation in a way that no
agent can control a principal.
 A corporation may require a director to be a shareholder. Otherwise, there are few, if
any, qualifications.
e. Election of Directors - The number of directors is stated in the articles or bylaws. The
incorporators, or the corporation in the articles, appoint the first board, which serves until the first
shareholders’ meeting.
i. A majority vote of the shareholders elects subsequent directors. Directors
typically serve for a year or more.
ii. Close corporations may eliminate the board altogether.
iii. Removal of Directors- A director can be removed for cause (and usually not
without cause).

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iv. Vacancies on the Board- A vacancy can occur through a director’sdeath

or resignation or if a new position is created.
f. Board of Directors’ Meetings- The dates for regular board meetings are set inthe
articles and bylaws or by board resolution, without further notice.
i. A quorum is generally a majority of the number of authorized directors
[RMBCA 8.24].
ii. Ordinary matters require majority approval—certain extraordinarymatters
may require more.
g. Directors’ Responsibilities
i. Authorization of major corporate policy decisions
ii. Appointment, supervision, and removal of corporate officers and other
managerial employees, and determination of their compensation
iii. Financial decisions such as the payment of dividends to shareholders
h. Rights of Directors
i. Right to Participation- Directors’ basic right is to participate in management,
which includes a right to be notified of board meetings.
ii. Right of Inspection- Directors have access to all corporate books and records.
iii. Right to Indemnification- Most states (and RMBCA 8.51) permit a corporation
to indemnify a director for costs, fees, and judgments in defending corporation-
related suits.
i. Knowledge Check: 1 minute total. Tests students’ knowledge about the role of a board
member.

II. Corporate Management-Officers - The board normally hires officers. Qualifications are set in the
articles or bylaws. Rights are defined by employment contracts. One personcan hold more than
one office and be both an officer and a director. Officers’ duties are the same as those of
directors.
a. President, Vice President, Secretary
b. One person can hold more than one role

III. Duties of Directors and Officers- Directors and officers are corporate fiduciaries.
a. Duty of Care- The duty of care includes acting in good faith and in the best interests of
the corporation, and exercising the care that an ordinarily prudent person would use in similar
circumstances [RMBCA 8.30(a), 8.32(a)]. Breach of the duty may result in liability for negligence.
b. Duty of Loyalty- Directors and officers must subordinate their self-interest to the interest of
the corporation. This means that they should not—
i. Compete with the corporation.
ii. Usurp a corporate opportunity.
iii. Have an interest that conflicts with an interest of the corporation.
iv. Use information that is not public to make a profit trading securities.

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v. Authorize a corporate transactions that is detrimental to minority shareholders.

vi. Sell control over the corporation.
c. Conflicts of Interest- Directors and officers must fully disclose any potential conflict of
interest. After full disclosure, the individual may go ahead if the other directors or shareholders
approve (assuming the circumstances are otherwise fair and reasonable).
d. The Business Judgment Rule- Directors and officers are immune from liability when a
decision is within managerial authority, as long as the decision complies with management’s
fiduciary duties and acting on the decision is within the powers of the corporation.
i. When the Rule Applies
a. The director took reasonable steps to become informed
about the matter.
b. The director had a rational basis for the decision.
c. There was no conflict of interest between the director’s
personal interest and the interest of the corporation.
ii. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or
small groups and consider the following: In which of the following scenarios
would a board member or officer be protected under the business judgment
rule? What more information might you need to make your decision?
1. The president of a toy company who produces a product that may be a
choking hazard to small children
2. A board of directors who votes to acquire another company already in
insolvency, which later bankrupts their company.
3. A board member of a theme park who purchases a tract of land next to
the park without notifying the other directors that the landowner is
interested in selling.
a.
IV. Liability of Directors and Officers- Directors and officers are personally liable for their torts and
crimes, and may be liable for those of subordinates (under the ―responsible corporate officer‖
doctrine or the ―pervasiveness of control‖ theory). The corporation is liable for acts done within
the scope of employment.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. Why is it incorrect to characterize a director as either an agent or a trustee of a corporation? Even

though directors act for and on behalf of the corporation, no individual director can act as an agent to
bind the corporation. Moreover, directors, as a group, collectively control the corporation in a way that
no agent can control a principal. Directors are also often incorrectly characterized as trustees because they
occupy positions of trust and control over the corporation. Unlike trustees, however, directors do not own or
hold title to property for the use and benefit of others.

2. What actions must a director or officer take to avoid liability when a corporation enters into a
contract or engages in a transaction in which an officer or director has a material interest? The director
or officer must make a full disclosure of the interest and must abstain from voting on the proposed
transaction. Although standards vary from state to state, a contract will generally not be voidable if it
was fair and reasonable to the corporation at the time the contract was made, there was a full disclosure
of the interest of the officers or directors involved in the transaction, and the contract is approved by a
majority of the disinterested directors or shareholders.

3. Why do courts in their application of the business judgment rule give significant deference
(weight) to the decisions of corporate directors and officers? Courts give significant deference to the
decisions of corporate directors and officers by considering the reasonableness of a decision at the time it
was made, without the benefit of hindsight. Corporate decision makers are not subjected to second-
guessing. This is because judges are not business experts, and courts do not have access to all of the
information and factors that a corporate director or officer may weigh and balance in making a decision.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Business Judgement Rule
o Shareholders, Directors and Officers
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.

318
website, in whole or in part.
 Business Law: Text & Exercises (MindTap Course List)

Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments may discussion.

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discussion topic. Comments not add value to discussion 0 points

motivate otherstudents to topic. Comments may not
respond. motivate other students to
20 points respond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 31:
Combining and Dissolving Corporations

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 320
Cengage Supplements.................................................................................................................................................. 320
List of Student Downloads ....................................................................................................................................... 320
Chapter Objectives ....................................................................................................................................................... 320
Key Terms ........................................................................................................................................................................ 320
What's New in This Chapter ........................................................................................................................................ 321
Chapter Outline ............................................................................................................................................................. 321
Discussion Questions ...................................................................................................................................................... 324
Appendix......................................................................................................................................................................... 326
Generic Rubrics.......................................................................................................................................................... 326
Standard Writing Rubric ......................................................................................................................................... 326
Standard Discussion Rubric ...................................................................................................................................... 326

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the ways in which two or more corporations may combine
into one corporation, whether voluntarily or by force.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

125. Identify the basic steps in a merger and a consolidation

126. Explain successor liability following a purchase of assets

127. Identify actions to resist takeovers

128. Discuss the phases for corporate termination

Key Terms
consolidation: A contractual and statutory process in which two or more corporations join tobecome a
completely new corporation.
dissolution: The formal disbanding of a partnership, corporation, or other business entity. For instance,
partnerships can be dissolved by acts of the partners, by operation of law, or by judicialdecree.
merger: A contractual and statutory process in which one corporation (the surviving
corporation) acquires all of the assets and liabilities of another corporation.
parent corporation: A corporation that owns all of the shares of another corporation (known asits
subsidiary).
receiver: In a corporate dissolution, a court-appointed per- son who winds up corporate affairs and
liquidates corporate assets.
share exchange: A process in which some or all of the shares of one corporation are exchangedfor some
or all of the shares of another corporation, and both corporations continue to exist. short-form merger: A
merger between a subsidiary corporation and a parent corporation that owns at least 90 percent of the
outstanding shares of each class of stock issued by the subsidiary corporation.

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subsidiary corporation: A corporation wholly owned by another corporation (the parent

corporation).
surviving corporation: The remaining, or continuing, corporation following a merger. takeover: The
acquisition of control over a corporation through the purchase of a substantial number of the voting
shares of the corporation.
target corporation: The corporation to be acquired in a corporate takeover; a corporation to whose
shareholders a tender offer is submitted.
tender offer: An offer to purchase made by one company directly to the shareholders of another
(target) company; often referred to as a ―takeover bid.‖
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:


1 New Case
o Case Analysis 41.1: In re Trulia, Inc. Stockholder Litigation (2016)—on Zillow’sstock
for stock purchase of Trulia and how shareholders claimed that the directors
breached their fiduciary to them.
o New Case 41.2: Heavenly Hana, LLC v. Hotel Union & Hotel Industry of Hawaii Pension
Plan (2018)—does a purchasing corporation assume the liability of the selling
corporation if the buyer has constructive notice of potential liability?
 2 New Case Problems
o 2018 case on tender offers
o 2017 case on successor liability
1 New ―A Question of Ethics‖ using all-new IDDR Approach on purchase of assets (based on2019 case)
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Chapter Outline
I. Merger, Consolidation, and Share Exchange- Merger and consolidations are legal combinations
of two or more corporations.
a. Merger- A merger is the legal combination of two or more corporations.
i. One of the Firms Survives- After a merger, only one of the corporations
continues to exist.
ii. Surviving Corporation Inherits All Legal Rights and Obligations of the Other
Firm- The existing corporation acquires all the rights, powers, and privileges that
both corporations had, without a formal transfer. It also assumes liability for both
firms’ debts and obligations.
b. Consolidation- In a consolidation, two or more corporations combine to form an entirely
new corporation.

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i. A New Corporation Is Formed- The results are essentially the same as the results
of merger.
ii. New Corporation Inherits All Legal Rights and Obligations of Both
Predecessors- The new corporation acquires all the rights, powers, and privileges
that both corporations had. It also assumes liability for both firms’ debts and
obligations.
c. Share Exchange- In a share exchange, some or all of the stock of a company are
exchanged for some or all of the stock of another. A company that holds all of the shares
of another is the other’s parent corporation of which the wholly owned firm is a subsidiary
corporation.
i. Knowledge Check: 1 minute total. Tests students’ understanding of subsidiary
corporations.
d. Merger, Consolidation, and Share Exchange Procedures- Procedures vary somewhat
among jurisdictions (for example, in some states, a consolidation follows the steps for
incorporation). Generally, the basic steps are—
A. Each board approves the plan, which must specify—
ii. The terms and conditions of the deal.
iii. How the value of the shares of each participating corporation will be determined.
iv. How those shares will be converted into shares, or other securities, cash, property,
or other interests in another participating firm.
A. Each firm’s shareholders vote on the plan at a shareholders’meeting.
B. The plan is filed, usually with the secretary of state.
C. The state issues a certificate of merger or consolidation.
e. Short-Form Mergers- The Revised Model Business Corporation Act (RMBCA) provides for
merging a substantially owned subsidiary corporation into its parent, under certain
circumstances without shareholder approval.
f. Shareholder Approval- The board of directors and the shareholders must authorize
actions taken on extraordinary matters (sale, lease, or exchange of all or substantially all
corporate assets; amendment to the articles of incorporation; merger; consolidation;
dissolution).
g. Appraisal Rights- A shareholder has a right to dissent and be paid fair value (according
to an appraisal) for the number of shares held on the date of a merger or consolidation.
i. When Appraisal Rights Apply- The right normally extends to mergers,
consolidations, short-form mergers, sales of substantially all the corporate assets
not in the ordinary course of business, and in certain states, adverse amendments
to the articles of incorporation.
ii. Procedures- This right is available only when a state statute provides for it. Each
state that permits it also provides its procedure, which must be strictly adhered to
or the right is lost.

II. Purchase of Assets

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 When a corporation acquires all or most of the assets of another corporation by purchase,
there is no change in the legal entity so shareholder approval is generally not required.
 A corporation that sells all its assets must obtain board of director and shareholder
approval.
 U.S. Department of Justice antitrust guidelines may constrain or prohibit a purchase of all
or most of the assets of a corporation, if the purchase is construed as a merger.
a. When Shareholder Approval May Be Required- If the acquiring corporation plans to pay
for the acquisition through an issuance of additional shares, shareholder approval may be
required.
b. Successor Liability in Purchases of Assets- A purchasing corporation is not usually
responsible for any liabilities of the seller. Exceptions are—
i. Express or implied agreement—The purchasing corporation impliedly or
expressly assumes the seller’s liabilities.
ii. De facto merger—The transaction is, in effect, a merger or consolidationof the
two firms.
iii. Continuation—The purchaser continues the seller’s business and retainsthe same
shareholders, directors, and officers.
iv. Fraud—The sale is entered into fraudulently to escape liability.

III. Purchase of Stock- An acquiring corporation may deal directly with shareholders to buy their
shares.
a. Tender Offers- A public offer to all shareholders is a tender offer. The price is usually
higher than the market price of the stock before the offer, but there may be a condition:
the receipt of a specified number of outstanding shares by a specified date, for instance.
b. Takeover Defenses and Directors’ Fiduciary Duties- The directors of the target firm must
act in the best interest of their company in deciding whether the shareholders’ acceptance
or rejection of the offer would be most beneficial.
i. The directors must show that they had reasonable grounds to believe the tender
offer posed a danger to the corporation.
ii. The defensive tactics must have been reasonable.
iii. A target’s board can issue additional shares for existing shareholders to buy at
low prices. This effectively dilutes the proportion of an acquiring firm’s ownership
of the target, making it perhaps prohibitively expensive to make the acquisition.
iv. Discussion Activity: 5-10 minutes total. As a class, discuss the following: Square
Corp. has been buying up all available stock for public sale of Circle Inc.
Eventually, Square Corp. is at a point that if they purchase anymore stock they
will be a majority shareholder. Is there anything Circle Inc. can do to prevent
Square Corp. from gaining control of the company?

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What other information would be helpful in evaluating Circle Inc.’schoices?

IV. Corporate Termination- The termination of a corporation has two phases—dissolutionand

winding up. Dissolution can occur by—
 An act of the state.
 An agreement of the board and the shareholders.
 The expiration of the time period states in the article of incorporation.
 A court order.
a. Dissolution
i. Voluntary Dissolution- There are two ways in which dissolution can bebrought
about—
A. Shareholders’ unanimous vote to initiate dissolution.
B. A proposal of the board submitted to the shareholders at a
shareholders’ meeting.
ii. Involuntary Dissolution- A state can bring an action to dissolve acorporation
if—
A. The corporation has not paid its taxes.
B. The firm has failed to submit annual reports.
C. The company has engaged in ultra vires acts.
D. The corporation engaged in fraud during incorporation.
E. Shareholders can petition to have a corporation dissolved if[RMBCA
14.30]—
a. The directors are deadlocked, the shareholders are unable to
break it, and the corporation is suffering irreparableinjury.
b. Acts of the directors or controlling shareholders are illegal,
oppressive, or fraudulent.
c. Corporate assets are being misapplied or wasted.
d. The shareholders are deadlocked in voting power and have
failed to elect directors.
b. Liquidation- When dissolution is voluntary, the directors act as trustees, and court
supervision is unnecessary. If that is not possible (because the directors do not want the
job, cannot agree, or shareholders or creditors have good reasons against it, or dissolution
is involuntary), a court can appoint a receiver.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. Describe the four steps by which a merger or consolidation takes place. Before a merger or
consolidation can be completed, the following steps must be taken: (1) the board of directors of each
corporation involved must approve a merger or consolidation plan; (2) the shareholders of each
corporation must vote approval of the plan at a shareholders meeting (though the margin of vote
necessary for approval will necessarily vary from state to state); (3) the approved articles of merger or
consolidation must be filed with the secretary of state; and (4) the state must issue a certificate of merger
to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.

2. What sorts of corporate actions require the approval of both the board of directors and the
shareholders? Although the board of directors is usually authorized to make decisions regarding ordinary
business matters, both the board and the shareholders must approve certain extraordinary decisions such
as the sale, lease, or exchange of all or substantially all corporate assets or the amending of the articles
of incorporation or even the dissolution of the corporation.

3. What advantages is a company likely to realize from a merger? Advantages would include a
reduction in research, development, production, and marketing costs, and the elimination of duplicative
personnel. What is a possible disadvantage of a merger? Without merging, firms are often competitors.
Combining their assets and operations would end the competition, which could arguably undercut
profitability
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 32:
Security Interests and Creditors’ Remedies

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 329
Cengage Supplements.................................................................................................................................................. 329
List of Student Downloads ....................................................................................................................................... 329
Chapter Objectives ....................................................................................................................................................... 329
Key Terms ........................................................................................................................................................................ 329
What's New in This Chapter ........................................................................................................................................ 331
Chapter Outline ............................................................................................................................................................. 331
Discussion Questions ...................................................................................................................................................... 337
Additional Activities and Assignments ....................................................................................................................... 339
Additional Resources ..................................................................................................................................................... 340
Cengage Video Resources ...................................................................................................................................... 340

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Appendix......................................................................................................................................................................... 340
Generic Rubrics.......................................................................................................................................................... 340
Standard Writing Rubric ......................................................................................................................................... 340
Standard Discussion Rubric ...................................................................................................................................... 341

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further explore the Uniform Commercial Code and sales contracts.
Further, it examines the rights and remedies available to creditors when a debtor defaults.
Additionally, the chapter covers protections debtors have from aggressive creditors trying to collection
on a debt.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

129. Explain how an enforceable security interest is created and perfected

130. Identify general priority rules governing security interests

131. State a secured party’s options on a debtor’s default

132. Distinguish different types of liens

133. Define suretyship and guaranty contracts

Key Terms
attachment: (1) In the context of secured transactions, the process by which a security interest in the
property of another becomes enforceable. (2) In the context of judicial liens, a court- ordered seizure
and taking into custody of property prior to the securing of a judgment for a past-due debt.
collateral: Under Article 9 of the Uniform Commercial Code, the property subject to a security interest.
debtor: Under Article 9 of the Uniform Commercial Code, any party who owes payment or performance
of a secured obligation, whether or not the party actually owns or has rights in the collateral.
deficiency judgment: A judgment against a debtor for the amount of a debt remaining unpaidafter
collateral has been repossessed and sold.
execution: An action to carry into effect the directions in a court decree or judgment.

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financing statement: A document prepared by a secured creditor and filed with the appropriate
government official to give notice to the public that the creditor claims an interest in collateral belonging
to the debtor named in the statement. The financing statement must contain the names and addresses of
both the debtor and the creditor, and describe the collateral by type or item.
floating lien: A security interest in proceeds, after-acquired property, or property purchased under a line
of credit (or all three); a security interest in collateral that is retained even when the collateral changes in
character, classification, or location.
junior lienholder: A person or business that holds a lien that is subordinate to one or more other liens
on the same property.
levy: The obtaining of money by legal process through the seizure and sale of property, usually done
after a writ of execution has been issued.
perfection: The legal process by which secured parties protect themselves against the claims of third
parties who may wish to have their debts satisfied out of the same collateral; usually accomplished by the
filing of a financing statement with the appropriate government official. proceeds: Under Article 9 of the
Uniform Commercial Code, whatever is received when collateral is sold or otherwise disposed of.
secured party: A lender, seller, or any other person in whose favor there is a security interest, including
a person to whom accounts or chattel paper has been sold.
secured transaction: Any transaction in which the payment of a debt is guaranteed, or secured, by
personal property owned by the debtor or in which the debtor has a legal interest.
security agreement: An agreement that creates or provides for a security interest between the debtor
and a secured party.
security interest: Any interest ―in personal property or fixtures which secures payment orperformance of an
obligation‖ [UCC 1–201(37)].
Attachment: (1) In the context of secured transactions, the process by which a security interest in the
property of another becomes enforceable. (2) In the context of judicial liens, a court- ordered seizure
and taking into custody of property prior to the securing of a judgment for a past-due debt.
co-surety: A joint surety; one who assumes liability jointly with another surety for the payment of an
obligation.
default: Failure to pay a debt when it is due.
garnishment: A legal process used by a creditor to collect a debt by seizing property of the debtor
(such as wages) that is being held by a third party (such as the debtor’s employer). guarantor: A
person who agrees to satisfy the debt of another (the debtor) only after the principal debtor
defaults. A guaran- tor’s liability is thus secondary.
lien: (pronounced leen) A claim against specific property to satisfy a debt.
mechanic’s lien: A statutory lien on the real property of another, created to ensure payment for work
performed and materials furnished in the repair or improvement of real property, such as a building.
right of reimbursement: The legal right of a person to be restored, repaid, or indemnified for costs,
expenses, or losses incurred or expended on behalf of another.
right of subrogation: The right of a person to stand in the place of (be substituted for) another, giving the
substituted party the same legal rights that the original party had.

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surety: A person, such as a cosigner on a note, who agrees to be primarily responsible for the debt of
another.
suretyship: An express contract in which a third party to a debtor-creditor relationship (thesurety)
promises to be primarily responsible for the debtor’s obligation.

[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 New chapter-opening scenario on purchase of Learjet in establishing a security interest for the
bank.
 1 New Case:
o Case 30.1: Royal Jewelers, Inc. v. Light (2015)—on written or authenticated security
agreement.
o Case 30.2: In re Tusa–Expo Holdings, Inc. (2016)—on proceeds and whether actions
taken by the debtor and another creditor stripped a secured creditor ofits interest in
certain proceeds.
o New Case 30.3: SunTrust Bank v. Monroe (2018)—on whether the creditor’s disposition
of the collateral was commercially reasonable and the consequences to a creditor
seeking a deficiency judgment of the sale not being commercially reasonable.
 1 New Case Problem
o 2018 case on disposition of collateral
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on priority (based on 2018case)
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Chapter Outline
I. Secured Transactions- UCC terminology is used in all documents in securedtransactions.
 Secured party—a creditor who has a security interest in a debtor’s collateral.
 Debtor—the party who owes payment or other performance of an obligation.
 Security interest—an interest in a debtor’s collateral that secures payment orperformance of an
obligation.
 Security agreement—an agreement that creates or provides for a security interest.
 Collateral—the subject of the security agreement.
 Financing statement—the instrument normally filed to give public notice to third partiesof a
secured party’s security interest.

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a. Creating a Security Interest

i. Basic Requirements- When the requirements are met, a creditor’s rights attach to
the collateral [UCC 9–203]. To have an enforceable securityinterest—
ii. Written or Authenticated Security Agreement- A written or authenticated security
agreement must describe (reasonably identify) the collateral and be signed or
authenticated by the debtor [UCC 9–102(a)(7), 9–203(1), 9–108(c)].
iii. Secured Party Must Give Value- Value is any consideration that supports a
simple contract [UCC 1–201(44)]. Value can be security given for a preexisting
(antecedent) obligation or any binding commitment to extend credit.
iv. Debtor Must Have Rights in the Collateral-The debtor’s rights can represent a
current or future interest. Title is not a requirement.
b. Perfection of a Security Interest- Perfection protects a security interest against some
claims of third parties who may wish to have their debts satisfied out of the same
collateral. Collateral is generally considered either tangible or intangible.
i. Perfection by Filing- The most common method of perfecting a security interest
under Article 9 is to file a financing statement with the appropriate public office.
This may be done electronically [UCC 9– 102(a)(18)]. A financing statement
must—
 Be signed by the debtor.
 Contain the addresses of debtor and creditor.
 Describe collateral by type or item [UCC 9–502, 9–504].
ii. Perfection by Possession-Perfection by possession may be impractical because it
denies a debtor the right to use, sell, or derive income from property to pay off
the debt. Security interests in some types of collateral (negotiable instruments,
nonnegotiable transferable instruments, stocks, bonds) can only be perfected by
possession.
iii. Perfection by Attachment—The Purchase Money Security Interest in Consumer
Goods
1. Automatic Perfection-A purchase-money security interest (PMSI) can be
perfected automatically when it is created under a written security
agreement.
2. Exceptions to Automatic Perfection-Exceptions include—
a. Security interests that are subject to other federal or state laws.
b. Sales to businesses or other entities that do not qualify as
consumers [UCC 9–311, 9–324].
iv. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider each of the following:
1. A security agreement with the description, ―all of the debtor’s
personal property now owned and hereafter acquired.‖

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2. A filed security agreement that has the debtor’s name spelled

incorrectly.
3. A security agreement covering the property of a corporation, filed in a
state other than that in which the corporation is registered.
c. The Scope of a Security Interest
i. Proceeds- A secured party has an automatically perfected interest in proceeds
from the sale, exchange, or other disposal of collateral [UCC 9– 315]. The
interest remains perfected for twenty days after the debtor’s re- ceipt of the
proceeds. When collateral is of a type that is likely to be sold, a security
agreement typically provides for extended coverage.
ii. After-Acquired Property-This is property acquired after the execution of a
security agreement [UCC 9–204(a)].
iii. The Floating-Lien Concept-Altogether, this is described as a floating lien (a lien
that changes over time).
1. A Floating Lien in Inventory-The concept applies to inventory as it is
bought and sold.
2. A Floating Lien in a Shifting Stock of Goods-The concept applies to
goods as they are processed from raw materials to finished goods and
sold, turning into accounts receivable, chattel paper, or cash.
d. Priorities
i. General Rules of Priorities-The first interest to be filed or perfected has priority
over later filed or perfected security interests. If no interest has been perfected,
the first to attach has priority.
1. Perfected security interests versus unsecured creditors and unperfected
interests—When a security interest is perfected, it has priority over any
unperfected interests, including priority to the proceeds from a sale of
collateral resulting fro a bankruptcy [UCC 9–322(a)(2)].
2. Conflicting perfected security interests—When two or more creditors have
perfected security interests in the same collateral, the interest that was the
first to perfect generally has priority [UCC 9–322(a)(1)].
3. Conflicting unperfected security interests—When two conflicting security
interests are unperfected, the first to attach has priority [UCC 9–
322(a)(3)].
ii. Exceptions to the General Priority Rules-A perfected PMSI prevails over a
previously a security interest in after-acquired collateral. Also—
1. Buyers in the Ordinary Course of Business-Takes goods free of any
security interest even if the buyer knows of the interest [UCC 9–320(a)].
iii. Knowledge Check: 1 minute total. Tests students’ understanding of creditor
priority upon default.
e. Default

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i. What Constitutes Default- Because Article 9 does not define default, the parties
can decide for themselves what constitutes default. Default occurs most commonly
when a debtor fails to make payments or goes bankrupt.
ii. Basic Remedies- The creditors’ remedies are cumulative.
1. Repossession of the Collateral by the Secured Party- A secured party
can take possession of collateral on default unless the security agreement
states otherwise, as long as there is no breach of the peace. Otherwise
the party must resort to judicial process [UCC 9–609]. Other state law
determines what constitutes breach of the peace (generally, trespass onto
real property, assault, battery, or breaking and entering).
2. Judicial Remedies- A secured party’s other basic remedies include
proceeding to judgment on the underlying debt (execution and levy). This
is rarely used, unless the value of the collateral is considerably below the
amount of the debt and the debtor has other assets to satisfy the debt
[UCC 9–601(a)].
iii. Retention of Collateral by the Secured Party
1. Notice Requirements- To retain the collateral, the creditor must notify the
debtor and, in some cases, other secured parties.
2. Objections- If the debtor or secured party objects within twenty days, the
collateral must be sold.
3. Consumer Goods- When collateral is consumer goods in which a creditor
has a PMSI, and a debtor has paid 60 percent of the price or loan in a
non-PMSI, a secured party must dispose of the collateral within ninety
days, according to the procedures set outin the text.
iv. Disposition of Collateral- After default and repossession, a secured party can
retain the collateral or sell, lease, or otherwise dispose of it in any commercially
reasonable manner [UCC 9–602, 9–603, 9–610, 9–620].
1. Disposition of Collateral by the Secured Party
a. Sale Can Be Public or Private- To dispose of collateral, a public
sale is not required, and there are no specific time requirements.
b. Must Be Commercially Reasonable- Generally, for a sale to be
conducted in a commercially reasonable manner, notice of the
place, time, and manner of sale is required [UCC 9–602, 9–603,
9–610, 9–
c. Proceeds from Disposition- Proceeds from the sale must be
applied in the following order—
i. Reasonable expense.
ii. The balance of the debt.
iii. Subordinate security interests.
iv. Surplus to the debtor.

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v. Deficiency Judgment- The debtor is generally liable for any deficiency between
the amount of the debt and whatever the secured party received on disposition of
the collateral.
vi. Redemption Rights- Before the collateral is sold (or retained in satisfaction of
the debt), a debtor or another secured party can redeem the collateral by
satisfying the obligations it secures and paying the secured party’s expenses
[UCC 9–623].
vii. Knowledge Check: 1 minute total. Tests students’ understanding about the
disposition of collateral after repossession.
viii. Think Pair Share Activity: 5-10 minutes total. Ask students to forms pairs or small
groups and consider the following: A secured party can repossess collateral on a
debtor’s default, unless the security agreement states otherwise, as long as there is
no breach of the peace.
What types of actions do you think constitute breach of the peace?
II. Laws Assisting Creditors
a. Liens- A lien creditor has priority over an unperfected secured party. Mechanic’s and
artisan’s liens also have priority over a perfected secured party unless a statute provides
otherwise.
i. Mechanic’s Liens- Mechanic’s liens are simple to understand (and may be
within the experience of some students).
1. Real Property Secures the Debt
2. Governed by State Law- Generally, a lienholder must file written notice
of the lien within 60 to 120 days from the last date on which work
was provided.
ii. Artisan’s Liens- An artisan’s lien usually takes priority over other creditors’ claims
to the same property.
1. Lienholder Must Retain Possession- Normally, a lienholder must have
retained possession of the property and have agreed to provide services
on a cash, not a credit, basis.
2. Foreclosure on Personal Property Possible- Notice must be given to the
owner of the property before a foreclosure and sale.
iii. Judicial Liens- These liens help ensure that a judgment is collectible.
1. Writ of Attachment- Prejudgment attachment requires notice to the
debtor and a hearing (under the Fourteenth Amendment’s due process
clause). The creditor must have an enforceable right to payment.
a. The creditor files an affidavit, stating the ground for the writ.
b. The creditor posts a bond to cover court costs, and the value of
the attached property and the loss of its use to the debtor.
c. The court issues a writ. The sheriff seizes the debtor’s property,
which can be sold to satisfy a later judgment in the creditor’s
favor.

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2. Writ of Execution- If a debtor does not or cannot pay an adverse

judgment—
a. The creditor can return to court for a writ of execution.
b. The sheriff seizes the debtor’s property, which can be sold to
satisfy the judgment.
c. Before the property is sold, the debtor can pay the judgment and
redeem the (nonexempt) property.
b. Garnishment- Garnishment is a collection remedy directed at a debtor’s property or rights
held by a third person (typically, an employer or a bank).
i. Procedures- Garnishment is a state law remedy and the procedures differ from
state to state. In some states, a separate order may be required for, for example,
each pay period to garnish wages.
ii. Laws Limiting the Amount of Wages Subject to Garnishment- Federal and state
laws limit the amount that can be garnished from wages. State laws often provide
for larger exemptions, and state and federal statutes can be applied together to
reduce the amount that may be garnished.
c. Suretyship and Guaranty
i. Suretyship- A surety is primarily liable—the creditor can hold the surety
responsible for payment of the debt when the debt is due, without first exhausting
all remedies against the debtor. A surety agreement does not have to be in
writing to be enforceable (but it usually is).
ii. Guaranty
1. A guarantor is secondarily liable—liability arises only when the debtor
defaults.
2. The contract between guarantor and creditor must be in writing to be
enforceable unless the ―main purpose‖ exception applies. A guaranty
can cover a single transaction or a series of transactions.
d. Defenses of the Surety and the Guarantor
i. Material modification—Any material change in the contract between principal and
creditor without prior consent of the surety (or guarantor) may discharge the
surety, even if the change does not affect the risk.
ii. Surrender of property—If a creditor surrenders the collateral to the debtor or
impairs the collateral without the surety’s consent, the surety’s obligation may be
reduced.
iii. Payment or tender of payment—If the debt is paid, or tender of payment is
made and rejected,
e. Defenses of the Principal Debtor- A surety can assert his or her own defenses or use any
defenses available to the principal (except personal defenses). This is the most important
concept in suretyship, because most defenses available to a surety are those of the principal.
i. Incapacity and bankruptcy—As a defense, a surety or guarantor can assert his or
her incapacity or bankruptcy, but not the principal debtor’s.
ii. Statute of limitations—A statute of limitations is a defense to payment for the
principal debtor, but not for a surety or guarantor.

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iii. Fraud—A surety or guarantor can assert fraud as a defense.

f. Rights of the Surety and the Guarantor
i. The Right of Subrogation- Any right the creditor had against the debtor becomes
the right of the surety—creditor rights in bankruptcy, rights to collateral possessed
by the creditor, and rights to judgments secured by the creditor.
ii. The Right of Reimbursement- The surety is entitled to receive from the debtor all
outlays made on behalf of the suretyship arrangement.
iii. The Right of Contribution- A surety who pays more than his or her proportionate
share on a debtor’s default is entitled to recover from the co-sureties the amount
paid above the surety’s obligation.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What sort of description in a written security agreement might be insufficient to create a security
interest? Descriptions that have been held to be insufficient included an attempted security interest in ―all
of the debtor’s personal property now owned and hereafter acquired.‖ Why would this description be
considered insufficient to create a security interest? It is too general to put third parties on notice of the
possible claim of the creditor.

2. What happens when a secured party claims a security interest in collateral that has beensold by the
debtor? Generally, a security interest in collateral continues after the collateral is sold unless the secured
party authorized a sale. Exceptions include: (1) buyers in the ordinary course of business, who take goods
free of any security interest created by a merchant in the merchant’s inventory, even if the security interest
is perfected and even if the buyer knows of it (a consumer, for instance, who buys an stereo from a
retailer takes the stereo free of any se- curity interest, created by the retailer, in the retailer’s
inventory); (2) buyers of farm products, who are considered buyers in the ordinary course of business
under the Food Security Act and may take farm products free of any security interest, unless (a) the buyer
receives notice of the security interest within a year before the purchase; (b) the buyer fails to register with
the secretary of state before the purchase, and the secured party has properly perfected his or her
interest centrally; or (c) the buyer receives notice from the secretary of state that the farm products being
sold are subject to an effective financing statement (EFS), which a secured party must file in addition to an
Article 9 financing statement to protect his or her interest in a farmer’s products in those states with EFS
filing systems; (3) buyers of consumer goods from consumers take goods free of any security interest, if the
goods are bought for personal, family, or household use, without knowledge of an earlier seller’s security
interest in the goods and the purchase occurs before a secured party has filed a financing statement (a
person who buys a

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neighbor’s television in which the original retailer had a PMSI takes the television free of the PMSI, for
example, if the retailer has not filed a financing statement); and (4) buyers of chattel paper and
instruments may not be taken subject to secured interests despite perfection (security interests in instruments
can be perfected only by possession; security interests in chattel paper can be perfected by possession or
by filing—when perfection of chattel paper is made by filing only, if the paper is then sold to a new
buyer in the ordinary course of business, the new buyer will have priority over the secured creditor.

3. What are a secured party’s rights on a debtor’s default? A secured party’s rights on a debtor’s
default include obtaining the collateral, accelerating the debt, and stopping all other credit (which
normally occurs because the secured party is the debtor’s principal source of credit). Repossessing
Collateral. A secured party has a right to take possession of collateral on default unless the security
agreement states otherwise, as long as there is no breach of the peace (or the secured party must use
judicial process). State law other than the UCC determines what constitutes breach of the peace. (In some
states, satisfying the elements of an action for wrongful trespass could provide grounds necessary to
initiate an action for breach of the peace. That is a reason that most car repossessions occur when a car is
parked on a street or in a parking lot.) Retaining Collateral. After default and repossession, a secured
party can retain the collateral (or sell, lease, or otherwise dispose of it in any commercially reasonable
manner). If the debtor has not renounced or modified in writing his or her rights after default, the secured
party must notify the debtor in writing of a proposal to retain the collateral. With consumer goods, no
other notice is necessary. In other cases, notice must be sent to any other secured party from whom the
secured party has received written notice of a claim to the collateral. If (within twenty-one days after
notice has been sent) the secured party receives an objection in writing from a person entitled to receive
notice, the secured party must dispose of the collateral. If no written objection is made, the secured party
can retain the collateral in full satisfaction of the debt. Disposing of Collateral. When collateral is consumer
goods in which a secured party has a purchase-money security interest, and a debtor has paid 60 percent
of the price or loan, the secured party must dispose of the collateral within ninety days. If not, the
creditor is open to an action for conversion or other liability, unless the debtor renounced or modified in
writing after default the right to demand a sale of the goods. If collateral is not consumer goods, a
secured party can choose not to retain it, but disposition generally must be in a commercially reasonable
manner. A public sale is not required, and there are no specific time requirements, but notice of the place,
time, and manner of sale is required. The debtor must be notified if he or she has not renounced or
modified, in writing, the right to notice. For consumer goods, no other notice need be sent; in other cases,
notice must be sent to any other secured party from whom the secured party has received written notice of
a claim to the collateral. No notice is necessary when collateral is perishable, threatens to decline speedily
in value, or is of a type customarily sold on a recognized market. Applying the Proceeds from Disposition.
The proceeds must be applied in the following order: (1) reasonable expenses stemming from retaking,
holding, or preparing for sale; (2) satisfaction of the balance of the debt owed to the secured party; (3)
subordinate security interests whose written demands have been received before the proceeds are
completely distributed; and (4) any surplus to the debtor. Obtaining

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any Deficiency between the Debt and the Proceeds from the Sale. A debtor is liable for any deficiency
between the amount of the debt and whatever the secured party received on disposition of the collateral
(unless otherwise agreed). If the underlying transaction was a sale of accounts or of chattel paper, a
secured party can collect a deficiency judgment only if the security agreement provides.
[return to top]

Additional Activities and Assignments

12. Business Case: Security Interests
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
i. If Rafael is paid based on his recovery of the aircraft, is he incentivized to break
the law?
ii. Should Barron be able to avoid repossession and/or recovery of his
aircraft by the bank by keeping it locked in a hanger?
iii. Is there a better way for a bank to retain a security interest for these types of
agreements and if so, would it likely limit the number of loans the bank would be
able to make?
d. Role Play: Break into small groups of 5-7 students.
Half the students in the group should represent the mechanic and half the students in the
group should represent the bank and one student should act as a mediator. Each side
should develop arguments as to why they have a greater priority in the collateral than
the other. Each side should then present their arguments to the designated mediator who
shall make a ruling.
e. Writing Assignment: At any point during the course of these events, has the bank
perfected a security interest? Why or why not?
f. Ethics Question: The bank, now in possession of the plane, decides to exercise their right
to dispose of the collateral in order to satisfy the outstanding debt. Keller, who works in
the department at the bank responsible for these types of sales, is also a novice pilot
and is interested in buying his own plane. Seeing thatthe outstanding loan principal
amount was just over $121,000, Keller decided to purchase the plane himself. He
notified his supervisor that he wanted to buy the plane for the same amount that was still
owed on it rather than putting it up forauction. His manager felt that since the bank
would come out even and not of the expense of sending the plane to auction, he would
allow Keller to buy it. The plane’s fair market value was approximately $270,000. Have
Keller and his manager committed any ethical violations?
[return to top]

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Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Surety in a Secured Transaction
o Priority of Creditors in Debtor Asset Distribution
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner ideas in a mostly clear present ideas in a clear
and with strong manner and with a mostly manner and with strong
organizational structure.The strong organizational organizational structure.
assignment includesan structure. The assignment The assignment includes an
appropriate includes an appropriate introduction, content,
introduction, content, and introduction, content, and and conclusion, but

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conclusion. Coverage of conclusion. Coverage of coverage of facts,

facts, arguments, and facts, arguments, and arguments, and
conclusions are logically conclusions are mostly conclusions are not
related and consistent. 10 logically related and logically related and
points consistent. consistent.
7 points 0 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
Offers criticism in an 0 points
a constructive manner.
Provides both positive and offensive manner.

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negative feedback.5 Provides only negative

points feedback.
3 points
[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 33:
Mortgages

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 343
Cengage Supplements.................................................................................................................................................. 343
List of Student Downloads ....................................................................................................................................... 343
Chapter Objectives ....................................................................................................................................................... 343
Key Terms ........................................................................................................................................................................ 343
What's New in This Chapter ........................................................................................................................................ 344
Chapter Outline ............................................................................................................................................................. 344
Discussion Questions ...................................................................................................................................................... 346
Additional Resources ..................................................................................................................................................... 347
Cengage Video Resources ...................................................................................................................................... 347
Appendix......................................................................................................................................................................... 347
Generic Rubrics.......................................................................................................................................................... 347
Standard Writing Rubric ......................................................................................................................................... 348
Standard Discussion Rubric ...................................................................................................................................... 348

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the concept of mortgages.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

134. Distinguish between fixed- and adjustable-rate mortgage loans

135. Identify ways lenders can protect their interests

136. State the debtor protection provisions of the Truth-in-Lending Act

137. Identify ways to avoid foreclosure proceedings

Key Terms
default: Failure to pay a debt when it is due.
down payment: The part of the purchase price of real property that is paid in cash up front, reducing
the amount of the loan or mortgage.
equitable right of redemption: The right of a defaulting borrower to redeem property before a
foreclosure sale by paying the full amount of the debt, plus any interest and costs that have accrued.
forbearance: The act of refraining from exercising a legal right; an agreement between a lender and a
borrower in which the lender agrees to temporarily cease requiring mortgage payments, to delay
foreclosure, or to accept smaller payments than previously scheduled.
foreclosure: A proceeding in which a mortgagee either takes title to or forces the sale of the
mortgagor’s property in satisfaction of a debt.
homeowner’s insurance: A form of property insurance that protects the home of the insured person and
its contents against losses.
homestead exemption: A law permitting a debtor to retain the family home, either in its entirety
or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in
bankruptcy.

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mortgage: A written instrument that gives a creditor (the mortgagee) an interest in, or lien on, the
debtor’s (mortgagor’s) real property as security for a debt. If the debt is not paid, the property can be
sold by the creditor and the proceeds used to pay the debt.
mortgage insurance: Insurance that compensates a lender for losses due to a borrower’s default on
a mortgage loan.
prepayment penalty clause: A provision in a mortgage loan contract that requires the borrower
to pay a penalty if the mortgage is repaid in full within a certain period.
short sale: A sale of real property for an amount that is less than the balance owed on the
mortgage loan, usually due to financial hardship.
workout agreement: A formal contract between a debtor and his or her creditors in which the parties
agree to negotiate a payment plan for the amount due on the loan instead of proceeding to foreclosure.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

1 New Case:
o Case Analysis 29.1: Picerne Construction Corp. v. Villas (2016)—on a state
mechanic’s lien statute that requires the lien to be filed no more than ninety daysafter
―completion of the work.‖
o New Case 29.2: Banc of California, N.A. v. Madhok (2019)—a property owner
defaulted on her mortgage, and the lender obtained a writ of execution for a sheriff’s
sale of the property. After the foreclosure sale, the former owner askedthe court that
had issued the writ to set aside the sale, and the court refused. Indoing so, did the court
abuse its discretion?
o Case 29.3: HSBC Realty Credit Corp. (USA) v. O’Neill (2014)—on a loan guaranty
signed by an LLC’s member for a $8.1 million loan to the LLC.
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on defenses of the guarantor(based on
2017 case)
[return to top]

Chapter Outline
II. Types of Mortgages- An individual who buys real property typically borrows the funds from a
financial institution to pay for it. A mortgage is a written instrument that gives the creditor an
interest in, or a line on, the property as security for the payment.
a. Fixed-Rate Mortgages versus Adjustable-Rate Mortgages
i. Fixed-rate mortgage—a standard mortgage with a fixed rate of interest.
Payments are the same for its duration. The interest rate may be based on the
borrower’s credit history, credit score, income, and debts.

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ii. Adjustable-rate mortgage—the interest rate on an changes periodically. The rate

may begin relatively low and fixed. After a certain time, and at certain intervals,
the rate adjusts. The adjustment consists of a specified number of points added to
an index rate. Most ARMs limit the amount that the rate can increase over the
duration of the loan.

III. Lender Protections

a. Mortgage Insurance- usually required if a borrower does not make a down
payment of at least 20% of the mortgage price
b. Recording of the Mortgage Loan- ensures the creditor is officially on record asholding
an interest in the property
c. Contract Provisions- Terms may include—
i. Loan terms—the amount, the interest rate, the period of repayment, andothers.
ii. Prepayment penalty clause.
iii. Provisions for the maintenance of the property.
iv. A statement obligating the borrower to maintain homeowners’ insurance.
v. A list of the borrower’s non-loan financial obligations—property taxes andso on.
vi. Creditor protections—mortgage insurance stipulations, for example.
IV. Borrower Protections
a. Predatory Lending- Two specific types of practices are at the core of a violation:
i. Steering and targeting
ii. Loan flipping
b. The Truth-in-Lending Act
i. Disclosures:
1. loan principal
2. interest rate at which the loan is made
3. APR
4. All fees and costs associated with the loan
ii. Prohibitions- TILA prohibits a number of lender abuses such as pressuring an
appraiser to misstate the value of a property or advertise a loan as fixed-rate if
its rate or payment amounts will change

V. Mortgage Foreclosure- If a borrower defaults, or fails to pay a loan, the lender can foreclose on
the mortgaged property. The foreclosure process allows a lender to repossess and auction the
property. A foreclosure can be expensive and remains on a borrower’s credit report for seven
years.
a. Ways to Avoid Foreclosure
i. Forbearance—the postponement of part or all of the payments of a loan in
danger of foreclosure. This may be based on a borrower’s securing a new job,
selling the property, or some other factor.

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ii. Workout—a voluntary attempt to cure a default. A workout agreement sets

out the parties’ rights and responsibilities—for example, a lender may agree to
delay foreclosure in exchange for a borrower’s financial information.
iii. Short sale—a sale of the property for less than the balance due on a mortgage
loan. A borrower—who typically must show some hardship— sells the property
with the lender’s consent.
b. Foreclosure Procedure- A lender must strictly comply with the terms of the state statute
governing foreclosures.
i. Judicial foreclosure- supervised by the court
ii. Power of sale foreclosure- lender can foreclose and sell the property without
judicial supervision
iii. Acceleration clauses- allows the lender to call the entire loan due under certain
conditions
iv. Notice of default and notice of sale
v. Deficiency judgments- if the final sales price of the foreclosure sale is not
enough to cover the loan amount, the lender can generally ask a court for a
deficiency judgment to make up the difference.
c. Redemption Rights
1. In all states, a borrower can exercise an equitable right of redemption to
buy the property after default by paying the amount of the debt, plus
interest and costs, before the foreclosure sale.
2. In some sates, a borrower can exercise a statutory right of redemption to
buy the property even after a judicial foreclosure and sale of the
property at auction to a third party. This right may exist for up to a year
after the sale. Some states allow the borrower to retain possession of
the property until the redemptionperiod ends.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is the usual method of mortgage foreclosure? The usual method of foreclosure is a judicial sale
at which the mortgaged real estate is sold. If the sale proceeds cover the mortgage debt and foreclosure
costs, the debtor receives any surplus. If the proceeds do not cover the debt and costs, the mortgagee can
seek to recover the difference through a deficiency judgment, which is obtained in a separate action. A
deficiency judgment entitles the creditor to recover this difference from a sale of a debtor’s other
nonexempt property. Before a foreclosure

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sale, a mortgagor can redeem the property by paying the debt, plus any interest and costs. (This
right is known as the equity of redemption. In some states, a mortgagor may redeem property within a
certain time—called a statutory period of redemption—after the sale.)

2. How might a notice of default and foreclosure actually benefit a debtor? A debtor benefits most
from having a debt forgiven and paying a debt is the most common method to accomplish this end. If a
notice of default and foreclosure prompts an otherwise tardy debtor into paying down a debt, the debtor
benefits by preventing damage to his or her credit ratings. Other debtors also benefit because creditors
are encouraged to make more credit available, and can afford to do so at a cheaper price because the
number of defaults is reduced.

3. Should the federal government regulate the advertising of real property and mortgages on the
Internet to protect consumers from potential fraud? If so, what kind of regulations would be
appropriate, and how might they be enforced? Yes, because the possibility that real estate buyers and
sellers might otherwise be deceived by misleading or false advertising is too great and the consequences
too severe. Appropriate regulations might resemble those that already exist to regulate real estate and
mortgages and other advertising at the federal level. No, although some applicable federal regulation of
marketing already exists, because the states should more appropriately regulate the advertising of real
property and mortgages and other aspects of such transactions that occur within their borders.

[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Surety in a Secured Transaction
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

348
website, in whole or in part.
 Business Law: Text & Exercises (MindTap Course List)

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not

349
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20 points motivate other students to

respond.
10 points
Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 34:
Bankruptcy

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 350
Cengage Supplements.................................................................................................................................................. 350
List of Student Downloads ....................................................................................................................................... 350
Chapter Objectives ....................................................................................................................................................... 350
Key Terms ........................................................................................................................................................................ 350
What's New in This Chapter ........................................................................................................................................ 351
Chapter Outline ............................................................................................................................................................. 351
Discussion Questions ...................................................................................................................................................... 356
Additional Activities and Assignments ....................................................................................................................... 357
Additional Resources ..................................................................................................................................................... 358
Cengage Video Resources ...................................................................................................................................... 358
Appendix......................................................................................................................................................................... 358
Generic Rubrics.......................................................................................................................................................... 358
Standard Writing Rubric ......................................................................................................................................... 359
Standard Discussion Rubric ...................................................................................................................................... 360

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Purpose and Perspective of the Chapter

The purpose of this chapter is to further examine bankruptcy law, including Chapter 7, 11, 12 and 13.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

138. Describe three common types of bankruptcy relief

139. List the duties of a bankruptcy trustee

140. Identify the debtor and procedures in a Chapter 11 Reorganization

141. Explain how a Chapter 13 plan differs from Chapter 7 and 11 plans

Key Terms
Automatic stay: In bankruptcy proceedings, the suspension of almost all litigation and other
action by creditors against the debtor or the debtor’s property. The stay is effective the moment the
debtor files a petition in bankruptcy.
bankruptcy trustee: A person appointed by the court to man- age the debtor’s funds in a
bankruptcy proceeding.
cram-down provision: A provision of the Bankruptcy Code that allows a court to confirm a
debtor’s Chapter 11 reorganization plan even though only one class of creditors has accepted it.
discharge: (1) The termination of an obligation, such as occurs when the parties to a contract have fully
performed their contractual obligations. (2) The termination of a bankruptcy debtor’s obligation to pay
debts.
liquidation: The sale of the nonexempt assets of a debtor and the distribution of the fundsreceived
to creditors.
order for relief: A court’s grant of assistance to a complainant. In bankruptcy proceedings, the order
relieves the debtor of the immediate obligation to pay the debts listed in the bankruptcy petition.
petition in bankruptcy: The document that is filed with a bankruptcy court to initiate
bankruptcy proceedings.

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U.S. trustee: A government official who performs certain administrative tasks that a bankruptcy judge
would otherwise have to perform.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New chapter-opening scenario on increase for brick-and-mortar retailers due to thedramatic

rise of online retailers, such as Amazon.com.
 Updated the claim amounts necessary for creditors to file an involuntary action
 1 New Case:
o Case 31.1: In re Anderson (2016)—on distribution to secured creditors.
o Case 31.2: In re Cummings (2015)—on whether a bankruptcy court properly
denied a discharge based on the debtors’ conduct.
o New Case 31.3: In re Chamberlain (2018)—on whether a promise to pay children’scollege
expenses qualified as a ―domestic-support obligation‖ that is non- dischargeable in a
Chapter 13 bankruptcy.
 3 New Case in Points
o 2017 case on calculating when a debtor is able to pay unsecured debts
o 2017 case on transfers that do not constitute preferences
o 2017 case on fraudulent transfers
 1 New Case Problem
o 2018 case on the reorganization plan
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on reorganization (based on2017
case)
 New Unit-Ending Task-Based Simulation feature
[return to top]

Chapter Outline
I. The Bankruptcy Code- The U.S. Constitution gave Congress the power to establish
―uniform laws on the subject of bankruptcies throughout the United States.‖ Federal
bankruptcy laws (as amended most recently in the 2005 Bankruptcy Reform Act) are called the
Bankruptcy Code or the Code.
a. Types of Bankruptcy Relief- The Bankruptcy Code is in Title 11 of the U.S.C. andhas eight
chapters. Chapters 1, 3, and 5 include definitions and provisions governing case
administration, creditors, debtors, and estates.
i. Chapter 7 provides for liquidation.
ii. Chapter 11 governs reorganizations.
iii. Chapters 12 and 13 provide for the adjustment of debts by parties with regular
incomes (family farmers under Chapter 12).

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b. Poll Activity: 1 minute total for poll (additional 3 minutes for discussion).
Asks students’ to gauge their tolerance for the use of bankruptcy relief.
c. Voluntary Bankruptcy- Available for Chapter 7, 11, or 13. Brought by the debtor.
Includes a list of secured and unsecured creditors, in addition to financial statements, and
a credit counseling certificate. Failing to provide the appropriate documents is grounds
for dismissal. If the filing is found proper, the court will enter an order for relief.
d. Involuntary Bankruptcy- When the creditors force the debtor into bankruptcy. Cannot
be commenced against a farmer or charitable organization. Requires:
i. debtor has 12 or more creditors, three of more of those having unsecured claims
adding up to at least $16,750 that join in the petition.
ii. If debtor has fewer than 12 creditors, one or more creditor having an unsecured
claim of $16,750 or more may file.
e. Automatic Stay- The automatic stay protects a debtor’s property from creditors’ actions.
A creditor’s willful violation of the stay may entitle a party to recover compensatory and
punitive damages, costs, and attorneys’ fees.

II. Liquidation Proceedings- In a Chapter 7 liquidation (an ordinary or ―straight‖

bankruptcy), a debtor states his or her debts and turns his or her assets over to a trustee, who sells
nonexempt assets and distributes the proceeds to creditors. With exceptions, the rest of the debts
are discharged.
a. Substantial Abuse—Means Test- A grant of relief cannot be ―substantial abuse‖
of Chapter 7.
i. The Basic Formula- If a debtor’s family income is more than the median family
income in the state in which the petition is filed, the petition may be dismissed on
a presumption of abuse.
b. The Bankruptcy Trustee - A trustee’s principal duty is to collect and reduce to money the
property of the debtor’s estate and to close up the estate as fast as is compatible with the
parties’ best interests.
i. Review for Substantial Abuse
A. Within ten days of the first creditors’ meeting, the trustee must review the
debtor’s filing and determine whether abuse is presumed under the
means test, and if so, notify all creditors.
B. When there is a presumption of abuse, the trustee must file a motion to
dismiss the petition, convert it to a Chapter 13 case, or state why not.
The trustee must provide notice of a debtor’s petition to a domestic
support creditor (e.g., an ex-spouse).
ii. Creditors’ Meeting - The U.S. trustee calls the creditors’ meeting within twenty and
forty days of the petition. The debtor must attend (unless excused by the court)
and submit to examination under oath. At the meeting, the trustee ensures that the
debtor is advised of the potential consequences of bankruptcy and of his or her
ability to file for bankruptcy under a different Chapter.

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A. The Trustee’s Powers

B. Right to possession—The trustee has a right to possession of the debtor’s
property and can require persons holding a debtor’s property when
a petition is filed to give the property to thetrustee.
C. Strong-arm power—The trustee’s position is equivalent in rights to that
of certain other parties. A trustee has strong-arm power—the same right
as a lien creditor who could have levied execution on the debtor’s
property.
D. Powers of avoidance—A trustee also has specific avoidance powers to
set aside a transfer of the debtor’s property. These powers include any
voidable rights and the power to avoid.
c. Estate in Bankruptcy- Commencement of a Chapter 7 proceeding creates an estate in
property, which consists of all the debtor’s legal and equitable interests in property
before the filing of the petition. It also includes certain after- acquired property, such as
gifts and inheritances.
i. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small
groups and consider whether each of the following should be an asset included in
the bankruptcy estate:
A. Designer clothing and handbags given as a gift to the debtor
B. Artwork displayed in the home
C. Valuable heirloom jewelry and antiques
D. Private airplane used by the debtor to give flying lessons and alsoused
to take family vacations
d. Property Distribution
i. Creditors’ Claims- Normally, creditors must file proof of their claims within ninety
days of the meeting. In a disputed or unliquidated claim, the court sets the value.
Any creditor’s claim is allowed automatically unless contested by the trustee, the
debtor, or another creditor. Claims for breach of employment contracts or real
estate leases for terms longer than one year are limited to one year’s rent or
wages. Filing a false claimis a crime.
ii. Distribution to Secured Creditors- If collateral is surrendered, a secured party
can accept it in full satisfaction of the debt or sell it, apply the proceeds to the
debt, and become an unsecured creditor for the difference.
iii. Distribution to Unsecured Creditors- There is an order in which unsecured debts
are paid. Each class must be paid before the next class. If proceeds are
insufficient to pay all creditors in a class, payment is proportional, and classes
lower in priority receive nothing. Any amount remaining goes to the debtor. The
order of priority is—
A. Claims for domestic-support obligations.
B. Administrative expenses.

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C. In an involuntary bankruptcy, expenses incurred in the ordinarycourse

of business.
D. Unpaid wages, salaries, and commissions earned within ninetydays
of the filing.
E. Unsecured claims for contributions to employee benefit plans.
F. Consumer deposits.
G. Certain government taxes and penalties.
H. Claims for death or injury resulting from the unlawful operationof a
motor vehicle.
I. Claims of general creditors.
e. Discharge Under Chapter 7
i. Exceptions to Discharge- The most important claims not dischargeableunder
Chapter 7 include the following—
A. Claims for back taxes accruing within two years prior to bankruptcy.
B. Claims for amounts borrowed r to pay federal, or any non-
dischargeable, taxes.
C. Claims against property or money obtained by the debtor underfalse
pretenses or by false representations.
D. Claims based on fraud or misuse of funds by the debtor or claims
involving the debtor’s embezzlement or larceny.
E. Domestic support obligations.
F. Claims for amounts due on a retirement account loan.
G. Claims based on willful or malicious conduct by the debtor.
H. Certain government fines and penalties.
I. Certain student loans, unless payment causes undue hardship.
J. Knowledge Check: 1 minute total. Tests students’ understanding of
which debts are eligible for discharge in bankruptcy.
ii. Objections to Discharge- The following circumstances (relating to the debtor’s
conduct and not to the debt) will cause a discharge to be denied—
A. The debtor’s concealment or destruction of property with theintent
to hinder, delay, or defraud a creditor.
B. The debtor’s fraudulent concealment or destruction of records, orfailure
to keep adequate records, of his or her financial condition.
C. The granting of a discharge to the debtor within eight years ofthe
filing of the petition.
D. The debtor’s failure to attend a required consumer-educationcourse.
E. Proceedings in which the debtor could be found guilty of afelony.

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iii. When a discharge is denied, the assets may still distributed to creditors. After the
bankruptcy proceeding, the debtor remains liable for the unpaid portions of all
claims.
A. Effect of a Discharge—The effect of a discharge is to void any judgment
on a discharged debt and enjoin any action to collect a discharged debt
(but not against a co-debtor).
B. Revocation—A debtor may lose his or her discharge by revocation on
petition by the trustee or a creditor. The court may within a year revoke
a discharge if a debtor acted fraudulently or dishon- estly during
bankruptcy proceedings.
III. Chapter 11- Reorganizations
 Corporations commonly use Chapter 11, but any debtor (except a stockbroker or a
commodities broker) eligible for Chapter 7 is eligible for Chapter 11.
 The same principles cover Chapter 7 and Chapter 11 proceedings (a case may be
voluntary or involuntary, the automatic stay rules apply, and so on).
 Under Chapter 11, creditors and debtor plan for the debtor to pay some debts,be
discharged of the rest, and continue in business.
a. Creditors’ Committees- A committee of unsecured creditors is appointed to consult with
the debtor (or the trustee) about administration of the case or formulation of the plan.
Additional committees may be appointed to represent special-interest creditors. In most
cases, orders affecting the estate are not entered without the committees’ input.
b. The Reorganization Plan
i. Filing the Plan- A debtor may file a plan within the first 120 days (to eighteen
months) after the date of the order for relief. If the debtor does not meet the
deadline, any party may propose a plan.
ii. Acceptance of the Plan- Once developed, a plan is submitted to each class of
creditors, who must accept it unless the class is not adversely affected by it.
iii. Confirmation of the Plan- For an individual, confirmation requires payment of
domestic-support obligations. For a small business, confirmation must occur within
forty-five days. Even if all classes accept a plan, the court may not confirm it if it
is not ―in the best interests of the creditors.‖ If only one class accepts a plan, the
court may still confirm it under the Code’s cram down provision.
iv. Discharge- A plan is binding on confirmation. Claims are not discharged if they
would be denied in a liquidation proceeding. An individual debtor is not
discharged until a plan’s completion.
v. Knowledge Check: 1 minute total. Tests students’ understanding about cram-
down provisions.

IV. Chapter 13- Adjustment

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a. Individuals’ Repayment Plans—Chapter 13- Individuals (not partnerships or

corporations) with regular income who owe fixed unsecured debts or fixed secured debts
of less than certain statutorily specified amounts may use Chapter 13.
i. Good Faith Requirement- A debtor must act in good faith at the time of the filing
of the plan and the filing of the petition.
ii. The Repayment Plan- Only a debtor may file a plan. This plan may provide for
the payment of all obligations in full or for payment of an amount less than 100
percent. The plan must provide for—
A. Turnover of the debtor’s future earnings or income to the trustee to
execute the plan.
B. Full payment all claims entitled to priority. Payments must be completed
within three to five years, depending on the debtor’s family income.
C. The same treatment of each claim within a particular class of claims.
a. Length of the Plan- Subject to the means test for family median
income, the time for payment may not exceed three years unless
the court extends it to five years.
b. Confirmation of the Plan- This will occur in a hearing within
twenty to forty-five days after the creditors’ meetingif—
i. Secured creditors accept it.
ii. It provides that creditors retain their liens.
iii. The debtor surrenders property securing the claimsto the
creditors.
iv. Creditors with purchase-money security interests in
(a) motor vehicles bought within 910 days of a petition
retain their liens until they are paid in full and (b) other
personal property bought within one year are covered
by the plan.
iii. Discharge- Most debts are dischargeable, except—
A. Allowed claims not provided for by the plan.
B. Certain long-term debts.
C. Certain taxes and payments on retirement accounts.
D. Claims for domestic-support obligations.
E. Debts related to injury or property damage caused while drivingunder
the influence of alcohol or drugs.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

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1. How are secured debts handled in a bankruptcy proceeding? Within thirty days of filing a petition or
before the first creditors’ meeting, whichever is first, a consumer-debtor must file with the clerk of court
a statement of intent to retain or surrender secured collateral. (The trustee is to enforce the statement
within forty-five days, or the automatic stay is terminated.) If the collateral is surrendered, the secured
party can accept it in full satisfaction of the debt or foreclose on it and use the proceeds to pay off the
debt. If the value exceeds the debt, the proceeds cover reasonable fees and costs incurred because of the
debtor’s default. Any excess is used to satisfy unsecured creditors’ claims. If the collateral’s value is less
than the debt, the secured creditor becomes an unsecured creditor for the difference.

2. What is the essential difference between bankruptcy under Chapter 7 and bankruptcy under
Chapter 11? Under Chapter 7, a debtor’s assets are liquidated; under Chapter 11, a debtor’s assets are
administered in the hope of a continuation in business and a return to solvency. Under Chapter 11, a
debtor generally continues in business as a debtor in possession (although the court may appoint a trustee
to operate the business if gross mismanagement is shown or if appointing a trustee is otherwise in the
estate’s best interest).

3. Does the BAPCA act adequately balances the interests of creditors and debtors? Why or why not?
The act may subject many individuals to additional financial risk. Supporters of the new law contend that it
will curb abuse by deterring financially troubled debtors from looking at bankruptcy as a mere ―planning
tool‖ instead of as a last resort. Critics of the act argue that it will make it difficult for debtors to
obtain a ―fresh start‖ financially—one of the goals of bankruptcy law.
[return to top]

Additional Activities and Assignments

13. Business Case: Bankruptcy
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. An individual can file for Chapter 7 bankruptcy once every 8 years. Is this too often?
Or not often enough?
2. What debts should be exempt (or non-exempt) from discharge? Why?
3. When a business files for bankruptcy, what is the economic ripple effect to other
businesses and the economy?
4. Should there be any criminal penalties for businesses or individuals who incur debts
knowing that they are unable to pay?
d. Role Play: Break into small groups of 5-7 students.

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e. The group should imagine they are the CEO of the creditor shipping company. The
company’s financial well-being is tied to being paid by Caine’s business and they are
concerned that a discharge of the debt or even a significant delay in payment (through
a reorganization payment plan) would cause the shipping company to file bankruptcy
as well. Develop a strategic plan to implement financial safeguards for the company
which would help avoid this kind of threat.(This may include additional corporate policies
and procedures relating to fulfilling service orders, requiring personal guarantors on
accounts, securing
transactions with collateral, etc.) Once you have a plan discuss whether you thinkany of
these safeguards would inhibit business? Why or why not?
f. Writing Assignment: Describe, in order of priority, which of Caine’s personal creditors
will be paid out and how much each is entitled to receive and why. Also identify any
debts that cannot be discharged and any assets Caine is entitled to keep and why.
g. Ethics Question: If a business owner, or individual, purposely incurs debts with the intent
of filing for Chapter 7 bankruptcy and having those debts discharged, have they
committed an unlawful act? Is it unethical to incur these debts if it is lawful to employ a
Chapter 7 bankruptcy discharging them? Why?
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Chapter 7 Bankruptcy
o Chapter 7, 11, and 13 Bankruptcies
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 35:
Insurance

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 362
Cengage Supplements.................................................................................................................................................. 362
List of Student Downloads ....................................................................................................................................... 362
Chapter Objectives ....................................................................................................................................................... 362
Key Terms ........................................................................................................................................................................ 362
What's New in This Chapter ........................................................................................................................................ 363
Chapter Outline ............................................................................................................................................................. 363
Discussion Questions ...................................................................................................................................................... 366

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Additional Resources ..................................................................................................................................................... 367

Cengage Video Resources ...................................................................................................................................... 367
Appendix......................................................................................................................................................................... 367
Generic Rubrics.......................................................................................................................................................... 367
Standard Writing Rubric ......................................................................................................................................... 367
Standard Discussion Rubric ...................................................................................................................................... 368

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Purpose and Perspective of the Chapter

The purpose of this chapter is to review various types of insurance coverage and defenses to payment.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

142. Define important insurance terms

143. State when insurance coverage begins

144. Explain how courts interpret insurance provisions

145. Identify defenses an insurance company may have against payment on a policy

Key Terms
binder: A written, temporary insurance policy.
coinsurance clause: A clause in an insurance contract that encourages property owners to insure their
property for an amount as close to full value as possible. If the owner insures the property up to a
specified percentage—usually 80 percent—of its value, she or he will recoverany loss up to the face
amount of the policy.
incontestability clause: A clause in a policy for life or health insurance stating that after the policy
has been in force for a specified length of time (usually two or three years), the insurer cannot contest
statements made in the policyholder’s application.
insurable interest: (1) In contract law, a property interest in goods being sold or leased that is
sufficiently substantial to permit a party to insure against damage to the goods. (2) In the
context of insurance, an interest in a person’s life or well-being that is sufficiently substantial that insuring
against the person’s death or injury does not amount to a mere wagering contract. insurance: A contract
by which the insurer promises to reimburse the insured or a beneficiary in the event that the insured is
injured, dies, or sustains damage to property as a result of particular, stated contingencies.
policy: In insurance law, the contract between the insurer and the insured.

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premium: In insurance law, the price paid by the insured for insurance protection for a specified period of
time.
risk: A prediction concerning potential loss based on known and unknown factors.
risk management: In the context of insurance, the transfer of certain risks from the insured to the
insurance company by contractual agreement.
term insurance: A type of life insurance policy for which premiums are paid for a specified term and
payment is made by the insurer only if the insured dies within the term period. underwriter: In insurance
law, the insurer, or the one assuming a risk in return for the payment of a premium.
universal life: A type of insurance that combines some aspects of term insurance with some aspects of
whole life insurance.
whole life: A type of life insurance in which the insured pays a level premium for his or her entire life
and in which there is a constantly accumulating cash value that can be withdrawn orborrowed against
by the borrower; sometimes referred to as straight life insurance.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o Case 50.1: Breeden v. Buchanan (2015)—on whether a man still had an insurable interest
in a home he no longer owned..
o New Case 50.2: Cannon v. Farm Bureau Insurance Company (2019)—an insurer
discovered that an injured party’s caregivers filed fraudulent claims for their services.
The court had to whether this fraud provided the insurer with a valid defense against
payment.
 1 New Case in Point
o 2017 case on defenses against payment of insurance claim
 1 New Business Scenario on the timing of insurance coverage
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on bad faith (based on 2017case)
[return to top]

Chapter Outline
I. Insurance Terminology and Concepts
a. Insurance Terminology- Insurance has its own special concepts and
terminology—
i. Policy—Insurance contract.
ii. Premium—Consideration paid to the insurer.
iii. Underwriter or insurer—Insurance company.
iv. Insured—Person or party covered by the insurance policy.
v. Agent—Insurance company representative who works for the insurer.

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vi. Broker—Independent contractor who sells insurance policies.

vii. When a broker deals with an applicant for insurance, the broker is, in effect, the
applicant’s agent. An insurance agent is not the applicant’s agent, however, but
an agent of the insurer, to whom the agent owes fiduciary duties.
b. Risk Management and Risk Pooling
c. Classifications of Insurance- Insurance is classified according to the nature of the risk
involved. The classifications include automobile, fire, health, homeowners’, life, and
mortgage insurance.
d. Insurable Interest- A person can insure anything in which he or she has an insurable
interest.
i. Life Insurance- One must have a reasonable expectation of benefit from the
continued life of another to have an insurable interest in that person’s life. This
interest must exist when the policy is obtained.
1. Life Insurance on Family Members- A close family relationship gives a
person an insurable interest in the life of another.
2. Key-Person Life Insurance- This is insurance an organization obtains on
the life of a person important to it.
ii. Property Insurance- In the case of property, an insurable interest exists when one
would sustain a pecuniary loss from its destruction. This interest must exist when
the loss occurs.
iii. Knowledge Check: 1 minute total. Tests students’ understanding of insurable
interest.
II. The Insurance Contract- Insurance policies generally are in standard form; and in some states,
standardization of forms is required.
a. Application for Insurance- The application is part of the insurance contract. Because an
insurance company evaluates the risk based on the information in the application,
misstatements or misrepresentations can void a policy.
b. Effective Date
i. A broker is the applicant’s agent. If the broker fails to obtain coverage, and
the applicant is harmed, the broker is liable.
1. Binder- A binder indicates that a policy is pending. A person who seeks
coverage from an insurer’s agent is usually protected from the moment
the application is made and a premium is paid.
2. Life Insurance- An insurance applicant may be protected from the time he
or she pays the first premium, or an applicant may not be protected until
he or she passes a physical exam.
c. Provisions and Clauses
i. Provisions Mandated by Statute- A policy includes whatever a statute requires,
even if the policy does not expressly include it.
ii. Incontestability Clauses- After a policy has been in effect for a statutorily
mandated period, the insurer cannot contest statements made in the application.

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iii.Coinsurance Clauses- These provide that if a property owner insures the

property up to a specified percentage of its value, the owner will recover any
loss up to the face amount of the policy. If the insurance is for less, the owner
suffers a proportionate share of the loss. Students might find it helpful to work
through a few examples of coinsurance clauses.
iv. Appraisal and Arbitration Clauses- Under these clauses, if the parties cannot
agree on the amount of a loss, an appraisal can be demanded, subject to the
review of a third party
v. Multiple Insurance Coverage- If the amount of the coverage under several
policies covering the same loss exceeds the amount of the loss, the insured can
collect only each insurer’s proportionate share of the liability, relative to the total
amount of the insurance.
vi. Antilapse Clauses- A policy may not automatically lapse if a payment is not
made on the due date—i.e., there may be a grace period under an antilapse
clause. If no payment is made after the grace period, the policy may be
cancelled, or the insurer may—
1. Extend the insurance for a period of time.
2. Issue a policy with less coverage to match the amount of the
payments.
3. Pay to the insured the policy’s cash surrender value.
d. Cancellation- An insured can cancel a policy at any time. An insurer can cancel only on
written notice. The reasons for cancellation depend somewhat on the type of insurance—
i. Auto insurance—Can be canceled for nonpayment of premiums or suspension of
the insured’s driver’s license.
ii. Property insurance—Can be canceled for nonpayment of premiums.
iii. Life and health insurance—May be canceled before the date of an incontestability
clause for false statements by the insured.
iv. Insurance may not be canceled for reasons of discrimination or other violations of
public policy, including the insured’s appearance as a witnessagainst the insurer.
e. Defenses against Payment- An incontestability clause may prevent an insurance company
from asserting certain defenses. A misstatement of age is not sufficient to void a policy.
But an insurance company’s defenses to payment include ordinary contract defenses and
others—
i. Fraud or misrepresentation—Defense against paying a claim and disaffirming or
rescinding a policy.
ii. Lack of insurable interest—Renders a policy void from the beginning.
iii. Act that is illegal or violates public policy—Supports refusal to pay a claim or
rescission of a policy.
iv. Knowledge Check: 1 minute total. Tests students’ understanding of an appraisal
clause.

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[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Discuss the concept of risk pooling. All types of insurance companies use the concept of risk pooling in
that they spread the risk among a large number of people—the pool—to make the premiums small
compared with the coverage offered. Through the extensive correlation of data over a period of time,
insurers can estimate fairly accurately the total amount they will have to pay if they insure a particular
group.

2. How is the effective date of an insurance policy usually determined? Coverage on an insurance
policy can begin when a binder is written, when the policy is issued or, depending on the terms of the
contract, after a certain period of time has elapsed. Alternatively, the parties may agree that a life
insurance policy will be binding at the time the insured pays the first premium or the policy may be
expressly contingent upon the applicant’s passing a physical examination. Because the insurance policy is
essentially a contract between the insured and the insurer, the parties have great freedom to set the
particular terms and conditions that will govern the effective date of the policy.

3. What sort of defenses may an insurance company raise against payment on a claim? An insurance
company can raise any of the defenses that would be valid in an ordinary action on a contract as well as
some defenses that do not apply in ordinary contract actions. If the insurance company can show that the
policy was procured by fraud, misrepresentation, or violation of warranties, it may have a valid defense
for not paying on a claim. Improper actions, such as those that are against public policy or that are
otherwise illegal, can also give the insurance company a defense against the payment of a claim or allow
it to rescind the contract.

4. What are some of the types of insurance policies that businesses carry to protect themselves from
risk? General Liability. Comprehensive general liability insurance can cover virtually as many risks as the
insurer agrees to cover. Among the types of coverage that a business might wish to acquire, for example,
is protection from liability for injuries arising from on-premises events not otherwise insured against, such as
company social functions. Some specialized establishments may be subject to liability in individualized
circumstances, and policies can be drafted to meet their needs. In many jurisdictions, for example, statutes
impose liability on a seller of intoxicating liquor when a buyer of the liquor, intoxicated as a result of the
sale, injures a third party. Legal protection may extend not only to immediately consequent injuries, such as
quadriplegia in an automobile accident, but also to the loss of support suffered by a family because of the
injuries. Insurance can provide coverage for these injuries and losses. Product Liability. Manufacturers may
be subject to liability for injuries that their products cause, and product liability insurance can be written to
match specific products’ risks. Coverage can be procured under a comprehensive general liability policy or
under a separate policy. The coverage may include expenses involved in recalling and replacing a
product that has proved to be defective. Professional Malpractice. In recent years, professionals—
attorneys, physicians,

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architects, and engineers, for example—have increasingly become the targets of negligence suits.
Professionals may purchase malpractice insurance to protect themselves against such claims. The large
judgments in some malpractice suits have received considerable publicity and are sometimes cited in
what has been termed ―the insurance crisis,‖ because they have contributed to a considerable
increase in malpractice insurance premiums in recent years. Workers’ Compensation. Workers’
compensation insurance covers payments to employees who are injured in accidents arising out of and in
the course of employment (that is, on the job). Workers’ compensation is governed by state statutes that
provide for fixed awards to employees or their dependents without considering issues of proof or
negligence. Such statutes make the employer strictly liable for the injuries of his employees but workers’
compensation is an exclusive remedy and will bar any common-law remedies that the employee might
otherwise have asserted.
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o The Insurable Interest
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but
conclusion. Coverage of coverage of facts,

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facts, arguments, and facts, arguments, and arguments, and

conclusions are logically conclusions are mostly conclusions are not
related and consistent. 10 logically related and logically related and
points consistent. consistent.
7 points 0 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 36:
Personal Property

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 370
Cengage Supplements.................................................................................................................................................. 370
List of Student Downloads ....................................................................................................................................... 370
Chapter Objectives ....................................................................................................................................................... 370
Key Terms ........................................................................................................................................................................ 370
What's New in This Chapter ........................................................................................................................................ 371
Chapter Outline ............................................................................................................................................................. 371
Discussion Questions ...................................................................................................................................................... 373
Additional Activities and Assignments ....................................................................................................................... 374
Additional Resources ..................................................................................................................................................... 375
Cengage Video Resources ...................................................................................................................................... 375
Appendix......................................................................................................................................................................... 375
Generic Rubrics.......................................................................................................................................................... 375
Standard Writing Rubric ......................................................................................................................................... 375
Standard Discussion Rubric ...................................................................................................................................... 376

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Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the concept of personal property as distinguishable from real
property.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

146. Explain the nature of personal property

147. Identify different types of property ownership

148. State how ownership of personal property is acquired

149. Define mislaid, lost, and abandoned property

Key Terms
abandoned property: Property that has been discarded by the owner, who has no intention of reclaiming
it.
accession: The addition of value to personal property by the use of labor or materials. confusion: The
mixing together of goods belonging to two or more owners to such an extent that the separately owned
goods cannot be identified.
constructive delivery: A symbolic delivery that confers the right to take possession of property that cannot
be physically delivered.
dominion: Ownership rights in property, including the right to possess and control theproperty.
estray statutes: A statute defining finders’ rights in property when the true owners are unknown.
gift: A voluntary transfer of property made without consideration, past or present.
gift causa mortis: A gift made in contemplation of imminent death. The gift is revoked if the donor does
not die as contemplated.
gift inter vivos: A gift made during one’s lifetime and not in contemplation of imminent death, in contrast to
a gift causa mortis.

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lost property: Property that the owner has involuntarily parted with and then cannot find or recover.
mislaid property: Property that the owner has voluntarily parted with and then has
inadvertently forgotten.
personal property: Property that is movable; any property that is not real property; sometimescalled
personalty or chattel.
property: Legally protected rights and interests in anything with an ascertainable value that is subject to
ownership.
real property: Land and everything attached to it, such as trees and buildings.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o Classic Case 48.1: In re Estate of Piper (1984)—on the requirement that a donor
relinquish complete control and dominion over property before a give can be
constructively delivered).
o New Case 48.2: State of Washington v. Preston (2018)—on whether it is
reasonable to believe that a diamond ring found on the floor of a store is
abandoned property.
o Case Analysis 48.3: Zissu v. IH2 Property Illinois, L.P. (2016)—on how a constructive
bailment arose when tenants were evicted from rental property and the landlord
removed their personal property and left it outside where it was stolen or damaged.
 1 New Concept Summary
o on ―Mislaid, Lost, and Abandoned Property‖
 2 New Case Problems
o 2017 case on nature of personal property
o 2017 case on duties of the bailee
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on abandoned property(based
on 2017 case)
[return to top]

Chapter Outline
I. Personal Property versus Real Property- Personal property is moveable. (Real property is
immoveable.) When two or more persons own property, concurrent ownership exists.
a) Why Is the Distinction Important?
i) Taxation- Taxation of types of property differs—businesses may be taxed onpersonal
property (when non-business owners often are not).

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ii) Acquisition- Transfer of personal property can be less formal. Ownership of personal
property can often be proved by simple possession.
b) Conversion of Real Property to Personal Property- Trees and other vegetation severed, and
minerals mined, from real property is personal property.

II. Property Ownership- Rights of Possession- ownership of personal property can take thesame
form as ownership of real property.
a) Fee simple- entitled to use or possess or dispose of the property
b) Concurrent ownership
i) Tenancy in common
ii) Joint tenancy
iii) Community property

III. Acquiring Ownership of Personal Property

a) Possession- Acquiring ownership of personal property by possession occurs with the capture of
wild animals. Those who find lost or abandoned property also can acquire ownership rights
through possession.
b) Production- Writers, inventors, and manufacturers produce personal property and thereby
acquire title.
c) Gift- A gift is a voluntary transfer of property ownership not supported by consideration. The three
requirements are—
 Donative intent.
 Delivery.
 Acceptance.
i) Donative Intent- Donative intent is determined from the language of the donor and the
surrounding circumstances. In a challenge to a gift of a disproportionate share of the donor’s
assets, a court will likely consider the donor’s mental capacity and lookfor evidence of fraud
or duress.
ii) Delivery- Delivery can occur through an agent, or third party.
(1) Constructive Delivery- Examples of actual delivery and constructive delivery include a
key to a safe-deposit box (for delivery of the contents of the box), stock, and contracts.
(2) Relinquishing Dominion and Control- Effective delivery requires giving up complete
dominion and control.
iii) Acceptance- Courts generally assume acceptance unless shown otherwise.
d) Accession- Accession occurs when someone adds value to a piece of property by use of labor or
materials.
(1) Ownership can be in issue if (1) a party has wrongfully caused the accession or (2) the
materials added or labor expended greatly increase the value.
(2) Depending on the degree of good or bad faith and the amount of the increase, ownership
passes, or ownership does not pass but the owner may compensate the improver.
e) Confusion

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(1) When confusion occurs by agreement, honest mistake, or the act of some third party, the
owners all share ownership in proportion to the amount each contributed.
(2) If a person wrongfully and willfully mixes his or her goods with those of another to render
them indistinguishable, thereby causing confusion, the innocent party acquires title to the
total.

IV. Mislaid, Lost, and Abandoned Property- (LO2) The rules governing the ownership of found
property differ depending on whether it is categorized mislaid, lost, or found.
a) Mislaid Property- If property has been mislaid, the owner—not the finder—has first claim to it,
although the owner of the place where the property was mislaid becomes the caretaker. If the
owner does not assert this claim, the owner of the premises on which it was discovered may claim
it.
b) Lost Property- If property has been lost (involuntarily left), the finder has first claim to it—after its
true owner.
i) Conversion of Lost Property- Failing to return property to its true owner is conversion. Many
states require a finder to attempt to locate the owner.
ii) Estray Statutes- Estray statutes require finders to report their finds.
c) Abandoned Property- If property has been intentionally abandoned, a finder’s possession entitles
him or her to its title. A trespasser who finds an item of abandoned property, however, does not
acquire title—the owner of the real property on which it was found does.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. How may a gift be delivered to a donee when physical delivery is impossible due to the nature of
the gift itself? Because some objects cannot be physically delivered, a symbolic or constructive delivery
will be sufficient. Constructive delivery does not confer actual possession of the object in question but
instead constitutes an act that is regarded as legally sufficient for showing that a gift has been made.

2. What is the difference between mislaid, lost and abandoned property? Mislaid property is property
that has been voluntarily placed somewhere by the owner and then inadvertently forgotten. When mislaid
property is found, the owner of the place where the property was mislaid becomes the caretaker of the
property because it is highly likely that the true owner will return to reclaim his or her property. Property
that is involuntarily lost, by contrast, is lost property. A finder of lost property can claim title to the
property against the whole world, except the true owner. If the true owner demands that the lost property
be returned, the finder

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must return it. Finally, property that has been discarded by the true owner who has no intention of claiming
title to it is abandoned property. The finder of abandoned property acquires title to it, and such title is
good against the whole world including the former owner. The owner of lost property who eventually gives
up any attempt to find the lost property will generally be held to have abandoned the property.

3. Is it possible to deliver a gift of personal property over the Internet? Explain. Of course, it is
possible, although not in all cases. Online delivery of personal property, when possible, would usually fall
into the category of constructive delivery. This can be accomplished by e- mailing a combination to a safe,
for example, or other required code numbers or passwords, or transmitting documents of ownership or
documents attesting to a transfer of ownership.
[return to top]

Additional Activities and Assignments

14. Business Case: Personal Property
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. Should hotels be financially responsible for the contents of guests’ rooms in the event
of a break-in/theft?
2. If Alex and Jordan had left valuable items in their vehicle, should the valet or the
hotel be responsible for those items? Why or why not?
3. Should installed display cases be considered fixtures?
d. Role Play: In small groups of 4-6 students, complete the following activity. Divide into
two groups within your small group. One of the groups (2-3 students)should represent the
jewelry store and the other group (2-3 students) should represent Property Owners, Corp.
Imagine that upon moving, the jewelry store wishes to remove the chandelier and take it
with them to install in the new location. Property Owners, Corp. however, wishes to keep
the chandelier and believes it has become a fixture. Because the chandelier was designed
by a famous artist, it is worth more than $2 million and has many design elements used by
the jewelry store in their logo and marketing materials. Each group should develop their
strongest argument as to why they should prevail and present them to the other side for
debate.
e. Writing Assignment: While Alex and Jordan were out to dinner, a flood of water came
through their ceiling as a result of the guest in the room above them closing a bathtub
drain and negligently allowing the water to overflow and flood their room. The water
soaked Alex’s $80,000 handbag, ruining it. The hotel has signs posted on the door of
every room stating that the Hotel Grand is not
responsible for any loss, damage, or theft of guests’ items. What is Alex’s best argument as
to why the hotel is still liable for the cost of the damaged handbag?

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f. Ethics Question: Imagine you are the manager of the hotel. You consider the liability
issues related to having a valet park cars on behalf of your guests in the parking
garage attached to your hotel, such that the valets are employees of the hotel and guests
pay for the service through their hotel bill, or in contrast, the liability of hiring an outside
company to provide the service such that the guests pay the valet directly for the service
and the company takes any liability for problems that arise. Which of these options
provides for less legal liability to the hotel, and what are the ethical implications (if any)
for choosing either path?
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Bailments, and the Rights and Responsibilities of Bailors and Bailees.
o Personal Property
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts,
facts, arguments, and arguments, and

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 Business Law: Text & Exercises (MindTap Course List)

conclusions are logically conclusions are mostly conclusions are not

related and consistent. 10 logically related and logically related and
points consistent. consistent.
7 points 0 points
Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

377
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 Business Law: Text & Exercises (MindTap Course List)

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 37:
Bailments

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 378
Cengage Supplements.................................................................................................................................................. 378
List of Student Downloads ....................................................................................................................................... 378
Chapter Objectives ....................................................................................................................................................... 378
Key Terms ........................................................................................................................................................................ 378
What's New in This Chapter ........................................................................................................................................ 378
Chapter Outline ............................................................................................................................................................. 379
Discussion Questions ...................................................................................................................................................... 381
Additional Resources ..................................................................................................................................................... 381
Cengage Video Resources ...................................................................................................................................... 381
Appendix......................................................................................................................................................................... 382
Generic Rubrics.......................................................................................................................................................... 382
Standard Writing Rubric ......................................................................................................................................... 382
Standard Discussion Rubric ...................................................................................................................................... 382

378
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 Business Law: Text & Exercises (MindTap Course List)

Purpose and Perspective of the Chapter

The purpose of this chapter is to explore the concept of bailments.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

150. Outline the elements of a bailment

151. List a bailee’s rights

152. Identify a bailee’s basic responsibilities

153. What are the bailor’s duties

154. Outline special types of bailments

Key Terms
bailee: One to whom goods are entrusted by a bailor.
bailee’s lien: A possessory (artisan’s) lien that a bailee entitled to compensation can place on the
bailed property to ensure that he or she will be paid for the services provided.
bailment: A situation in which the personal property of one person (a bailor) is entrusted to another (a
bailee), who is obligated to return the bailed property to the bailor or dispose of it as directed.
bailor: One who entrusts goods to a bailee.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 1 New Case

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Classic Case 48.1: In re Estate of Piper (1984)—on the requirement that a donor
o
relinquish complete control and dominion over property before a give can be
constructively delivered).
o New Case 48.2: State of Washington v. Preston (2018)—on whether it is
reasonable to believe that a diamond ring found on the floor of a store is
abandoned property.
o Case Analysis 48.3: Zissu v. IH2 Property Illinois, L.P. (2016)—on how a constructive
bailment arose when tenants were evicted from rental property and the landlord
removed their personal property and left it outside where it was stolen or damaged.
 1 New Concept Summary
o on ―Mislaid, Lost, and Abandoned Property‖
 2 New Case Problems
o 2017 case on nature of personal property
o 2017 case on duties of the bailee
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on abandoned property(based
on 2017 case)
[return to top]

Chapter Outline
V. Elements of a Bailment
a) A bailment is created when personal property is delivered (without title) under an agreement that
the property be returned to the bailor or otherwise disposed of according to its owner’s
directions.
b) Personal Property Requirement- Bailments involving tangible items (jewelry, cattle, autos, and the
like) are more frequent than bailments of intangible personal property (promissory notes, shares
of stock, and so on.
c) Delivery of Possession- Delivery in this context requires (1) surrender of exclusive possession and
control and (2) knowing acceptance of the property. A coat flung over a chair in a restaurant by
a patron does not qualify, nor does jewelry in the pocket of a coat left with the attendant in a
coatroom.
(a) Physical versus Constructive Delivery- Delivery may be actual or constructive (giving
a key to a safe-deposit box).
(b) Involuntary Bailments- An involuntary bailment can occur accidentally or by mistake
(e.g., finding lost property).
d) The Bailment Agreement
(1) No written agreement is required for bailments of less than one year (that is, the Statute
of Frauds does not apply).
(2) A bailment requires the return of bailed property to the bailor or a third person, or
provides for disposal by the bailee. The agreement presupposes that the

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bailee will return the goods originally given by the bailor (unless they were fungible).
(3) Ordinary Bailments versus Special Bailments- The distinguishing feature among the
different types of bailments is which party receives the benefit.
VI. Rights of the Bailee
i) Right of Possession- A bailee has a right to temporary control and possession, which permits
the bailee to recover from third persons for damage or loss to the property.
ii) Right to Use Bailed Property- A bailee has a right to use the property for the purpose of the
bailment.
iii) Right of Compensation- A bailee has a right to be compensated, reimbursed for expenses, or
both. To enforce these rights, a bailee has a right to place an artisan’s lien on the property.
iv) Right to Limit Liability- A bailee has a right to limit liability by type of risk, monetary
amount, or both. The limits—
(1) Must be called to the attention of the bailor.
(2) Cannot be against public policy.
VII. Duties of the Bailee
i) The Duty of Care- A bailee must take proper care of the property during the bailment. As
noted above, the three types of bailments demand different degrees of care (the trend is
toward enforcement of a reasonable standard of care). Failing to exercise appropriate care
is tortious.
ii) Duty to Return Bailed Property- A bailee must surrender or dispose of the property at the end
of the bailment. Failing to return the property is conversion or a breach of contract (unless the
property is lost through no fault of the bailee, which the text mentions).
iii) Lost or Damaged Property- If property is destroyed, lost, damaged, or stolen— unless this
occurs through no fault of the bailee—conversion or negligence is presumed.
VIII. Duties of the Bailor
i) Bailor’s Duty to Reveal Defects- A bailor’s principal duty is to provide the bailee with goods
free from hidden defects that could injure the bailee. Failing to notify the bailee of defects is
negligence.
(1) In a mutual-benefit bailment, the bailor must notify the bailee of defects that the bailor
could have discovered with reasonable diligence.
(2) In a bailment for the sole benefit of the bailee, however, a bailor must notify a bailee
only of known defects.
ii) Warranty Liability for Defective Goods- Courts have applied warranties of fitness to
bailments for hire. UCC Article 2A extends implied warranties of merchantability and fitness
for a particular purpose to bailments whenever those bailments include rights to use the bailed
goods.

IX. Special Types of Bailments

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 Special bailments include those in which a bailee’s duty of care is extraordinary (liability
is absolute), as generally in cases involving common carriers and innkeepers.
 Warehouse companies have the same duty of care as ordinary bailees; but like carriers,
they are subject to extensive coverage of federal and state laws, including UCC Article
7.
a) Common Carriers
(a) Strict Liability Applies- A common-carrier contract of transportation creates a mutual-
benefit bailment, but a common carrier is held to a standard of care based on strict
liability.
(b) Limitations on Liability- This liability may be limited to an amount stated in the
shipment contract.
b) Warehouse Companies- Like ordinary bailees, warehouse companies are liable for loss or
damage to property resulting from negligence.
c) Hotel Operators- Innkeepers, and so on, are held to a strict liability standard with respect to
property brought into the rooms by guests. In most states, innkeepers can avoid strict liability by
providing a safe in which guests may keep their valuables. Statutes generally cover the liability
of innkeepers for items not kept in safes. This liability ranges from limits on dollar amounts to no
liability in the absence of negligence.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. Do bailees have the right to limit their bailment liability? Yes. Bailees can limit their bailment liability
by type of risk, by monetary amount, or both, so long as these limitations are called to the attention of the
bailor and the limitations are not against public policy. Whether notice is effective will depend on the
prominence of the notification itself and any other circumstances that might affect the effectiveness of the
notice. Yet these limitations may not be enforceable if they are considered to be against public policy and
therefore illegal. Exculpatory clauses that limit a bailee’s liability for his or her own wrongful acts will be
carefully reviewed by the courts.
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Bailments, and the Rights and Responsibilities of Bailors and Bailees.
o Personal Property
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in

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discussion by the posted submit discussion by the discussion.0

deadlines. Follows all posted deadlines. Does not points
assignment. instructionsfor follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 38:
Real Property

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 385
Cengage Supplements.................................................................................................................................................. 385
List of Student Downloads ....................................................................................................................................... 385
Chapter Objectives ....................................................................................................................................................... 385
Key Terms ........................................................................................................................................................................ 385
What's New in This Chapter ........................................................................................................................................ 386
Chapter Outline ............................................................................................................................................................. 386
Discussion Questions ...................................................................................................................................................... 389
Additional Resources ..................................................................................................................................................... 390
Cengage Video Resource........................................................................................................................................ 390
Appendix......................................................................................................................................................................... 391

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Generic Rubrics.......................................................................................................................................................... 391

Standard Writing Rubric ......................................................................................................................................... 391
Standard Discussion Rubric ...................................................................................................................................... 392

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine laws related to the transfer of real property.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

155. Define real property

156. Identify common types of real property ownership

157. Explain how real property ownership is transferred

158. Describe eminent domain

Key Terms
adverse possession: The acquisition of title to real property through open occupation, without the consent
of the owner, for a period of time specified by a state statute. The occupation must be actual, exclusive,
open, continuous, and in opposition to all others, including the owner. condemnation: The judicial
procedure by which the government exercises its power of eminent domain. It generally involves two
phases: a taking and a determination of fair value.
deed: A document by which title to real property is passed.
easement: A nonpossessory right, established by express or implied agreement, to make limited use of
another’s property without removing anything from the property.
eminent domain: The power of a government to take land from private citizens for public use on the
payment of just compensation.
fixture: An item of personal property that has become so closely associated with real property that it is
legally regarded as part of that real property.
license: In the context of intellectual property, a contract permitting the use of a trademark,
copyright, patent, or trade secret for certain purposes. In the context of real property, a
revocable right or privilege of a person to come on another person’s land.
life estate: An interest in land that exists only for the duration of the life of a specified
individual, usually the holder of the estate.

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nonpossessory interest: In the context of real property, an interest that involves the right to use land
but not the right to possess it.
quitclaim deed: A deed that conveys only whatever interest the grantor had in the property and therefore
offers the least amount of protection against defects of title.
warranty deed: A deed in which the grantor promises that she or he has title to the property conveyed
in the deed, that there are no undisclosed encumbrances on the property, and that the grantee will
enjoy quiet possession of the property; provides the greatest amount of protection for the grantee.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o New Case 49.1: In the Matter of the Estate of Nelson (2018)—to determine the
distinction between a life estate and a fee.
o Spotlight Case 49.2: Stambovsky v. Ackley (1991)—on whether the buyer of a house had
the right to rescind the sales contract because he was not told that the house was allegedly
haunted.
o Case Analysis 49.3: Montgomery County v. Bhatt (2016)—on whether the owner of land
next to a railroad line could acquire a portion of the right-of-way by adverse possession,
includes some Grateful Dead lyrics at the beginning of the case.
 2 New Case in Points
o 2017 case on license
o 2017 case on adverse possession
 2 New Case Problems
o 2017 case on eminent domain
o 2018 case on transfer of ownership
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on easements (based on 2017
case)
 Updated Limited-Time Group Assignment with a new activity.
[return to top]

Chapter Outline
I. The Nature of Real Property- Real property usually refers to land, but it also includes subsurface
rights, air rights, and fixtures.
a. Land and Structures- Land includes the soil on the surface of the earth, the natural
products or artificial structures attached to it, water on or under its surface, and the air
space above it.
b. Airspace and Subsurface Rights- Significant limitations on air or subsurface rights
normally have to be indicated on the deed.

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i. Airspace Rights- Generally, plane flights do not violate owners’ rights, but strung
wires, leaning buildings, and projecting roofs do).
ii. Subsurface Rights
A. Ownership of land’s surface and subsurface can be separate. Rights to a
subsurface that holds minerals, oil, or natural gas can be valuable.
B. Conflicts may arise between surface and subsurface owners when
attempts are made to excavate. Generally, the owners of subsurface
rights are absolutely liable if their excavation causes the surface to
subside.
c. Plant Life and Vegetation- When land with growing crops is sold, the sale includes the
crops, unless otherwise specified. Crops sold by separately are goods (and the sale is
covered by the UCC [UCC 2–107(2)]).
d. Fixtures- Fixtures—items affixed or attached to real property in a permanent way—are
included in a sale of land if the contract does not provide otherwise.
i. Typical Fixtures- Flooring, cabinets, and windows are typical fixtures. An item will
be deemed a fixture if—
A. It cannot be removed without substantial damage to theremaining realty.
B. It is so adapted to the rest of the realty as to be part of it.
ii. The Role of Intent- The key to determining whether something is a fixture is the
intent of its owner.
iii. Trade Fixtures Are Personal Property- Unlike other fixtures, trade fixtures
generally remain the tenant’s property.

II. Ownership and Other Interests in Real Property

a. Ownership in Fee Simple- An owner in fee simple has the greatest aggregation of rights,
privileges, and power.
i. A fee simple absolute is limited absolutely to a person and his or her heirs and is
assigned forever without limitation or condition.
ii. The rights that accompany a fee simple absolute include the right to use the land
for whatever purpose the owner sees fit (but not to unreasonably interfere with
others’ use of their land).
b. Life Estates- A life estate lasts for the life of some specified individual. The tenant of a
life estate has certain rights with limits—use without waste, extraction of resources by
existing facilities only, mortgage for periods shorter than the life term. A life tenant’s
duties include maintaining the value of the property.
c. Nonpossessory Interests- An easement allows a person to use land without taking
anything from it. A profit allows a person to take something from the land.
i. Easement or Profit Appurtenant- An easement or profit appurtenant attaches to
adjacent property.
ii. Easement or Profit in Gross- An easement or profit in gross does not depend on
the proximity of property—it requires the existence of only

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one parcel of land, which must be owned by someone other than theowner of
the easement or profit in gross.
iii. Creation of an Easement or Profit- Profits and easements are createdby—
A. Deed or will—This involves the delivery of a deed or a dispositionin a
will by the owner.
B. Implication.
C. Necessity—This is like implication but does not require a divisionof
property.
D. Prescription—This is akin to acquiring title by adverse possession.
iv. Knowledge Check: 1 minute total. Tests students’ understanding ofeasements.
v. License- A license is the revocable right of a person to come ontoanother
person’s land, such as a ticket to a movie.

III. Transfer of Ownership

a. Deeds- Possession and title to land can be passed by deed withoutconsideration. A deed
requires—
 The names of the grantor and grantee.
 Words evidencing an intent to convey.
 A legally sufficient description of the land.
 The grantor’s (and spouse’s) signature.
 Delivery.
i. Warranty Deeds- This provides the most protection against defects oftitle,
including covenants that state—
A. The grantor has title to, and the power to convey, the property.
B. The buyer will not be disturbed in possession of the land.
C. The transfer is made without unknown adverse claims of thirdparties.
ii. Quitclaim Deed- This warrants less than other deeds, conveying only
whatever interest the grantor has.
b. Will or Inheritence
c. Adverse Possession- Adverse possession is a means of obtaining title to landwithout
delivery of a deed.
i. Requirements for Adverse Possession- The possession must be—
A. Actual and exclusive.
B. Open, visible, and notorious.
C. Continuous and peaceable for the requisite time.
D. Hostile and adverse.
ii. Purpose of the Doctrine- Adverse possession statutes—
A. Aid in the resolution of boundary disputes and in quieting titlewhen it
is in dispute.

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B. Encourage the use of property by (1) assuring that it remains in the

stream of commerce, (2) depriving owners who sit on their rights too long
of their property, and (3) rewarding possessors who put land to
productive use.

d. Eminent Domain- Eminent domain is a power of the government to take landfor public
use. Of course, exercise of the power of eminent domain is subject to the Constitution and
whatever other law applies.
i. Right to Take the Property- Under the takings clause of the Fifth Amendment, the
government may not take private property for public use without just
compensation.
ii. Just Compensation- Separate proceedings are used to determine that land is
necessary for public use, to obtain title, and to determine the land’s fair
value (which is generally its market value).
e. Knowledge Check: 1 minute total. Tests students’ understanding of eminent domain.

[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. How might the doctrine of unconscionability affect the validity of leases? A court may declare an
entire lease or any of its clauses to be unconscionable and thus illegal, depending on the circumstances
surrounding the transaction and the parties’ relative bargaining positions. A clause which absolves the
landlord from any responsibility for failing to provide heat in the middle of the winter, for example, would
not be enforceable because it would breach the warranty of habitability. Such a provision would be
unconscionable and, hence, illegal.
2. What is a retaliatory eviction? A retaliatory eviction occurs when a landlord evicts a tenant for
complaining to a government agency about the condition of the leased premises. Under some statutes, a
retaliatory motive will be presumed if eviction proceedings are begun within a certain time after a tenant
has complained. If a tenant can prove that a landlord’s primary purpose in evicting or attempting to evict
the tenant is retaliation for reporting violations regardless of the time elapsed, then the tenant may be
entitled to stop the eviction proceedings or collect damages.
3. When may a tenant withhold the payment of rent? The withholding of rental payments is a remedy
that is generally associated with the landlord’s breach of the warranty of habitability. When rent
withholding is authorized under a statute (known as a ―rent-strike‖ statute), the tenant must usually put
the amount withheld into an escrow account. This account is held in the name of the tenant and an escrow
agent and the funds are returnable to the depositor if the landlord fails to fulfill the escrow condition (such
as providing adequate heat in the winter).

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4. What is a landlord’s lien and how may it be exercised? Under the common law, the landlord could
take and keep or sell whatever of the defaulting tenant’s personal property was on the leased premises.
Today, the landlord does not have this alternative unless the parties have contracted for it or it is
permitted under a statute. Some states grant the landlord a lien on all of the tenant’s personal property in
the leased premises but require the landlord to initiate court proceedings to exercise the lien. The court will
typically authorize a sheriff to seize the tenant’s property. Other states allow the landlord to seize specific
items of the tenant’s property and hold them as security for unpaid rent (that is, as protection or assurance
that the landlord will recoup something on the tenant’s obligation), but the landlord must obtain a court
order to sell the property.
5. Why should the power of eminent domain be used to further economic development? In Kelo v.
City of New London, Connecticut, the United States Supreme Court held that economic development can
constitute ―public use‖ within the meaning of the Fifth Amendment’s takings clause to justify a
local government’s exercise of its power of eminent domain to take private property. The development
―unquestionably serves a public purpose,‖ even though it would also benefit private parties. The Court
reasoned, ―Promoting economic development is a traditional and long accepted function of government.
There is, moreover, no principled way of distinguishing economic development from the other public
purposes that we have recognized. In our cases upholding takings that facilitated agriculture and mining,
for example, we emphasized the importance of those industries to the welfare of the States in question
[and in a third case] we endorsed the purpose of transforming a blighted area into a well-balanced
community through redevelopment Clearly, there is no basis for exempting
economic development from our traditionally broad understanding of public purpose.‖

[return to top]

Additional Resources
Cengage Video Resource
 MindTap Videos:
o Acquiring Title Through Adverse Possession
o Eminent Domain
o Landlords, Tenants, and Tenancies
[return to top]

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two The assignment has three The assignment is
or fewer grammatical and to five grammatical and incomplete or

392
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 Business Law: Text & Exercises (MindTap Course List)

spelling errors.5 spelling errors.3 unintelligible.0

points points points
[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 39:
Landlord-Tenant Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 394
Cengage Supplements.................................................................................................................................................. 394

393
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 Business Law: Text & Exercises (MindTap Course List)

List of Student Downloads ....................................................................................................................................... 394

Chapter Objectives ....................................................................................................................................................... 394
Key Terms ........................................................................................................................................................................ 394
What's New in This Chapter ........................................................................................................................................ 397
Chapter Outline ............................................................................................................................................................. 397
Discussion Questions ...................................................................................................................................................... 399
Additional Resources ..................................................................................................................................................... 400
Cengage Video Resource........................................................................................................................................ 400
Appendix......................................................................................................................................................................... 400
Generic Rubrics.......................................................................................................................................................... 400
Standard Writing Rubric ......................................................................................................................................... 401
Standard Discussion Rubric ...................................................................................................................................... 402

394
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 Business Law: Text & Exercises (MindTap Course List)

Purpose and Perspective of the Chapter

The purpose of this chapter is to examine laws related to the transfer of real property.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

159. Identify different types of tenancies

160. Describe a lease agreement

161. Outline the rights and duties under a lease agreement

162. Discuss the transfer of rights to leased property

163. Explain how a lease usually terminates

Key Terms
adverse possession: The acquisition of title to real property through open occupation, without the consent
of the owner, for a period of time specified by a state statute. The occupation must be actual, exclusive,
open, continuous, and in opposition to all others, including the owner. closing: The final step in the sale of
real estate, in which ownership is transferred to the buyer in exchange for payment of the purchase price.
commercial use: Use of land for business activities only; sometimes called business use. community
property: A form of concurrent property owner- ship in which each spouse ownsan undivided one-half
interest in property acquired during the marriage.
concurrent ownership: Joint ownership.
condemnation: The judicial procedure by which the government exercises its power of eminent domain. It
generally involves two phases: a taking and a determination of fair value. constructive eviction: A form
of eviction that occurs when a landlord fails to perform
adequately any of the duties required by the lease, thereby making the tenant’s further use and
enjoyment of the property exceedingly difficult or impossible.
conveyance: The transfer of title to real property from one person to another by deed or other
document.

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deed: A document by which title to real property is passed.

easement: A nonpossessory right, established by express or implied agreement, to make limited use of
another’s property without removing anything from the property.
eminent domain: The power of a government to take land from private citizens for public use on the
payment of just compensation.
escrow account: An account generally held in the name of the depositor and the escrow agent. The funds
in the account are paid to a third person on fulfillment of the escrow condition. eviction: A landlord’s act
of depriving a tenant of possession of the leased premises.
fee simple absolute: An ownership interest in land in which the owner has the greatest possible
aggregation of rights, privileges, and power. The owner can use, possess, or dispose of the property as he
or she chooses during his or her lifetime. On death, the interest in the property
passes to the owner’s heirs.
fixed-term tenancy: A type of tenancy under which property is leased for a specified period oftime, such
as a month, a year, or a period of years; also called a tenancy for years.
fixture: An item of personal property that has become so closely associated with real property that it is
legally regarded as part of that real property.
grant deed: A deed that simply states that property is being conveyed from the grantor to another.
Under statute, a grant deed may impliedly warrant that the grantor has at least not conveyed the
property’s title to someone else.
implication: A way of creating an easement or profit in real property when it is reasonable to imply its
existence from the circumstances surrounding the division of the property.
implied warranty of habitability: An implied promise by a seller of a new house that the house is fit for
human habitation. Also, the implied promise by a landlord that rented residential premises are habitable.
industrial use: Land use for light or heavy manufacturing, shipping, or heavy transportation. inverse
condemnation: The taking of private property by the government without payment ofjust compensation
as required by the U.S. Constitution. The owner must sue the government to recover just compensation.
joint tenancy: Joint ownership of property by two or more co-owners in which each co-owner owns an
undivided portion of the property. On the death of one of the joint tenants, his or her interest
automatically passes to the surviving joint tenant(s).
lease: Under Article 2A of the UCC, a transfer of the right to possess and use goods for a period of time
in exchange for payment. In the context of real property, an agreement by which a property owner
(landlord) agrees to give another party (the tenant) the exclusive right to possess the property for a
limited time.
leasehold estate: An interest in real property that gives a tenant a qualified right to possess and/or
use the property for a limited time under a lease.
license: In the context of intellectual property, a contract permitting the use of a trademark,
copyright, patent, or trade secret for certain purposes. In the context of real property, a
revocable right or privilege of a person to come on another person’s land.
life estate: An interest in land that exists only for the duration of the life of a specified
individual, usually the holder of the estate.
marketable title: Title to real estate that is reasonably free from encumbrances, defects in the chain of
title, and other matters that affect title, such as adverse possession.

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metes and bounds: A way of describing the boundary lines of land according to the distance between
two points, often using physical features of the local geography.
necessity: In criminal law, a defense against liability. Under Section 3.02 of the Model Penal Code, this
defense is justifiable if ―the harm or evil sought to be avoided‖ by a given action ―is greater than that
sought to be prevented by the law defining the offense charged.‖ In real property law, a way of
creating an easement when one party must have the easement in order to have access to his or her
property.
nonpossessory interest: In the context of real property, an interest that involves the right to use land
but not the right to possess it.
periodic tenancy: A lease interest in land for an indefinite period involving payment of rent at fixed
intervals, such as week to week, month to month, or year to year.
prescription: A way of creating an easement or profit in real property by openly using the
property, without the owner’s consent, for the required period of time (similar to adverse
possession).
profit: In the context of real property, the right to enter onto another’s property and remove something
of value from that property.
quitclaim deed: A deed that conveys only whatever interest the grantor had in the property and therefore
offers the least amount of protection against defects of title.
recording statute: A statute that allow deeds, mortgages, and other real property transactions to be
recorded so as to provide notice to future purchasers or creditors of an existing claim on the property.
residential use: Use of land for construction of buildings for human habitation only. restrictive covenant:
A private restriction on the use of land. If its benefit or obligation passes with the land’s ownership, it is
said to ―run with the land.‖
special-use permits: A permit granted by local zoning authorities that allows for a specific
exemption to zoning regulations for a particular piece of land.
special warranty deed: A deed that warrants only that the grantor held good title during his or her
ownership of the property and does not warrant that there were no defects of title when the property was
held by previous owners.
sublease: A tenant’s transfer of all or part of the leased premises to a third person for a period shorter
than the lease term.
taking: The government’s taking of private property for public use through the power of eminent
domain.
tenancy at sufferance: A tenancy that arises when a tenant wrongfully continues to occupy leased
property after the lease has terminated.
tenancy at will: A type of tenancy that either the landlord or the tenant can terminate without notice.
tenancy by the entirety: Joint ownership of property by a married couple in which neitherspouse can
transfer his or her interest in the property without the consent of the other. tenancy in common: Joint
ownership of property in which each party owns an undivided interest that passes to his or her heirs at
death.
title insurance: Insurance commonly purchased by a purchaser of real property to protect against
loss in the event that the title to the property is not free from liens or superior ownership claims.

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trade fixture: The personal property of a commercial tenant that has been installed or affixed to real
property for a business purpose. When the lease ends, the tenant can remove the fixture
but must repair any damage to the real property caused by the fixture’s removal. variance: An
exception from zoning rules granted to a property owner by local zoning authorities.
warranty deed: A deed in which the grantor promises that she or he has title to the property conveyed
in the deed, that there are no undisclosed encumbrances on the property, and that the grantee will
enjoy quiet possession of the property; provides the greatest amount of protection for the grantee.
waste: The use of real property in a manner that damages or destroys its value.
zoning laws: Rules and regulations that collectively manage the development and use of land.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o New Case 49.1: In the Matter of the Estate of Nelson (2018)—to determine the
distinction between a life estate and a fee.
o Spotlight Case 49.2: Stambovsky v. Ackley (1991)—on whether the buyer of a house had
the right to rescind the sales contract because he was not told that the house was allegedly
haunted.
o Case Analysis 49.3: Montgomery County v. Bhatt (2016)—on whether the owner of land
next to a railroad line could acquire a portion of the right-of-way by adverse possession,
includes some Grateful Dead lyrics at the beginning of the case.
 2 New Case in Points
o 2017 case on license
o 2017 case on adverse possession
 2 New Case Problems
o 2017 case on eminent domain
o 2018 case on transfer of ownership
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on easements (based on 2017
case)
 Updated Limited-Time Group Assignment with a new activity.
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Chapter Outline
IV. Types of Tenancy
a. Fixed Term Tenancy- also known as a tenancy for years, property is leased for a specific
period of time such as a month or a year. Created by an express contract. At the end of
the period the property returns to the landlord.

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b. Periodic Tenancy- lease that does not specify how long it is to last but doesspecify
that rent is to be paid at certain intervals such as weekly or monthly
c. Tenancy at Will- either party can terminate without notice. Lease is for as long as they
both agree.
d. Tenancy At Sufferance- not a true tenancy, it is the wrongful retaining ofpossession of
the property by the tenant

V. Lease Agreement- creates the landlord-tenant relationship. Can be oral or written. Iflease is
for more than a year, it must be in writing in most states.

VI. Landlord-Tenant Relationships

 The temporary nature of possession distinguishes a tenant from a purchaser. The exclusivity
of possession distinguishes a tenant from a licensee.
 Leases may be oral or written. In most states, leases must be in writing for some tenancies
(such as those exceeding one year). State or local law often dictates permissible lease
terms.
a. Rights and Duties
i. Possession- A landlord is obligated to give a tenant possession of the property
at the beginning of the lease term, and the tenant has the right to retain
possession until the lease expires.
ii. Quiet Enjoyment- The covenant of quiet enjoyment is the essence of the landlord-
tenant relationship, as the text points out. A breach creates liability for damages.
iii. Eviction
A. An eviction occurs when a landlord deprives a tenant of possession of the
leased property or interferes with his or her use or enjoyment of it
before the end of the term.
B. Constructive eviction occurs when the landlord wrongfully performs, or
fails to perform, any of the undertakings the lease requires, thereby
making the tenant’s further use and enjoyment of the property difficult or
impossible.
b. Use of the Premises- Generally, a tenant may use leased property in any manner within
the terms of the lease (which impliedly includes uses that are legal, that reasonably relate
to the ordinary use of the property, and that do not harm the landlord’s interest).
c. Maintenance of the Premises- The tenant is responsible for damages, but not ordinary
wear and tear. The landlord must comply with local building codes, which sometimes
require that property be maintained in good repair.
i. Compliance with Ordinances
ii. Implied warranty of habitability- requires landlord to ensure that the premises
are habitable and in good repair
d. Rent- Generally, a tenant must pay the rent even if he or she refuses to occupy the
property or moves out, as long as the refusal or the move is unjustifiable and

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the lease is in force. This responsibility ends if, for example, the building burns down. A
tenant may withhold rent if the warranty of habitability is violated and explains how this
is done and how much may be withheld.
e. Commercial Lease Terms- some states allow a greater flexibility in negotiating the lease
terms of a commercial lease

VII. Transferring Rights to Leased Property- A landlord can sell, give away, or
otherwise transfer his or her real property just like any other real property owner.
The lease remains in effect, and the tenant pays rent to the new owner.
a. Assignment- The tenant’s transfer of his or her entire interest in the leased
property to a third person is an assignment of the lease. The landlord’s
consent may be required, and the tenant remains liable for the rent.
b. Sublease- Restrictions that apply to assignments also apply to subleases.
VIII. Termination of the Lease- A lease can terminate in several ways—
A. A lease terminates if its term ends (notice is not normally required).
B. A tenant may buy the leased property.
C. The parties may agree to end a tenancy before it would otherwise
terminate.
D. A tenant may abandon the premises.
If a tenant abandons the premises, the landlord may let the property stay vacant
and charge the tenant the rent for the term. But most states require a landlord to
mitigate the damages by making a reasonable attempt to re-let the property.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. How might the doctrine of unconscionability affect the validity of leases? A court may declare an
entire lease or any of its clauses to be unconscionable and thus illegal, depending on the circumstances
surrounding the transaction and the parties’ relative bargaining positions. A clause which absolves the
landlord from any responsibility for failing to provide heat in the middle of the winter, for example, would
not be enforceable because it would breach the warranty of habitability. Such a provision would be
unconscionable and, hence, illegal.
2. What is a retaliatory eviction? A retaliatory eviction occurs when a landlord evicts a tenant for
complaining to a government agency about the condition of the leased premises. Under some statutes, a
retaliatory motive will be presumed if eviction proceedings are begun within a certain time after a
tenant has complained. If a tenant can prove that a landlord’s primary

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purpose in evicting or attempting to evict the tenant is retaliation for reporting violations regardless of the
time elapsed, then the tenant may be entitled to stop the eviction proceedings or collect damages.
3. When may a tenant withhold the payment of rent? The withholding of rental payments is a remedy
that is generally associated with the landlord’s breach of the warranty of habitability. When rent
withholding is authorized under a statute (known as a ―rent-strike‖ statute), the tenant must usually put
the amount withheld into an escrow account. This account is held in the name of the tenant and an escrow
agent and the funds are returnable to the depositor if the landlord fails to fulfill the escrow condition (such
as providing adequate heat in the winter).
4. What is a landlord’s lien and how may it be exercised? Under the common law, the landlord could
take and keep or sell whatever of the defaulting tenant’s personal property was on the leased premises.
Today, the landlord does not have this alternative unless the parties have contracted for it or it is
permitted under a statute. Some states grant the landlord a lien on all of the tenant’s personal property in
the leased premises but require the landlord to initiate court proceedings to exercise the lien. The court will
typically authorize a sheriff to seize the tenant’s property. Other states allow the landlord to seize specific
items of the tenant’s property and hold them as security for unpaid rent (that is, as protection or assurance
that the landlord will recoup something on the tenant’s obligation), but the landlord must obtain a court
order to sell the property.
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Additional Resources
Cengage Video Resource
 MindTap Videos:
o Acquiring Title Through Adverse Possession
o Eminent Domain
o Landlords, Tenants, and Tenancies
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

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Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 40:
Wills and Trusts

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 404
Cengage Supplements.................................................................................................................................................. 404
List of Student Downloads ....................................................................................................................................... 404
Chapter Objectives ....................................................................................................................................................... 404
Key Terms ........................................................................................................................................................................ 404
What's New in This Chapter ........................................................................................................................................ 405
Chapter Outline ............................................................................................................................................................. 406
Discussion Questions ...................................................................................................................................................... 409
Additional Activities and Assignments ....................................................................................................................... 410

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Additional Resources ..................................................................................................................................................... 411

Cengage Video Resources ...................................................................................................................................... 411
Appendix......................................................................................................................................................................... 411
Generic Rubrics.......................................................................................................................................................... 411
Standard Writing Rubric ......................................................................................................................................... 411
Standard Discussion Rubric ...................................................................................................................................... 412

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the idea of estate planning via wills and trusts.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

164. Outline the requirements of a will

165. Discuss how to revoke or modify a will

166. Describe intestate distributions of property

167. List the elements of a trust

Key Terms
Administrator: One who is appointed by a court to administer an estate if the decedent died without a
valid will or if the executor named in the will cannot serve.
Bequest: A gift of personal property by will (from the verb to bequeath).
codicil: A written supplement or modification to a will. A codicil must be executed with thesame
formalities as a will.
constructive trust: An equitable trust that is imposed in the interests of fairness and justice when
someone wrongfully holds legal title to property.
devise: A gift of real property by will, or the act of giving real property by will.
devisee: One designated in a will to receive a gift of real property.
estate planning: Planning in advance how one’s property and obligations should be transferred on one’s
death. Wills and trusts are two basic devices used in estate planning.
executor: A person appointed by a testator in a will to administer the testator’s estate. intestacy laws:
State statutes that specify how property will be distributed when a person dies intestate (without a valid
will).
intestate: As a noun, one who has died without having created a valid will. As an adjective, the state of
having died without a will.
legacy: A gift of personal property under a will.
legatee: One designated in a will to receive a legacy (a gift of personal property).

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living trust: A trust created by the grantor (settlor) and effective during his or her lifetime. living will: A
document that allows a person to control the methods of medical treatment that may be used after a
serious accident or illness.
per capita: A method of distributing an intestate’s estate so that each heir in a certain class(such as
grandchildren) receives an equal share.
per stirpes: A method of distributing an intestate’s estate so that each heir in a certain class (such as
grandchildren) takes the share to which her or his deceased ancestor (such as a mother or father) would
have been entitled.
probate: The process of proving and validating a will, and settling all matters pertaining to an estate.
testamentary trust: A trust that is created by will and there- fore does not take effect until thedeath of
the testator.
testate: Having left a will at death.
testator: One who makes and executes a will.
Trust: An arrangement in which title to property is held by one person (a trustee) for the benefit of another
(a beneficiary).
Will: An instrument made by a testator directing what is to be done with her or his property after
death.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o New Case 51.1: In re Navarra (2018)—involved an heir’s petition to substitute the
distribution under a will with the disinheritance of four of the legatees.
o Case Analysis 51.2: Peterson v. Harrell (2010)—on whether the testator had intended
to revoke part or all of her will by making certain changes to it after it was executed.
o Case 51.3: Dowdy v. Dowdy (2016)—on trusts and how a phrase could be
interpreted.
 1 New Digital Update feature—
o Social Media Estate Planning
 1 New Case in Point
o 2017 case on undue influence
 1 New Case Problem
o 2018 case on testamentary intent
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on estate administration(based on
2019 case)
 New Unit-Ending Task-Based Simulation feature

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Chapter Outline
I. Wills - The property of a person who dies intestate, and without heirs, passes to the state. A will
must follow exactly the requirements of the appropriate state’s statutes to be effective. Besides
distributing property, a will can appoint a guardian and a personal representative.
a. Terminology of Wills
i. Testator—person who makes a will.
ii. Testate—state of having made a valid will before death.
iii. Executor—person or party appointed by a testator in a will to administerthe
estate.
iv. Administrator—person or party appointed by a court for a decedent whodies
without a will to administer the estate.
v. Probate—establish the validity of a will and administer the testator’sestate.
vi. Probate court—court that oversees the administration of a will.
vii. Intestate—state of not having made a valid will before death.
viii. Intestacy laws or laws of descent—statutes that prescribe the distributionof an
intestate’s property.
ix. Escheat—transfer of title to an intestate’s property to the state.
x. Devise—gift of real estate by will.
xi. Devisee—recipient of a devise.
xii. Bequest or legacy—gift of personal property under a will.
xiii. Legatee—recipient of a legacy.
b. Types of Gifts- Gifts may be specific, general, or residuary.
i. Specific and General Devises or Bequests
A. Specific devise or bequest (legacy)—describes particular property.
B. General devise or bequest (legacy)—describes property
generally—―all my land‖ or ―$10,000,‖ for example.
ii. Residuary Clause- The residuary (assets remaining after specific gifts have been
made and debts paid) are distributed to the surviving spouse, descendants, or
others according to a residuary clause, or if there is none, the state’s intestacy
laws.
c. Requirements for a Valid Will
i. Testamentary Capacity and Intent
A. A testator must be of legal age (usually eighteen) and sound mind—able
to formulate and comprehend a plan for the disposition of property—
when a will is made. A valid will represents the maker’s intent. The
testator must—
B. Know the nature of the act of making a will.

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C. Comprehend and remember family and others for whom thetestator has
affection.
D. Know the nature and extent of his or her property.
E. Understand the distribution of assets called for by the will.
ii. Writing Requirements -A written document is generally required, though it can
be informal. In some cases, an oral will, such as a nuncupative will, is valid,
particularly if made during the last illness of the testator.
iii. Signature Requirements- If a will is in writing, the testator must sign it. Intent is the
key as to whether a particular mark is a signature.
iv. Witness Requirements
A. Two, and sometimes three, witnesses are required. Their qualifications
and the manner in which witnessing must be done varies. Some states
prohibit interested parties from witnessing. A witness does not have to
read the will.
B. In some jurisdictions, witnesses must sign in the sight or presence of each
other, but the UPC requires only that the testator acknowledge his or her
signature to the witnesses [UPC 2–502].
d. Transfer of Digital Assets Upon Death
i. Passwords
ii. Add Digital Executor to your will
iii. Adding digital heirs
iv. Use a password manager
e. Revocation of Wills
i. Revocation by a Physical Act - A testator may revoke a will by intentionally
burning, tearing, canceling, obliterating, or destroying it or by having someone
else do so in the presence of the maker and at the maker’s direction. In some
states, partial revocation is recognized. Of course, where provided, statutorily
prescribed methods must be followed precisely.
ii. Revocation by a Subsequent Writing- A codicil can amend or revoke provisions in
a will. A new will may (or may not) revoke a prior will, depending on the
language (the text provides an example). If an express declaration of revocation
is missing, the wills are read together; if there are inconsistent dispositions, the
second will controls.
iii. Marriage and Divorce- A marriage, divorce, or annulment, after a will has been
executed generally revokes the will (at least as regards the new spouse or ex-
spouse). Generally, a new spouse gets an intestate share, and an ex-spouse
gets nothing. Exceptions include—
a. A provision in the will that covers the new spouse.
b. A prenuptial agreement.
iv. Children- The birth of children after a will has been executed generally revokes
the will (at least as regards the new children). Generally, unless

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the will clearly indicates that the testator intended to disinherit the newchildren,
they get intestate shares.

II. Intestacy Laws- Intestacy statutes set out rules and priorities under which ―natural‖ heirs inherit
property (after estate debts are paid). The rules vary widely from state to state.
a. Surviving Spouse and Children- A surviving spouse is usually entitled to a share of an
estate—the entire estate if there are no children or grandchildren, one-half if there is one
surviving child, and one-third if there are two or more children.
b. When There Is No Surviving Spouse or Child- If there is no surviving spouse or child, an
estate passes to lineal descendants (in the order of grandchildren and parents) or, if none,
collateral heirs (brothers and sisters, nieces, nephews, aunts, and uncles).
c. Stepchildren, Adopted Children, and Illegitimate Children- Legally adopted children are
heirs; stepchildren are not. In most stares, any child born of a union that has the
characteristics of a formal marriage is legitimate. An illegitimate child’s Inheritance rights
may differ from those of a legitimate child).
d. Grandchildren
i. Per Stirpes Distribution- Per stirpes is a method of dividing an intestate share by
which a class or group of distributees (for example, grandchildren) take the share
that their deceased parent would have been entitled to inherit had that parent
lived.
ii. Per Capita Distribution- An estate may also be distributed on a per capita basis,
which means that each person takes an equal share of the estate.

III. Trusts - A trust involves any arrangement by which legal title to property is transferred from one
person to be administered by a trustee for another person’s benefit. The elements of a valid trust
are—
 A designated beneficiary.
 A designated trustee.
 A fund identified to enable title to pass to the trustee.
 Delivery by the settlor or grantor to the trustee with the intent of passingtitle.
a. Express Trusts
i. Living Trusts- A grantor executes a living trust during his or her lifetime.
A. Revocable Living Trusts- A living trust can be revocable, in which the
grantor retains control over the property and must pay taxes on it).
B. Irrevocable Living Trusts- A living trust can be irrevocable, in which the
grantor gives up control and does not pay the taxes.
C. Testamentary Trusts- A testamentary trust is created by will on the
settlor’s death.

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b. Implied Trusts
i. Constructive Trusts - A constructive trust is an equitable remedy that enables
plaintiffs to recover property (and sometimes damages) from defendants who
would otherwise be unjustly enriched. The text provides examples.
ii. Resulting Trusts- A resulting trust arises from the conduct of the parties.
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What is the purpose of a residuary clause? A will may provide that any assets remaining after specific
gifts are made and debts are paid are to be distributed through a residuary clause. Such a clause is used
because the exact amount to be distributed cannot be determined until all other gifts and payouts are
made. Problems can arise, however, when the will does not specifically name the beneficiaries to receive
the residue. If it is impossible for the court to determine the intentions of the testator, the residue will pass
according to state laws of intestacy.

2. What are the three requirements that must be satisfied in order for a testator to demonstrate his or
her testamentary capacity? The testator must (1) comprehend and remember the ―natural objects of his
or her bounty‖ (usually family members and persons for whom the testator has affection); (2)
comprehend the kind and character of the property being distributed; and (3) understand and formulate a
plan for disposing of the property.

3. How does a living trust differ from a testamentary trust? A living trust is a trust executed by a
grantor during his or her lifetime. The grantor executes a ―trust deed,‖ and legal title to the trust property
passes to the named trustee. The trustee has a duty to administer the property as directed by the grantor
for the benefit and in the interest of the beneficiaries. A testamentary trust, by contrast, is a trust created
by will to come into existence upon the settlor’s death. Although a testamentary trust has a trustee who
maintains legal title to the trust property, the actions of the trustee are subject to judicial approval. If the
will setting up a testamentary trust is invalid, then the trust will also be invalid and the designated trust
property will then pass according to intestacy laws.

4. What is a constructive trust? A constructive trust arises by operation of law as an equitable remedy
that enables plaintiffs to recover property (and sometimes damages) from defendants who would
otherwise be unjustly enriched. The legal owner of the property is declared to be a trustee for the parties
who, in equity, are actually entitled to the beneficial enjoyment that flows from the trust.

5. How might the availability of a secure online repository for a person’s will affect a challenge to
the will? A copy of a will might be produced more easily if it were deposited in an electronic database
that could be accessed online. Whether a court would accept it as authentic is another question. The kind
of proof that could be required to validate an online copy would

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be different from the proof needed to prove a paper copy. The testator’s e-signature would be in a
different form (even a copy of the original would be electronic). These and other factors in such
circumstances could make it easier to challenge and easier to propound a will.
[return to top]

Additional Activities and Assignments

15. Business Case: Estate Planning
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:
1. Should an individual be able to cut out a spouse entirely from inheriting? Why or Why
not?
2. If a grantor provides an inheritance for a beneficiary in an asset protection trust (also
known as a spendthrift trust) is it fair that the beneficiary’s creditors cannot access the
funds?
3. What standard should be used to judge the mental competency of a testator at the
moment of making a will?
4. What are some indicators that may be red flags that the person is either not
competent at the time of executing estate documents or may be under undue influence?
d. Role Play: Half of the group should represent the interests of Evelyn’s brother and sister
in EviePat, LLC. The second half of the group should represent Kit Wood’s newly inherited
interest in the company. Assume, as the controlling and managing member of EviePat,
LLC, Kit has decided to take the company in a new direction and expand its offerings
through the acquisition of a few other companies. This also means that there will be less
profits to distribute for the
foreseeable future. Evelyn’s brother and sister, however, prefer the keep the company
running as it has been and receiving profit shares as they have been. Each side should
develop their best argument for either invalidating or validatingthe provisions of Evelyn’s
estate planning documents and, as a group, debate their merits.
e. Writing Assignment: Evelyn’s children, Barron and Jessup, upset at learning the amount
and structure of their inheritance seek to invalidate the provision of the trust and will.
What is their best argument for overturning those provisions and what is their likelihood
of winning their case?
f. Ethics Question: Imagine the attorney who prepared Evelyn’s documents was
aware of her Parkinson’s diagnosis and that as a result of the disease, Evelyn had begun
to suffer from dementia. However, it appeared to him that she had both lucid and non-
lucid moments. During the course of their consultations, meetings, and preparation of
documents, Evelyn made several statements which seemed odd (like that she was
preparing to take a trip to the moon) but generally seemed

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to be coherent. Is it ethical for the attorney to continue to prepare estate planning

documents based on her requests? When (if ever) should the attorneystop working?
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Gifts Inter Vivos and Causa Mortis
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other include peer reviewed
other scholarly work. scholarly work. journals and other

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5 points 3 points scholarly work.0

points
Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 41:
Administrative Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 414
Cengage Supplements.................................................................................................................................................. 414

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List of Student Downloads ....................................................................................................................................... 414

Chapter Objectives ....................................................................................................................................................... 414
Key Terms ........................................................................................................................................................................ 414
What's New in This Chapter ........................................................................................................................................ 415
Chapter Outline ............................................................................................................................................................. 415
Discussion Questions ...................................................................................................................................................... 420
Additional Resources ..................................................................................................................................................... 421
Cengage Video Resources ...................................................................................................................................... 421
Appendix......................................................................................................................................................................... 421
Generic Rubrics.......................................................................................................................................................... 421
Standard Writing Rubric ......................................................................................................................................... 421
Standard Discussion Rubric ...................................................................................................................................... 422

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine the role and powers of administrative agencies.

Cengage Supplements
The following product-level supplements provide additional information that may help you inpreparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

168. Identify how administrative agencies are created

169. Outline the basic functions of administrative agencies

170. State the controls on agency powers

171. Describe federal laws that make agencies accountable

Key Terms
Adjudication: The process of resolving a dispute by presenting evidence and arguments before a neutral
third party decision maker in a court or an administrative law proceeding. administrative agency: A
federal or state government agency created by the legislature to perform a specific function, such as to
make and enforce rules pertaining to the environment. administrative law judge (ALJ): One who
presides over an administrative agency hearing and has the power to administer oaths, take testimony,
rule on questions of evidence, and make determinations of fact.
administrative process: The procedure used by administrative agencies in fulfilling their threebasic
functions: rulemaking, enforcement, and adjudication.
bureaucracy: A large organization that is structured hierarchically to carry out specific functions.
delegation doctrine: A doctrine based on Article I, Section 8, of the U.S. Constitution, which hasbeen
construed to allow Congress to delegate some of its power to make and implement laws to administrative
agencies. The delegation is considered to be proper as long as Congress sets standards outlining the scope
of the agency’s authority.
enabling legislation: A statute enacted by Congress that authorizes the creation of an administrative
agency and specifies the name, composition, purpose, and powers of the agency. exhaustion doctrine: In
administrative law, the principle that a complaining party normally must have exhausted all available
administrative remedies before seeking judicial review.

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final order: The final decision of an administrative agency on an issue. If no appeal is taken, or if the case
is not reviewed or considered anew by the agency commission, the administrative law judge’s initial order
becomes the final order of the agency.
initial order: In the context of administrative law, an agency’s disposition in a matter other than a
rulemaking. An administrative law judge’s initial order becomes final unless it is appealed. interpretive
rule: A nonbinding rule or policy statement issued by an administrative agency that explains how it
interprets and intends to apply the statutes it enforces.
legislative rule: An administrative agency rule that carries the same weight as a congressionally enacted
statute.
notice-and-comment rulemaking: An administrative rule- making procedure that involves the publication
of a notice of a proposed rulemaking in the Federal Register, a comment period for interested parties to
express their views on the pro- posed rule, and the publication of the
agency’s final rule in the Federal Register.
[return to top]

What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 1 New Case
o New Case 43.1: Simmons v. Smith (2018)—involved a challenge to the boundariesof a
protected wild and scenic river established by the National Park Service.
o Case 43.2: Craker v. Drug Enforcement Administration (2013)—on a university
professor’s application to register to cultivate marijuana.
o Case Analysis 43.3: Olivares v. Transportation Security Administration (2016)—on a
federal agency’s role in determining whether alien pilots may be certified to operate
large, U.S.-registered aircraft.
 1 New Case Problem
o 2018 case regarding arbitrary and capricious test
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on arbitrary and capricioustest
(based on 2017 case)
 Updated Limited-Time Group Assignment with a new activity.
[return to top]

Chapter Outline
I. Agency Creation and Powers- Enabling legislation specifies the name, purposes,functions, and
powers of an agency (state or federal).
a. Enabling Legislation—An Example- The Federal Trade Commission (FTC) Actcreated
the Federal Trade Commission with the power to—
i. Create rules and regulations to carry out the FTC Act.
ii. Conduct investigations of business practices.
iii. Obtain reports from interstate corporations concerning their businesspractices.

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iv.
Investigate possible violations of federal antitrust statutes.
v.
Publish the findings of its investigations.
vi.
Recommend new legislation.
vii.
Hold trial-like hearings to resolve certain kinds of trade disputes thatinvolve
FTC regulations or federal antitrust laws.
b. Types of Agencies- There are two basic types of agencies. Their significant
difference is in the regulators’ accountability.
i. Executive agencies are subject to the authority of the president, who canappoint
and remove their officers.
ii. Independent regulatory agencies’ officers serve fixed terms and cannot be
removed without just cause.
iii. Knowledge Check: 1 minute total. Tests students’ recollection ofdifferent
types of agencies.

II. The Administrative Process- Administrative agencies exercise powers that are normally divided
among the three branches of government (rulemaking, rule enforcement, and adjudication).
a. Rulemaking- In enabling legislation, Congress confers an agency’s power to make rules.
Many rules must be adopted using the APA’s three-step notice-and- comment rulemaking
procedure.
i. Notice of the Proposed Rulemaking- An agency publishes a notice of proposed
rulemaking proceedings in the Federal Register, stating where and when
proceedings will be held, the agency’s authority for making the rule, and the
terms or subject matter. Proposed rules are also often published in the media and
trade journals.
ii. Comment Period- Interested parties can express their views on the proposed rule
in writing or, if a hearing is held, orally. The agency must respond to any
significant comments that bear directly on the proposed rule by either modifying
its final rule or explaining why it did not make any changes. The comment
period must be at least thirty days but is oftenlonger.
iii. The Final Rule
1. The final rule is published in the Federal Register with a statement of the
reasoning for the rule. Later compiled in the Code of Federal Regulations
(CFR), final rules (―legislative rules‖) have binding legal effect unless the
courts later overturn them.
2. If an agency fails to follow proper rulemaking procedures, the rule may
not be binding.
iv. Informal Agency Actions- A rule that only states an agency’s interpretation of its
enabling statute’s meaning is an ―interpretative rule‖ and may be issued without
formal rulemaking. These rules impose no direct or binding effect.
v. Knowledge Check: 1 minute total. Tests students’ understanding of rulemaking.

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b. Investigation- During the rulemaking process, an investigation obtains information about

a certain individual, firm, or industry to avoid issuing a rule that is arbitrary and
capricious and instead is based on a consideration of relevant factors. After final rules
are issued, agencies conduct investigations to monitor compliance.
i. Inspections and Tests- An on-site inspection may be the only way to obtain
evidence to prove a regulatory violation. Sometimes, an inspectionor test is used in
place of a formal hearing to correct or prevent an undesirable condition. If a firm
or individual refuses to cooperate with a request for an inspection or for
information, an agency may use a subpoena or a search warrant.
ii. Subpoenas- There are two basic types of subpoenas—the subpoena ad
testificandum (an ordinary subpoena, compelling a witness to appear at a
hearing) and the subpoena duces tecum (compelling an individual or organization
to hand over books, papers, records, or documents). Agency demands are limited
by—
1. The purpose of an investigation (an improper purpose isharassment).
2. The relevancy of the information being sought.
3. The specificity of the demand for testimony or documents.
4. The burden of the demand on the party from whom theinformation is
sought.
iii. Search Warrants- The Fourth Amendment protects against unreasonable searches
and seizures by government officers. In most instances, a physical search for
evidence must be conducted under the authority of a search warrant. Warrants
are not required to conduct searches in highly regulated industries. Sometimes, a
statute permits warrantless searches of certain types of hazardous operations,
such as mines. Also, a warrantless inspection in an emergency situation is normally
considered reasonable.
iv. Adjudication- Most administrative actions are resolved through negotiated
settlements at their initial stages, without formal adjudication.
1. Negotiated Settlements- A settlement is an appealing option to firms for
two reasons (regulated industries often do not want to appear to the
agency to be uncooperative, and litigation can be very expensive) and to
agencies for one reason (agencies thereby conserve their own resources).
2. Formal Complaints- A complaint is a public document, and a press
release may accompany it. If the party against whom the complaint is
made and the agency cannot agree on a settlement, the case goes
before an administrative law judge (ALJ).
a. The Hearing- Before a hearing, the agency must issue a notice
stating the facts and law on which the complaint is

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based, the legal authority for the hearing, and its time and place.
b. The Role of the Administrative Law Judge
i. An ALJ presides over a trial-like hearing, with the power
to administer oaths, take testimony, rule on questions of
evidence, and make determinations of fact.
ii. An ALJ must be unbiased. The APA requires that the ALJ
be separate from the agency’s investigative and
prosecutorial staff, prohibits private communications with
any party to an agency proceeding, and protects the ALJ
from arbitrary agency disciplinary actions.
v. Hearing Procedures- Hearing procedures vary from agency to agency. Disputes
are often resolved through informal proceedings. A formal hearing resembles a
trial—the parties can use discovery; during the hearing, parties can testify,
present other evidence, and cross-examine adverse witnesses. More information,
including hearsay, can be introduced as evidence during an administrative
hearing, however.
vi. Agency Orders- Either party may appeal the ALJ’s decision to the board or
commission that governs the agency. If the party against whom the complaint was
filed is dissatisfied with the commission’s decision, it may appeal the decision to a
federal court of appeals. If no party appeals (or if review is denied), the ALJ’s
decision is the final order.

III. Controls on Agency Powers

a. Executive Controls- The executive branch exercises control over agencies through the
president’s powers to appoint federal officers and through the president’s power to veto
enabling legislation or congressional attempts to modify an existing agency’s authority.
b. Legislative Controls- Congress exercises authority over agency power through enabling
legislation and subsequent legislation, such as the Administrative Procedure Act (APA) of
1946. Through the APA and other laws, Congress can—
i. Restrict or expand agency power substantively.
ii. Limit or increase agency power through funding.
iii. Set time limits on the life of an agency.
iv. Investigate an agency.
v. Affect agency policy through legislators’ attempts to help their
constituents deal with agencies.
c. Judicial Controls- The APA provides for judicial review of most agency decisions.
According to the exhaustion doctrine, a party must have used all potential administrative
remedies before filing a suit.

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i. The Administrative Procedure Act- Administrative process is the administration of

law by administrative agencies. The Administrative Procedure Act (APA) of 1946
imposes procedural requirements that all federal agencies must follow in their
rulemaking, adjudication, and enforcement functions.
ii. Judicial Deference to Agency Decisions- Courts generally defer to an agency’s
factual judgment on a subject within the area of its expertise and its interpretation
of its legal authority.
iii. The Arbitrary and Capricious Test The APA provides that courts should set aside
agency decisions that are ―arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law.‖ This includes such factors as—
1. Failure to provide a rational explanation for a decision.
2. Change in prior policy without an explanation.
3. Consideration of legally inappropriate factors.
4. Failure to consider a relevant factor.
5. Render of a decision plainly contrary to the evidence.

IV. Public Accountability- Several laws make agencies more accountable through public scrutiny.
a. Freedom of Information Act- Enacted in 1966, the Freedom of Information Act (FOIA)
requires federal agencies to disclose certain ―records‖ to ―any person‖ on request. An
agency’s failure to comply may be challenged in a federal district court. All federal
agencies must make documents available electronically within a year after their creation
and provide a clear index.
b. Government in the Sunshine Act- Enacted in 1976, the Government in the Sunshine Act
requires ―every portion of every meeting of an agency‖ to be open to ―public
observation.‖ Closed meetings are permitted when—
i. The subject of the meeting concerns accusing any person of a crime.
ii. Open meetings would frustrate implementation of future agency actions.
iii. The subject of the meeting involves matters relating to future litigation or
rulemaking.
c. Regulatory Flexibility Act- Under the Regulatory Flexibility Act (passed in 1980),
whenever a new regulation will have a ―significant impact upon a substantial number
of small entities,‖ an agency must conduct a regulatory flexibility analysis. The analysis
must—
i. Measure the cost that the rule would impose on small businesses.
ii. Consider less burdensome alternatives.
d. Small Business Regulatory Enforcement Fairness Act- Among the provisions of the
Small Business Regulatory Enforcement Fairness Act (SBREFA)—
i. Federal agencies must prepare guides that explain in ―plain English‖ how small
businesses can comply with regulations.
ii. Congress is permitted to review new federal regulations for at least sixty days
before they take effect.

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iii. Courts can enforce the act to ensure that federal agencies consider ways to
reduce the economic burden of new regulations on all businesses.
iv. The Office of the National Ombudsman at the U.S. Small Business Administration is
empowered to receive complaints from small businesses about their dealings with
federal agencies.
[return to top]

Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. What is a major advantage of agency rulemaking? The major advantage of rulemaking is that it can
resolve in one proceeding issues that might remain unsettled for years if case-by-case adjudication were
the only means of effecting agency policy.
2. Given that an administrative law judge is a member of the agency prosecuting a case, what
safeguards promote fairness? Under the APA, an administrative law judge (ALJ) is separated from the
investigative and prosecutorial staff. The APA prohibits ex parte communication between the ALJ and a
party to a proceeding. The APA protects the ALJ from agency discipline except on a showing of good
cause.
3. How do courts hold agency authority in check? Under the APA, courts provide a direct avenue for
review of most agency actions. A court may compel action deemed unlawfully withheld or prevent action
determined to exceed authority. Usually, a court defers to an agency’s findings of fact, but a court will
make an independent finding if required by statute, if inadequate fact-finding procedures were used, or if
new facts are raised in a proceeding to enforce a nonadjudicatory action. A court will review whether an
agency exceeded its authority under enabling legislation; whether an agency properly interpreted laws
applicable to the action under review; whether an agency violated the Constitution; whether an agency
acted in accord with procedural requirements; whether an agency’s actions were arbitrary, capricious, or
an abuse of discretion; and whether any agency conclusions are not supported by substantial evidence.
4. Is it ethical for an administrative agency to reverse or otherwise alter its policy whenthe change
increases the financial burden on the regulated parties? An agency may act within ethical—and legal—
bounds when it alters a policy, and the change does not necessarily indicate that the previous policy was
―wrong.‖ A change can be a reasonable response to a problem that arises during the course of
carrying out a policy that could have been itself reasonably determined. An agency is certainly entitled to
consider alternatives before selecting one over the others, and after one alternative is implemented, a
change to it can be equally acceptable. For example, the statute mandating a choice may be ambiguous,
or an agency may be evaluating its policy on a continuing basis in response to constantly changing
circumstances.

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5. Some do individuals or organizations prefer to sue an agency before it takes formal enforcement
action. Why? Individuals or organizations may prefer to take the offensive to gain such advantages as
the choice of forum. Also, waiting for an agency to act first can be expensive. A party faces the cost of the
agency enforcement action, which includes litigation expenses (plus whatever sanction, in the case of a
loss). The party may lose his or her investment in whatever the agency disallows (or requires). Essentially,
taking the initiative avoids these costs (and the initial predicament of having to choose whether or not to
conform with an agency’s rule).
[return to top]

Additional Resources
Cengage Video Resources
 MindTap Videos:
o Administrative Law
[return to top]

Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not
related and consistent. conclusions are mostly logically related and
logically related and

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10 points consistent.7 consistent.0

points points
Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

[return to top]

Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

Instructor Manual

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Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 42:
Antitrust Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 424
Cengage Supplements.................................................................................................................................................. 424
List of Student Downloads ....................................................................................................................................... 424
Chapter Objectives ....................................................................................................................................................... 424
Key Terms ........................................................................................................................................................................ 424
What's New in This Chapter ........................................................................................................................................ 425
Chapter Outline ............................................................................................................................................................. 426
Discussion Questions ...................................................................................................................................................... 431
Additional Activities and Assignments ....................................................................................................................... 431
Additional Resources ..................................................................................................................................................... 432
Cengage Video Resources ...................................................................................................................................... 432
Appendix......................................................................................................................................................................... 433
Generic Rubrics.......................................................................................................................................................... 433
Standard Writing Rubric ......................................................................................................................................... 433
Standard Discussion Rubric ...................................................................................................................................... 434

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Purpose and Perspective of the Chapter

The purpose of this chapter is to introduce students to the concepts around antitrust violations, including
horizontal and vertical restrictions in trade as well as group boycotts, price discrimination, and tying
agreements.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

172. List the activities prohibited by the Sherman Act

173. List the activities prohibited by the Clayton Act

174. State who enforces U.S. antitrust laws

175. Define the extraterritorial reach of U.S. antitrust laws

Key Terms
antitrust laws: Laws protecting commerce from unlawful restraints and anticompetitive practices.
attempted monopolization: An action by a firm that involves anticompetitive conduct, the
intent to gain monopoly power, and a ―dangerous probability‖ of success in achieving monopoly power.
concentrated industry: An industry in which a single firm or a small number of firms control alarge
percentage of market sales.
exclusive-dealing contract: An agreement under which a seller forbids a buyer to purchase products
from the seller’s competitors.
group boycott: An agreement by two or more sellers to refuse to deal with a particular personor firm.
horizontal merger: A merger between two firms that are competing in the same market. horizontal
restraint: Any agreement that restrains competition between rival firms competing in the same market.
market concentration: The degree to which a small number of firms control a large percentage of a
relevant market.

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market power: The power of a firm to control the market price of its product. A monopoly has the
greatest degree of market power.
monopolization: The possession of monopoly power in the relevant market and the willful acquisition
or maintenance of that power, as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident.
monopoly: A market in which there is a single seller or a very limited number of sellers.
monopoly power: The ability of a monopoly to dictate what takes place in a given market.
per se violations: A restraint of trade that is so anticompetitive that it is deemed inherently (perse) illegal.
predatory pricing: The pricing of a product below cost with the intent to drive competitors out of the
market.
price discrimination: A seller’s act of charging competing buyers different prices for identical products
or services.
price-fixing agreement: An agreement between competitors to fix the prices of products or services at
a certain level.
resale price maintenance agreement: An agreement between a manufacturer and a retailer in which the
manufacturer specifies what the retail prices of its products must be.
rule of reason: A test used to determine whether an anticompetitive agreement constitutes a reasonable
restraint on trade. Courts consider such factors as the purpose of the agreement, its effect on competition,
and whether less restrictive means could have been used.
vertical merger: The acquisition by a company at one stage of production of a company at a higher or
lower stage of production (as when a company merges with one of its suppliers or retailers).
vertical restraint: A restraint of trade created by an agreement between firms at different levels in the
manufacturing and distribution process.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New subsection on ―State Laws Concerning Price Discrimination‖

 1 New Case
o Case Analysis 46.1: McWane, Inc. v. Federal Trade Commission (2015)—an FTC action
under Section 5 of the Federal Trade Commission Act requiring proof of both the
possession of monopoly power in the relevant market and the willful acquisition or
maintenance of that power.
o New Case 46.2: Candelore v. Tinder, Inc. (2018)—a state court considered whetheran
allegation of age-based price discrimination in violation of the state’s civil
rights statute could support a claim for a violation of the state’s unfair
competition statute.
o Case 46.3: TransWeb, LLC v. 3M Innovative Properties Co. (2016)—regarding a
declaratory judgment of non-infringement, asserting a Walker Process claim. One

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of the primary issues was whether attorneys’ fees were an appropriate basis for
damages.
 Retained and Updated Digital Update feature—
o European Union Issues Record Fine against Google in Antitrust Case (added new
details regarding the court’s ruling and a subsection titled, ―Google Put Its Shopping Results
above Other Search Results‖)
o Includes a new Critical Thinking question
 1 New Case Problem
o 2018 case on tying arrangements
 1 New ―A Question of Ethics‖ using all-new IDDR Approach on Section 2 of the ShermanAct
(based on 2017 case)
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Chapter Outline
I. The Sherman Antitrust Act- The Sherman Act is proscriptive rather than prescriptive. It is the basis
for policing, rather than regulating, business conduct.
a. Major Provisions of the Sherman Act
i. Section 1—―Every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several States, or with
foreign nations, is hereby declared to be illegal [and is a felony punishable by
fine or imprisonment].‖
ii. Section 2—―Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several States, or with
foreign nations, shall be deemed guilty of a felony [and is similarly punishable].‖
b. Differences between Section 1 and Section 2
i. Section 1 requires two or more persons. One person alone can violate Section 2.
ii. Section 1 cases are often concerned with agreements that restrain trade. Section
2 cases deal with the structure of a monopoly.
iii. Both sections seek to curtail practices that result in undesired monopoly behavior,
but Section 2 requires that a ―threshold‖ or ―necessary‖ amount of monopoly
power already exist.
c. Jurisdictional Requirements- Any activity that substantially affects commerce falls under
the act, which also extends to U.S. nationals abroad who engage in activities that have an
effect on U.S. foreign commerce.
d. Section 1 of the Sherman Act- Trade restraints fall into two categories: horizontal and
vertical. Those that are blatantly anticompetitive are per se violations; those that are not
so blatant are analyzed under the rule of reason.
i. Per Se violations are violations that are so blatantly and substantially
anticompetitive that they are deemed inherently illegal. Examples:

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1. Price Fixing- An agreement among competitors to fix prices is unlawful

per se.
2. Group boycotts- An agreement by two or more sellers to refuse to deal
with, or boycott, a particular person or firm is a group boycott, or joint
refusal to deal, a per se violation
3. Market divisions- It is a per se violation for competitors to divide up
territories or customers.
ii. Rule of Reason- To insulate dealers from direct competition with other dealers
selling a manufacturer’s product, the manufacturer may institute territorial
restrictions or attempt to ban wholesalers or retailers from reselling the product to
certain classes of buyers.
1. Rationale for the Rule of Reason- If the rule-of-reason had not
developed, almost any business agreement could be held to violate the
Sherman Act.
2. Factors That Courts Consider- Factors that a court might consider in a
rule-of-reason analysis include—
a. The purpose of an arrangement.
b. The powers of the parties.
c. The effect of the parties’ actions.
d. Whether a less restrictive means might have accomplishedthe
same result.
3. The Reason Behind the Agreement Is Not a Defense
II. Section 2 of the Sherman Act- Section 2 proscribes monopolization and attempts to monopolize. A
tactic that may be involved in either offense is predatory pricing—pricing below the cost of
production to drive competitors out of business. The surviving firm can then price its products at high
enough levels to earn monopoly profits.
a. Monopolization- There are two elements to a Section 2 violation—
 Possession of monopoly power in the relevant market.
 Willful acquisition or maintenance of that power.
i. Defining Monopoly Power- Monopoly refers to control by a single entity. If a firm
has sufficient market power to affect prices and output, it may be a monopoly
even though it is not the sole seller in the market. To define a firm’s market power,
courts look to its share of the relevant market.
ii. Proving Monopoly Power - Monopoly power may be proved by direct evidence
that a firm used its market power to control prices or exclude competition. To
prove monopoly power indirectly, a firm may be shown to have a dominant
share of the relevant market. Courts also consider the barriers for competitors to
enter that market.
iii. Relevant Market- To define a firm’s market power, courts look to its share of
the relevant market, consisting of—
1. A product market.
2. A geographic market.

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iv. Relevant Product Market In determining the relevant product market, the key
issue is the degree of products’ interchangeability. Decisions on this issue can often
be interpreted as arbitrary.
v. Relevant Geographic Market - The geographic market is that section of the
country within which a firm can increase its price a bit without attracting new
sellers or without losing many customers to alternative suppliers outside that area.
vi. Discussion Activity: 5-10 minutes total. As a class discussion the following: In
thinking about how a court determines whether a firm has a dominant market
share and thus defining the relevant market, what factors might the court
consider? Imagine a case in which a coffee retailer is alleged to be a monopoly.
What questions may the court to determine the relevant product market? The
relevant geographic market?
vii. The Intent Requirement- The acquisition of monopoly power is not an antitrust
violation if it results from—
1. Business acumen—good management and efficiency.
2. The development of a superior product.
3. A historic accident.
4. If a firm possesses market power as a result of some purposeful act to
acquire or to maintain that power through anticompetitive means, it is a
violation of Section 2.
viii. Unilateral Refusals to Deal- Refusals to deal involve manufacturers who refuse to
deal with retailers or dealers who cut prices to levels substantially below the
manufacturers’ suggested retail prices. A refusal to deal is not a violation of
Section 1, although it may violate Section 2, depending on the monopoly power
of the firm refusing to deal and the anticompetitive effect on the market.
b. Attempts to Monopolize- This offense may involve predatory pricing (defined above) or
predatory bidding—the acquisition and use of monopsony power (market power on the
buy side). This occurs when a buyer bids up the price of an input too high for competitors
to pay, forcing them out of the market. Cases involving attempts to monopolize require
proof of—
i. Anticompetitive conduct.
ii. Intent to exclude competitors and garner monopoly power.
iii. A dangerous probability of success—a serious threat of monopolization— which
exists only when a party has some degree of market power.

III. The Clayton Act- The Clayton Act targets specific practices that substantially reduce competition
or could lead to monopoly power but are not clearly prohibited by the Sherman Act. The U.S.
Department of Justice and the Federal Trade Commission (FTC) enforce the act. Private parties
may sue for treble damages and attorneys’ fees.
a. Section 2—Price Discrimination- Price discrimination occurs when a seller charges
different prices to competitive buyers.

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i. Requirements
1. The seller must be engaged in interstate commerce.
2. The goods must be of like grade or quality.
3. The goods must have been sold to two or more buyers.
4. The effect of the price discrimination must be to substantiallylessen
competition or create a competitive injury.
b. Section 3—Exclusionary Practices- Sellers or lessors cannot sell or lease on condition that
the buyer or lessee not use or deal in goods of the seller or lessor’scompetitor.
i. Exclusive-Dealing Contracts- An exclusive-dealing contract, like other
anticompetitive agreements, is prohibited if it substantially lessens competition or
tends to create a monopoly.
ii. Tying Arrangements- The legality of a tying arrangement depends on many
factors, particularly the business purpose or effect of the arrangement. A tying
arrangement that involves services must be attacked under Section 1 of the
Sherman Act (because the Clayton Act has been held to cover only commodities). A
tying arrangement is most likely to be subject to a rule-of-reason analysis.
c. Section 7—Mergers
 A person or business organization cannot hold stock or assets in another business if
the effect may be to substantially lessen competition.
 A crucial consideration in merger cases is the market concentration of a product or
business—its percentage market share among competitors in the relevant market.
When a small number of companies control a large share of the market, the
market is concentrated.
d. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small groups
and consider the following: A company sells both widgets and trinkets. The trinket market
has been shrinking and the company is worried they will be stuck with a warehouse full of
trinkets which they can no longer sell, resulting in a financial loss. However, the widgets
have been selling well recently. The company decides to package every widget with a
trinket and increase the price of the widget to account for the trinket. Is this a violation
of the ClaytonAct? Why or why not?
IV. Enforcement and Exemptions
a. Agency Actions - The U.S. Department of Justice (DOJ) prosecutes violations of the
Sherman Act as either criminal or civil violations. The DOJ of the Federal Trade
Commission (FTC) can enforce the Clayton Act only through civil proceedings (violations of
the Clayton Act are not crimes). Remedies include divestiture and dissolution. The FTC also
enforces the Federal Trade Commission Act.
b. Private Actions- A private party who has been injured by a violation of the Sherman Act
or Clayton Act can sue for treble damages and attorneys’ fees. Private parties may also
seek injunctions. Under the Sherman Act, a private party must show that—

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i. The violation caused or was a substantial factor in causing an injury.

ii. The violation affected business activities protected by the antitrust laws.
iii. A private party can bring an action under Section 2 of the Sherman Act based on
the attempted enforcement of a fraudulently obtained patent. Such an action is
called a Walker Process claim.
c. Exemptions from Antitrust Laws- Exemptions to antitrust enforcement aregiven to—
i. Labor.
ii. Agricultural associations.
iii. Fisheries.
iv. Insurance companies
v. Exporters.
vi. Professional baseball.
vii. Oil marketing.
viii. Defense activities.
ix. Small business firms’ cooperative research.
x. State actions.
xi. Regulated industries.
xii. Businesspersons’ joint efforts to seek government action (exempted under the
Noerr-Pennington doctrine).

V. U.S. Antitrust Laws in the Global Context- (LO3) Persons in foreign nations are subject to U.S.
antitrust laws, as well as protected by those laws from illegal anticompetitive acts committed by
U.S. citizens.
a. The Extraterritorial Application of U.S. Antitrust Laws- Any conspiracy that has a
substantial effect on U.S. commerce is within the reach of the Sherman Act, whether the
violation occurs outside the United States and whether a foreign government or person
commits it. Any per se violation automatically falls under
U.S. jurisdiction.
b. The Application of Foreign Antitrust Laws- U.S. firms may be subject to foreign antitrust
laws if the firms’ conduct has a substantial effect on those entities’ commerce.
c. Think Pair Share Activity: 5-10 minutes total. Ask students to form pairs or small groups
and consider whether each of the following is within reach of the Sherman Act:
i. Two gas stations in a small town in France conspire to raise the price of gas via
price fixing.
ii. Two car manufacturers in France conspire to divide the market through each of
them only selling to particular geographic regions.
iii. Three wine companies in France agree to sell no wine to customers in the United
States, because the owners of those companies believe the U.S. government is
corrupt.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. What are the ethical values underpinning antitrust laws, and why are those laws applied to tying
arrangements in particular? The ethical values underlying the antitrust laws include honesty and equity
(and liberty or freedom if those can be characterized as ethical values). A challenge to a tying
arrangement is generally justified on the basis that the seller’s position of power in the marketplace for the
tying product is used to restrain competition in the marketplace for the tied product. The essential
characteristic of an invalid tying arrangement lies in a seller’s exploitation of its control over a tying
product to force a buyer to buy a tied product that the buyer either does not want or might prefer to buy
elsewhere on different terms

2. In what circumstances might a tying arrangement be considered procompetitive? A tying

arrangement (and any restraint of trade subject to a rule of reason analysis) may be considered
procompetitive if it results in lower prices or other benefits for consumers without illegally suppressing
competition. A tying arrangement would not be illegal as long as a seller does not have sufficient market
power to force a buyer to buy a product or do something else that the buyer would not otherwise do in a
competitive market

3. How does the Sherman Act affect international business? Section 1 of the Sherman Act declares that
its provisions are applicable both in the U.S and abroad; it purports to reach any conspiracy (foreign or
domestic) that has a substantial effect on U.S. commerce. Foreign governments as well as natural persons
can be sued for violating the Sherman Act regardless of whether the alleged violations occurred inside or
outside the U.S. Before a U.S. court will exercise its jurisdiction over an alleged antitrust violation,
however, the party bringing the claim must demonstrate that the alleged violations have the requisite
effect on U.S. commerce. The jurisdiction of the court will be automatically invoked, however, if a per se
violation has been committed as would be the case if a U.S. firm had joined a foreign cartel and conspired
successfully to control the production, price, or distribution of a good that substantially affected
U.S. commerce.

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Additional Activities and Assignments

16. Business Case: Antitrust Law
a. Students can find the full fact pattern for the scenario in their MindTap.
b. MindTap provides 5 multiple choice questions which are automatically graded. The
following are additional activities which can be adapted to fit the needs of your
classroom:
c. Discussion Questions:

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1. If an association of car dealerships sought to boycott a particular tire

manufacturer, are they violating the Sherman Act? Do their motivations for boycott
matter?
2. Do you think a company should have the legal right to change suppliers or vendors
for any reason, including a political or discriminatory one?
3. Does a car manufacturer, such as General Vehicles, have any financial influenceover
dealerships that sell its vehicles? If yes, could that influence extend to forcing a dealership
to follow the political agenda of the manufacturer if it is against the will of the
dealership?
4. Do boycotts, in general, violate antitrust provisions of the Sherman Act?
d. Role Play: In small groups of 3-5 students, complete the following activity. Imagine you
are on the Board of Directors for General Vehicles. Amira Kahn has improved profits
substantially over the past year, and the shareholders have been pleased with her
leadership. However, the Chief Operations Officer brought to
your attention that Kahn’s motives for changing suppliers could be a violation of Antitrust
laws. How would you proceed to investigate the matter? What evidencewould you collect
and review? Be prepared to present your plan to your classmates.
e. Writing Assignment: In addition to refusing to buy tires from Tova directly, General
Vehicle also eliminates any of their vendors from their supply line who purchase
supplies from Israel. As it relates to the vendor supply line, has as a boycott occurred?
Is this illegal under the Sherman Act?
f. Ethics Question: Assume you live in a country who supports the political policies of a
certain country; however, you as an individual, disagree with that position. You use your
business’s buying power to protest against that country by refusing to import any goods
from the country. You also refuse to do business with any other company who buys goods
from that country. Is this ethical?
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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Market Power
o Sherman Antitrust Act
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback. Customize these rubric templates as you wish. The
writing rubric indicates 40 points and the discussion rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points

Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Instructor Manual
Miller, Hollowell, Business Law: Texts and Exercises, 10th Edition. © 2023 Cengage; Chapter 43:
International and Space Law

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 436
Cengage Supplements.................................................................................................................................................. 436
List of Student Downloads ....................................................................................................................................... 436
Chapter Objectives ....................................................................................................................................................... 436
Key Terms ........................................................................................................................................................................ 436
What's New in This Chapter ........................................................................................................................................ 437
Chapter Outline ............................................................................................................................................................. 438

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Discussion Questions ...................................................................................................................................................... 443

Additional Resources ..................................................................................................................................................... 444
Cengage Video Resources ...................................................................................................................................... 444
Appendix......................................................................................................................................................................... 444
Generic Rubrics.......................................................................................................................................................... 444
Standard Writing Rubric ......................................................................................................................................... 444
Standard Discussion Rubric ...................................................................................................................................... 445

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Purpose and Perspective of the Chapter

The purpose of this chapter is to examine various laws related to international business, including
how activity which occurs outside of the United States may still fall under the jurisdiction of
federal courts and U.S. law.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

176. Identify important international principles and doctrines

177. Discuss how business is done internationally

178. Explain common provisions in international contracts

179. Outline international business regulations

180. List international space law treaties

Key Terms
act of state doctrine: A doctrine that provides that the judicial branch of one country will not examine
the validity of public acts committed by a recognized foreign government within its own territory.
comity: A deference by which one nation gives effect to the laws and judicial decrees of another nation.
confiscation: A government’s taking of a privately owned business or personal property withouta proper
public purpose or an award of just compensation.
distribution agreement: A contract between a seller and a distributor of the seller’s products setting out
the terms and conditions of the distributorship.
dumping: The selling of goods in a foreign country at a price below the price charged for the same
goods in the domestic market.
export: To sell products to buyers located in other countries.
expropriation: The seizure by a government of privately owned business or personal propertyfor a
proper public purpose and with just compensation.

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international law: The law that governs relations among nations. International customs and treaties are
generally considered to be two of the most important sources of international law. international
organization: In international law, a term that generally refers to an organization composed mainly of
nations and usually established by treaty. The United States is a member of more than one hundred
multilateral and bilateral organizations, including at least twenty through the United Nations.
national law: Law that pertains to a particular nation (as opposed to international law).
normal trade relations (NTR) status: A status granted through an international treaty by which each
member nation must treat other members at least as well as it treats the country that receives its most
favorable treatment. This status was formerly known as most-favored-nation status.
sovereign immunity: A doctrine that immunizes foreign nations from the jurisdiction of U.S.courts when
certain conditions are satisfied.
space law: Law consisting of the international and national laws that govern activities in outer space.
tariff: A tax on imported goods.
treaty: An agreement formed between two or more independent nations.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:

 New subsection on the United States–Mexico–Canada Agreement (formerly NAFTA)—abrief

summary of the changes under the new agreement.
 Updated Alien Tort Claim Act to Alien Tort Statute (ATS), mentioning U.S. Supreme Court decision
to limit foreign corporations from being sued under the ATS.
 Retained and Updated Ethics Today feature—
o Is It Ethical (and Legal) to Brew ―Imported‖ Beer Brands Domestically? (Updated with
new examples of imported beer labeling cases from 2017.)
 2 New Cases:
o New Case 24.1: Rubin v. Islamic Republic of Iran (2018)—on sovereign immunity that
involved an action to attach and execute a judgment against the property ofa foreign
state that had been held liable for the results of acts of terrorism.
o New Case 24.2: Changzhou Trina Solar Energy Co., Ltd. v. United States International
Trade Commission (2018)—on antidumping duties imposed on solarimports from China.
o Spotlight Case 24.3: Daimler AG v. Bauman (2014)—on whether the Alien Tort Statute
allows U.S. courts to exercise jurisdiction over a cause of action based on conduct that
occurred outside the United States.
 1 New Case in Point
o 2017 case the act of state doctrine

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 1 New Case Problem (based on 2018 case)

 1 New ―A Question of Ethics‖ using all-new IDDR Approach on doing business
internationally (based on 2017 case)
 New Unit-Ending Task-Based Simulation feature
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Chapter Outline
I. International Principles and Doctrines- Important international legal principles are based
primarily on courtesy and respect.
a. The Principle of Comity- One nation defers and gives effect to the laws and judicial
decrees of another nation, as long as those laws and decrees are consistent with the law
and public policy of the accommodating nation. The textincludes an example that involves
an international contract.
b. The Act of State Doctrine- The judicial branch of one country will not examine the validity
of public acts committed by a recognized foreign government within its own territory. This
doctrine avoids disturbing diplomatic relations.
i. When a Foreign Government Takes Private Property
1. Expropriation—A government seizes private property for a public
purpose and pays its (former) owners just compensation. In a suit
challenging the seizure, the government has the burden of proving that
the taking was an expropriation.
2. Confiscation—A government seizes private property for an illegal
purpose without compensating its (former) owners.
3. Doctrine May Immunize a Foreign Government’s Actions
ii. The act of state doctrine and the doctrine of sovereign immunity tend to shield
foreign nations from the jurisdiction of U.S. courts so that, in general, U.S. firms or
individuals who own property overseas have little
U.S. legal protection against government actions in the countries in which they
operate.
c. The Doctrine of Sovereign Immunity- The Foreign Sovereign Immunities Act (FSIA) of
1976 governs the circumstances in which an action may be brought in the United States
against a foreign nation, including attempts to attach a foreign nation’s property.
i. When a Foreign State Will Not Be Immune- A foreign state is not immune from
the jurisdiction of U.S. courts if the state—
1. Waives its immunity.
2. Carries on a commercial activity in the United States on which the action is
Based.
3. Commits a tort in the United States or violates certain international laws.
4. Is designated ―a state sponsor of terrorism‖ and is sued under the FSIA
for ―personal injury or death that was caused by an act of torture‖ or
a related act of terrorism.

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ii. Think Pair Share Activity: 10 minute total. Ask students to form pairs or small
groups and consider the following: Marcel worked for the French government and
was living in the United States. While here, Marcel engaged in the price fixing of
various French consumer goods, stole trade secrets, and entered into contracts with
U.S. suppliers which he breached. Do any of the international principles and
doctrines protect Marcel from liability?
iii. Application of the Act- A foreign state includes a political subdivision and an
instrumentality of the state. A commercial activity is a mercantile activity that has
substantial contact with the United States.

II. Doing Business Internationally- Selling products (or services) in foreign markets can be
accomplished by exporting goods manufactured domestically or by manufacturing goods
overseas.
a. Exporting- There are two ways to export—direct and indirect. The latter takes
advantage of agency relationships or distributorships.
i. Direct versus Indirect- Direct exporting does not involve third parties. Indirect
exporting involves the use of a third party to sell a product in a foreign market
for a domestic manufacturer.
ii. Agency Relationships versus Distributorships- A third party in a foreign market
is an agent. A third party in a foreign market who takes title to domestically
manufactured goods is a distributor.
b. Manufacturing Abroad- Manufacturing goods in foreign countries may have the
advantages of lower costs, taxes, and trade barriers, as well as less government
regulation, allowing for more effective competition in those markets.
i. Licensing- Licensing involves a payment of royalties.
ii. Franchising- Franchising, a well-known form of licensing, allows for greater
control over business operations than other licensing.
iii. Subsidiaries- When a U.S. firm establishes a wholly-owned foreign subsidiary,
the parent company often retains complete ownership of the facilities and
complete control over all phases of the operation.
iv. Discussion Activity: 5-10 minute total. As a class, discuss the following: A U.S.
business is interested in selling its products in a foreign country,but is concerned
that after an initial purchase, the buying company in the foreign country will
duplicate the product (make a ―knock-off‖ version) and sell the product at a
substantially lower price point. How could the
U.S. business protect its product and overall sales?

III. International Contract Provisions- Arbitration clauses are common in contracts governing
international sales.

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a. Effect of Choice-of-Law and Choice-of-Forum Clauses

i. When a contract contains forum-selection and choice-of-law clauses, a suit
arising from a dispute between the parties will be heard by a court in the
specified forum and decided according to that forum’s law.
ii. When a contract contains no such clauses, litigation may occur in two or more
countries with each applying its own law, and no certainty with regard to
enforcement of either judgment.
iii. Knowledge Check: 1 minute total. Tests students’ understanding about jurisdiction
in international cases.
iv. Choice of Language Clause
v. Force Majeure Clause
vi. Arbitration Clause

IV. Regulation of International Business Activities- National laws and international agreements
impose controls on international business transactions.
a. Investment Protections- International law principles are violated when property is
confiscated. Some countries provide constitutional or statutory guaranties against it, or
insurance for their citizens’ investments abroad. Few remedies are available, however.
i. Knowledge Check: 1 minute total. Tests students’ understanding of the concept of
confiscation.
b. Export Controls- Under the Constitution, Congress cannot impose export taxes, but to
restrict or encourage exports Congress can impose—
i. Export quotas—Control exports by setting quotas on the flow of commodities and
other products.
ii. Restrictions on technology exports—Impose restrictions on the flow of
technologically advanced products and technical data under the Export
Administration Act of 1979.
iii. Incentives and subsidies—Stimulate exports through tax incentives (exempting
income) and encouraging investment in and loans to U.S. export companies.
c. Import Controls- The production and sale of domestic products may be stimulated by
import restrictions, which include prohibitions, quotas, and tariffs.
i. Prohibitions- Prohibitions are imposed on—
1. Illegal drugs.
2. Books that urge insurrection against the U.S. government.
3. Agricultural products that pose dangers to domestic crops oranimals.
4. Goods coming from enemies of the United States.
ii. Quotas and Tariffs- Tariffs are imposed on such products as oil.
iii. Antidumping Duties- The United States regards dumping as an unfair
international trade practice. The procedure for imposing antidumping duties
involves two U.S. government agencies—the International Trade Commission (ITC)
and the International Trade Administration (ITA).

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1. The ITC assesses the effects of dumping on domestic businesses.

2. The ITA decides whether import sales were at less than fair market value.
The ITA determination establishes the amount of antidumping duties, which
are set to equal the difference between the price charged in the United
States and the price charged in the exporting country. A duty may be
retroactive to cover past dumping incidents.
d. Minimizing Trade Barriers
i. The World Trade Organization (WTO)- To minimize international trade barriers,
most of the world’s leading trade nations abide by the World Trade
Organization (WTO), formerly the General Agreement on Tariffs and Trade
(GATT). Each member agrees to grant normal-trade-relations (NTR) status to other
member countries.
V. Space Law- Space law consists of the international and national laws that govern activities in outer
space. These activities were once wholly the province of governments but are now beginning to
include efforts by private companies.
a. International Space Law- This consists of international treaties—primarily negotiated by
the United Nations (U.N.)—and U.N. resolutions. The major space law treaties were
concluded by the U.N. Committee on the Peaceful Uses of Outer Space (COPUS), which
also administers and advises on their effect.
i. Exploration and Exploitation- The U.N. Treaty on Principles Governing the
Activities of States in the Exploration and Use of Outer Space, including the Moon
and Other Celestial Bodies—generally referred to as the Outer Space Treaty—is
the foundation.
1. Articles I and II—Outer space is free for the exploration and use of all
nations. The moon, the planets, asteroids, and other celestial bodies are
not subject to the appropriation of any single nation.
2. Article IV—Space objects are to be used exclusively for peaceful
purposes.
3. Article VI—Each nation is responsible for its activities in outer space,
whether they are conducted by the government or by a private entity.
4. Article VII—Each nation is liable for the damage caused by its
space objects.
5. Article VIII—Each nation retains jurisdiction and control over its space
objects and the personnel on them.
6. Article IX—Space exploration must be conducted to avoid
―harmful contamination.‖
ii. Astronauts and Space Objects
1. Agreement on the Rescue of Astronauts, the Return of Astronauts and the
Return of Objects Launched into Outer Space (the Rescue Agreement)—
Each nation will undertake to rescue and assist astronauts in distress, and
recover errant space objects, and returnthem to their ―launching State.‖

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2. Convention on International Liability for Damage Caused by Space Objects

(the Liability Convention)—A launching State is absolutely liable for
personal injury and property damage caused by its space objects, subject
to a determination of fault.
3. Convention on Registration of Objects Launched into Outer Space (the
Registration Convention)—Each launching State is to maintain a registry of
the objects that it launches into space.
iii. Space Debris- Space debris mitigation guidelines endorsed by the U.N. reflect the
current practices of national and international organizations. The guidelines apply
to the planning, design, manufacture, and operational phases of spacecraft.
b. U.S. Space Law
i. Commercial Space Flight
1. The Federal Aviation Administration (FAA) regulates private spaceports
and the launch and reentry of private spacecraft under the Commercial
Space Launch Act.
2. Some states, including Florida, New Mexico, Texas, and Virginia, limit the
liability of space tourism providers under state tort law.
3. The U.S. Commercial Space Launch Competitiveness Act of 2015 provides
that any U.S. citizen or entity owns any mineral or other resource that the
person or entity retrieved from an asteroid.
ii. Exports of Space Technology- U.S. regulations classify all spacecraft as
―defense articles.‖ This restricts the transfer of space technology and data
concerning space technology to any foreign person or nation under the
U.S. Department of State’s International Traffic in Arms Regulations.
iii. Property Rights to Space Resources
1. Under U.S. law, the government must have sovereignty over territory
before it can confer title to associated property to its citizens. And Article
II of the Outer Space Treaty bans the national appropriation of territory
in space.
2. But Article VIII provides that a state party to the treaty retains jurisdiction
over objects on its space registry that are launched into space, and
Article IX prohibits interference with space activities. In effect, these
provisions confer the protections associated with property rights on private
space activities.
3. The U.S. Commercial Space Launch Competitiveness Act grants private
citizens property rights over asteroid resources that they obtain from
space.

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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.

1. How is the principle of comity applied? Like the act of state doctrine and the doctrine of sovereign
immunity, the principle of comity is based primarily on courtesy and respect, and is applied in the interest
of maintaining harmonious relations among nations. And like the states in our federal form of government,
in which each state honors the legal obligations formed in other states, as well as the judicial decisions with
respect to such obligations, on a global basis, nations aim to honor judgments rendered in other countries
when it is feasible to do so. But nations are not required to honor the actions of other nations. Under the
principle of comity, a nation will not give effect to an executive, legislative, or judicial act of another
country if the act is inconsistent with the nation’s own law and public policy. What other considerations
can take precedence over comity? A nation’s own laws and public policies take precedence over the
principle of comity. If an executive, legislative, or judicial act of another country is inconsistent with the law
and public policy of the nation being asked to give it effect, the nation is not likely to defer to it.

2. Discuss the act of state doctrine. The act of state doctrine is a judicially created principle that
provides that the judicial branch of one country will not examine the validity of public acts committed by
a recognized foreign government within its own territory. This doctrine is premised on the theory that the
U.S. judicial branch should not question the validity of acts by foreign governments within their own
borders when to do so would adversely affect relations with those foreign governments. The act of state
doctrine has important consequences for those parties doing business or investing in foreign countries
because individuals or businesseswhose assets are expropriated may be forced to litigate their claims in
the expropriating state’scourts due to the reluctance of the U.S. courts to entertain such claims.

3. How does the Sherman Act affect international business? Section 1 of the Sherman Act declares that
its provisions are applicable both in the U.S and abroad; it purports to reach any conspiracy (foreign or
domestic) that has a substantial effect on U.S. commerce. Foreign governments as well as natural persons
can be sued for violating the Sherman Act regardless of whether the alleged violations occurred inside or
outside the U.S. Before a U.S. court will exercise its jurisdiction over an alleged antitrust violation,
however, the party bringing the claim must demonstrate that the alleged violations have the requisite
effect on U.S. commerce. The

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jurisdiction of the court will be automatically invoked, however, if a per se violation has been committed as
would be the case if a U.S. firm had joined a foreign cartel and conspired successfully to control the
production, price, or distribution of a good that substantially affected
U.S. commerce.

4. Do U.S. discrimination laws apply in foreign countries? Title VII of the 1964 Civil Rights Act
regulates employment practices of businesses and covers employees who are employed in any industry
affecting commerce. Under the Civil Rights Act of 1991, this law has extraterritorial effect—it applies to
U.S. citizens employed in foreign countries.

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Additional Resources
Cengage Video Resources
 [list]
 MindTap Videos:
o [list]
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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete

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Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other scholarly include peer reviewed
other scholarly work. work. journals and other
5 points 3 points scholarly work.
0 points

Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

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Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

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Chapter 1

Table of Contents
Purpose and Perspective of the Chapter .................................................................................................................. 448
Cengage Supplements.................................................................................................................................................. 448
List of Student Downloads ....................................................................................................................................... 448
Chapter Objectives ....................................................................................................................................................... 448
Key Terms ........................................................................................................................................................................ 448
What's New in This Chapter ........................................................................................................................................ 449
Chapter Outline ............................................................................................................................................................. 450
Discussion Questions ...................................................................................................................................................... 451
Additional Resources ..................................................................................................................................................... 451
Cengage Video Resources ...................................................................................................................................... 451
Appendix......................................................................................................................................................................... 452
Generic Rubrics.......................................................................................................................................................... 452
Standard Writing Rubric ......................................................................................................................................... 452
Standard Discussion Rubric ...................................................................................................................................... 454

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Purpose and Perspective of the Chapter

The purpose of this chapter is to establish a foundation for the course, by introducing key
terminology and concepts that students will used through the book.

Cengage Supplements
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
 PowerPoint Deck

List of Student Downloads

Students should download the following items from the Student Companion Center to complete the activities
and assignments related to this chapter:
 PowerPoint Deck (without teaching notes, activities, or answers)

Chapter Objectives
The following objectives are addressed in this chapter:

1. Define law.
2. List major sources of law.
3. Identify the supreme law of the land
4. Distinguish different global legal systems

Key Terms
administrative agency: A federal or state government agency created by the legislature to perform a
specific function, such as to make and enforce rules pertaining to the environment. administrative law:
The body of law created by administrative agencies in order to carry out their duties and
responsibilities.
case law: The rules of law announced in court decisions. Case law interprets statutes,
regulations, constitutional provisions, and other case law.
civil law: The branch of law dealing with the definition and enforcement of all private or public rights, as
opposed to criminal matters.
common law: The body of law developed from custom or judicial decisions in English and U.S. courts, not
attributable to a legislature.
constitutional law: Law that is based on the U.S. Constitution and the constitutions of the various
states.
court of equity: A court that decides controversies and administers justice according to the rules,
principles, and precedents of equity.
court of law: A court in which the only remedies that can be granted are things of value, such as money
damages. In the early English king’s courts, courts of law were distinct from courts of equity.
criminal law: The branch of law that defines and punishes wrongful actions committed against the public.

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executive agency: An agency in which a principal grants an agent an exclusive territory anddoes not
allow another agent to compete in that territory.
independent regulatory agency: An administrative agency that is not considered part of the
government’s executive branch and is not subject to the authority of the president. Independentagency
officials cannot be removed without cause.
law: A body of enforceable rules governing relationships among individuals and between
individuals and their society.
opinion: A statement by a court expressing the reasons for its decision in a case. precedent: A court
decision that furnishes an example or authority for deciding subsequent cases involving identical or
similar facts.
remedy: The relief given to an innocent party to enforce a right or compensate for the violation of a right.
remedy at law: A remedy available in a court of law. Money damages are awarded as a remedy at
law.
remedy in equity: A remedy allowed by courts in situations where remedies at law are not
appropriate. Remedies in equity include injunction, specific performance, rescission and restitution,
and reformation.
stare decisis: (pronounced stahr-ee dih-si-sis) A common law doctrine under which judges are obligated to
follow the precedents established in prior decisions within their jurisdictions. statutory law: The body of law
enacted by legislative bodies (as opposed to constitutional law,administrative law, or case law).
uniform law: A model law created by the National Conference of Commissioners on Uniform State Laws
and/or the American Law Institute for the states to consider adopting. If a state adopts the law, it
becomes statutory law in that state. Each state has the option of adopting or rejecting all or part of a
uniform law.
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What's New in This Chapter

The following elements are improvements in this chapter from the previous edition:
 New chapter-opening scenario to help introduce how law and legal reasoning are a part of
everyday business operations and decisions.
 New subsection on ―Statutory Conflicts‖ with
o 1 new Numbered Example on sanctuary cities in certain states conflicting withfederal
immigration laws
 1 New Exhibit 1–6:
o An annotated 2018 Sample Court Case that illustrates the various elements
contained in a court opinion.
 Updated Exhibit 1–5 on how to read citations with all 2018 citations.
 1 New ―A Question of Ethics‖ (based on 2017 case).
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Chapter Outline
XI. What is Law?
a. Blackstone described the law as ―a rule of civil conduct,…commanding what isright,
and prohibiting what is wrong.‖
XII. Business Activities and the Legal Environment
a. Many different laws can affect a single business transaction
b. The role of law in small business covers everything from HR, to financing, to
advertising.
XIII. Sources of American Law
a. The Common Law
i. Early English Courts – Prior to the Norman Conquest in 1066 disputes were
settled in accordance with local legal customs which could vary greatly across
regions even within a country. After 1066, the system was unified and was
based on the decisions judges make in cases (the common law system).
ii. Stare Decisis – The use of legal precedents forms the basis for the doctrine of
stare decisis. A court’s application of a specific principle to a certain set of facts
is binding on that court and lower courts, which must then apply it in future cases.
A controlling precedent is binding authority. Other binding authorities include
constitutions, statutes, and rules. It provides for a system which is stable and
predictable.
1. Overturning precedents is permitted when there have been changes
in technology, business practices, or society’s attitudes.
2. When there is no precedent a judge may examine prior case law,
principles and policies behind the decisions, their historical setting, the
policies behind a legislature’s passing a specific statute,
society’s values and custom, and data and principles from other
disciplines.
iii. Knowledge Check Activity PPT Slide: 1 minute(s) total. Tests students’
knowledge on precedents and stare decisis.
iv. Think Pair Share Activity PPT Slide: 10 minutes total. Have students form pairs or
small groups and discuss the questions presented.
v. Equity:
3. Court of Law were courts that awarded payments of money or
property as compensation.
4. Courts of Equity were founded in justice and fair dealing and sought to
provide a more adequate remedy that money. The court provided an
order of specific performance, injunction, or recission of a contract.
5. Legal and Equitable Courts are not longer separate. Today, a
plaintiff can request both legal and equitable remedies in the same
action.
b. Constitutional Law

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i. U.S. Constitution is the supreme law of the land and will take precedence over
state constitutions.
c. Statutory Law
i. Statutes are enacted by legislatures (Congress). This type of law also
includes ordinances passed by cities and states
ii. Uniform Laws: Each state has the option to adopt a uniform law (or even a part of
the uniform law). Examples include: Uniform Commercial Code (UCC)
d. Administrative Law
i. Rules, orders, and decisions of administrative agencies.
XIV. Civil vs. Criminal Law
a. Civil law spells out the rights and duties that exist between persons and between citizens
and their governments
b. Criminal law has to do with a wrong committed against the public as a whole.
XV. National Law Around the World
a. Common law systems: United States, Australia, Canada, India
b. Civil law systems are based on codified law where the primary source of law is a
statutory code and precedents do not bind courts
XVI. International Law
a. A body of written and unwritten laws observed by independent nations in the relations
with other nations
b. No authority exists to enforce international law
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Discussion Questions
You can assign these questions several ways: in a discussion forum in your LMS; as whole-classdiscussions
in person; or as a partner or group activity in class.
1. What is the primary function of law? The primary function of law is to simultaneously maintain
stability and permit change. The law does this by providing for dispute resolution, the preservation of
political, economic, and social institutions, and the protection of property.

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Additional Resources
Cengage Video Resources
 MindTap Videos:
o Stare Decisis

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Appendix
Generic Rubrics
Providing students with rubrics helps them understand expectations and components of assignments.
Rubrics help students become more aware of their learning process and progress, and they improve
students’ work through timely and detailed feedback.
Customize these rubric templates as you wish. The writing rubric indicates 40 points and the discussion
rubric indicates 30 points.

Standard Writing Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Content The assignment clearly and The assignment partially The assignment does not
comprehensively addresses addresses some or all address the questions in the
all questions inthe questions in the assignment.
assignment. assignment. 0 points
15 points 8 points

Organization and Clarity The assignment presents The assignment presents The assignment does not
ideas in a clear manner and ideas in a mostly clear present ideas in a clear
with strong organizational manner and with a mostly manner and with strong
structure. The assignment strong organizational organizational structure.
includes an appropriate structure. The assignment The assignment includes an
introduction, content, and includes an appropriate introduction, content,and
conclusion. Coverage of introduction, content, and conclusion, but coverage of
facts, arguments, and conclusion. Coverage of facts, arguments, and
conclusions are logically facts, arguments, and conclusions are not logically
related and consistent. conclusions are mostly related and consistent.
10 points logically related and 0 points
consistent.
7 points

Research The assignment is based The assignment is based The assignment is not
upon appropriate and upon adequate academic based upon appropriate
adequate academic literature but does not and adequate academic
literature, including peer include peer reviewed literature and does not
reviewed journals and journals and other include peer reviewed
other scholarly work. scholarly work. journals and other

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5 points 3 points scholarly work.0

points
Research The assignment followsthe The assignment follows The assignment does not
required citation some of the required follow the required citation
guidelines. citation guidelines. guidelines.
5 points 3 points 0 points
Grammar and Spelling The assignment has two or The assignment has threeto The assignment is
fewer grammatical and five grammatical and incomplete or
spelling errors. spelling errors. unintelligible.
5 points 3 points 0 points

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Standard Discussion Rubric

Criteria Meets Requirements Needs Improvement Incomplete
Participation Submits or participates in Does not participate or Does not participate in
discussion by the posted submit discussion by the discussion.
deadlines. Follows all posted deadlines. Does not 0 points
assignment. instructions for follow instructions forinitial
initial post and responses. post and responses.3 points
5 points

Contribution Quality Comments stay on task. Comments may not stayon Does not participate in
Comments add value to task. Comments maynot discussion.
discussion topic. add value to discussion 0 points
Comments motivate other topic.
students to respond. Comments may not motivate
20 points other students torespond.
10 points

Etiquette Maintains appropriate Does not always maintain Does not participate in
language. Offers criticism in appropriate language. discussion.
a constructive manner. Offers criticism in an 0 points
Provides both positive and offensive manner.
negative feedback. Provides only negative
5 points feedback.
3 points

[return to top]

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