LibraryPirate SMITH & ROBERSON’S Business Law FIFTEENTH EDITION RICHARD A. MANN Professor of Business Law The University of North Carolina at Chapel Hill Member of the North Carolina Bar BARRY S. ROBERTS Professor of Business Law The University of North Carolina at Chapel Hill Member of the North Carolina and Pennsylvania Bars This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Smith & Roberson’s Business Law, Fifteenth Edition Richard A. Mann and Barry S. Roberts Vice President of Editorial, Business: Jack W. Calhoun Editor-in-Chief: Rob Dewey Sr. Acquisitions Editor: Vicky True-Baker Developmental Editor: Kendra Brown Marketing Manager: Laura-Aurora Stopa Marketing Coordinator: Nicole Parsons Content Project Manager: Scott Dillon Sr. Media Editor: Kristen Meere Sr. Manufacturing Buyer: Kevin Kluck Editorial Assistant: Patrick I. Clark Production Service/Compositor: Cadmus Communications Sr. Art Director: Michelle Kunkler Cover/Internal Designer: Ramsdell Design Image Permissions Manager: John Hill Text Permissions Manager: Audrey Pettengill Printed in the United States of America 12345671514131211 ª 2012, 2009 South-Western, Cengage Learning ALL RIGHTS RESERVED. 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Library of Congress Control Number: 2010939466 ISBN 13: 978-0-538-47363-7 ISBN 10: 0-538-47363-0 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com About the Authors Richard A. Mann received a B.S. in Mathematics from the University of North Carolina at Chapel Hill and a J.D. from Yale Law School. He is currently professor of Busi- ness Law at the Kenan-Flagler School of Business, Univer- sity of North Carolina at Chapel Hill, and is past president of the Southeastern Regional Business Law Association. He is a member of Who’s Who in America, Who’s Who in American Law, and the North Carolina Bar. Professor Mann has written extensively on a number of legal topics, including bankruptcy, sales, secured transac- tions, real property, insurance law, and business associa- tions. He has received the American Business Law Journal’s award both for the best article and for the best comment and has, in addition, served as a reviewer and staff editor for the publication. Professor Mann is a coauthor of Busi- ness Law and the Regulation of Business (Tenth Edition), Essentials of Business Law and the Legal Environment (Tenth Edition), and Contemporary Business Law. Barry S. Roberts received a B.S. in Business Administra- tion from Pennsylvania State University, a J.D. from the University of Pennsylvania, and an LL.M. from Harvard Law School. He served as a judicial clerk for the Pennsyl- vania Supreme Court prior to practicing law in Pitts- burgh. Barry Roberts is currently professor of Business Law at the Kenan-Flagler School of Business, University of North Carolina at Chapel Hill, and is a member of Who’s Who in American Law and the North Carolina and Pennsylvania Bars. Professor Roberts has written numerous articles on such topics as antitrust, products liability, constitutional law, banking law, employment law, and business associa- tions. He has been a reviewer and staff editor for the American Business Law Journal. He is coauthor of Business Law and the Regulation of Business (Tenth Edition), Essen- tials of Business Law and the Legal Environment (Tenth Edition), and Contemporary Business Law. COLUMN: ª PHOTOGRAPHEROLYMPUS CLOUDS: ª KERTLIS iii Contents in Brief Preface xiii Table of Cases xvii Table of Illustrations xxi PART 1 The Legal Environment of Business 1 1 Introduction to Law 2 2 Business Ethics and the Social Responsibility of Business 13 3 Civil Dispute Resolution 41 4 Constitutional Law 64 5 Administrative Law 86 6 Criminal Law 101 7 Intentional Torts 119 8 Negligence and Strict Liability 140 PART 2 Contracts 163 9 Introduction to Contracts 164 10 Mutual Assent 178 11 Conduct Invalidating Assent 196 12 Consideration 215 13 Illegal Bargains 233 14 Contractual Capacity 250 15 Contracts in Writing 264 16 Third Parties to Contracts 288 17 Performance, Breach, and Discharge 305 18 Contract Remedies 321 PART 3 Agency 339 19 Relationship of Principal and Agent 340 20 Relationship with Third Parties 361 PART 4 Sales 385 21 Introduction to Sales and Leases 386 22 Performance 408 23 Transfer of Title and Risk of Loss 429 24 Products Liability: Warranties and Strict Liability in Tort 446 25 Sales Remedies 472 PART 5 Negotiable Instruments 495 26 Form and Content 496 27 Transfer 511 28 Holder in Due Course 527 29 Liability of Parties 550 30 Bank Deposits, Collections, and Funds Transfers 571 PART 6 Unincorporated Business Associations 595 31 Formation and Internal Relations of General Partnerships 596 32 Operation and Dissolution of General Partnerships 619 33 Limited Partnerships and Limited Liability Companies 645 PART 7 Corporations 667 34 Nature, Formation, and Powers 668 35 Financial Structure 691 36 Management Structure 711 37 Fundamental Changes 742 COLUMN: ª PHOTOGRAPHEROLYMPUS CLOUDS: ª KERTLIS iv PART 8 Debtor and Creditor Relations 759 38 Secured Transactions and Suretyship 760 39 Bankruptcy 792 PART 9 Regulation of Business 819 40 Protection of Intellectual Property 820 41 Antitrust 842 42 Consumer Protection 866 43 Employment Law 893 44 Securities Regulation 927 45 Accountants’ Legal Liability 961 46 Environmental Law 974 47 International Business Law 997 PART 10 Property 1015 48 Introduction to Property, Property Insurance, Bailments, and Documents of Title 1016 49 Interests in Real Property 1040 50 Transfer and Control of Real Property 1060 51 Trusts and Decedents’ Estates 1077 Appendices [1] Appendix A The Constitution of the United States of America [2] Appendix B Uniform Commercial Code (Selected Provisions) [8] Appendix C Uniform Partnership Act [101] Appendix D Revised Uniform Partnership Act (Selected Provisions) [107] Appendix E Revised Model Business Corporation Act [116] Appendix F Dictionary of Legal Terms [148] Index [168] Contents in Brief v Contents COLUMN: ª PHOTOGRAPHEROLYMPUS CLOUDS: ª KERTLIS Preface xiii Table of Cases xvii Table of Illustrations xxi PART 1 The Legal Environment of Business 1 1 Introduction to Law 2 Nature of Law 2 Classification of Law 4 Sources of Law 5 Legal Analysis 9 Chapter Summary 10 Cases 11 Questions 12 2 Business Ethics and the Social Responsibility of Business 13 Law versus Ethics 14 Ethical Theories 14 Ethical Standards in Business 17 Ethical Responsibilities of Business 18 Corporate Governance 19 Chapter Summary 21 Cases 23 Questions 23 Problems 23 Business Ethics Cases 25 3 Civil Dispute Resolution 41 The Court System 41 The Federal Courts 41 State Courts 43 Jurisdiction 44 Subject Matter Jurisdiction 44 Jurisdiction over the Parties 46 Civil Dispute Resolution 47 Civil Procedure 48 Alternative Dispute Resolution 52 Chapter Summary 54 Cases 56 Questions 61 Problems 62 4 Constitutional Law 64 Basic Principles of Constitutional Law 64 Powers of Government 66 Limitations on Government 69 Chapter Summary 73 Cases 74 Questions 84 Problems 84 5 Administrative Law 86 Operation of Administrative Agencies 87 Limits on Administrative Agencies 89 Chapter Summary 91 Cases 92 Questions 98 Problems 98 6 Criminal Law 101 Nature of Crimes 101 White-Collar Crime 103 Crimes Against Business 105 Defenses to Crimes 107 Criminal Procedure 107 Chapter Summary 110 Cases 111 Questions 116 Problems 116 7 Intentional Torts 119 Intent 120 Harm to the Person 120 vi Harm to the Right of Dignity 122 Harm to Property 124 Harm to Economic Interests 125 Defenses to Intentional Torts 127 Chapter Summary 128 Cases 129 Questions 136 Problems 136 8 Negligence and Strict Liability 140 Negligence 140 Breach of Duty of Care 141 Factual Cause 145 Scope of Liability (Proximate Cause) 145 Harm 147 Defenses to Negligence 147 Strict Liability 149 Activities Giving Rise to Strict Liability 149 Defenses to Strict Liability 150 Chapter Summary 150 Cases 152 Questions 159 Problems 159 PART 2 Contracts 163 9 Introduction to Contracts 164 Development of the Law of Contracts 164 Definition of a Contract 165 Requirements of a Contract 166 Classification of Contracts 166 Promissory Estoppel 169 Quasi Contracts 169 Chapter Summary 170 Cases 171 Questions 176 Problems 176 10 Mutual Assent 178 Offer 178 Essentials of an Offer 179 Duration of Offers 181 Acceptance 183 Communication of Acceptance 183 Variant Acceptances 185 Chapter Summary 186 Cases 187 Questions 192 Problems 193 11 Conduct Invalidating Assent 196 Duress 196 Undue Influence 197 Fraud 197 Nonfraudulent Misrepresentation 199 Mistake 199 Chapter Summary 201 Cases 202 Questions 210 Problems 210 12 Consideration 215 Legal Sufficiency 215 Bargained-for Exchange 220 Contracts without Consideration 221 Chapter Summary 222 Cases 223 Questions 230 Problems 230 13 Illegal Bargains 233 Violations of Statutes 233 Violations of Public Policy 234 Effect of Illegality 237 Chapter Summary 238 Cases 239 Questions 247 Problems 247 14 Contractual Capacity 250 Minors 250 Incompetent Persons 252 Intoxicated Persons 253 Chapter Summary 253 Cases 254 Questions 261 Problems 261 15 Contracts in Writing 264 Statute of Frauds 264 Contracts within the Statute of Frauds 264 Compliance with the Statute of Frauds 270 Effect of Noncompliance 271 Parol Evidence Rule 271 The Rule 271 Situations to Which the Rule Does Not Apply 272 Supplemental Evidence 272 Interpretation of Contracts 273 Chapter Summary 274 Cases 276 Contents vii Questions 284 Problems 284 16 Third Parties to Contracts 288 Assignment of Rights 288 Delegation of Duties 291 Third-Party Beneficiary Contracts 292 Chapter Summary 294 Cases 295 Questions 301 Problems 302 17 Performance, Breach, and Discharge 305 Conditions 305 Discharge by Performance 307 Discharge by Breach 307 Discharge by Agreement of the Parties 308 Discharge by Operation of Law 309 Chapter Summary 311 Cases 313 Questions 317 Problems 318 18 Contract Remedies 321 Interests Protected by Contract Remedies 321 Monetary Damages 321 Remedies in Equity 325 Restitution 326 Limitations on Remedies 326 Chapter Summary 328 Cases 329 Questions 335 Problems 335 PART 3 Agency 339 19 Relationship of Principal and Agent 340 Nature of Agency 340 Creation of Agency 341 Duties of Agent to Principal 343 Duties of Principal to Agent 345 Termination of Agency 347 Chapter Summary 349 Cases 350 Questions 358 Problems 358 20 Relationship with Third Parties 361 Relationship of Principal and Third Persons 361 Contract Liability of the Principal 361 Tort Liability of the Principal 367 Criminal Liability of the Principal 370 Relationship of Agent and Third Persons 370 Contract Liability of Agent 370 Tort of Liability of Agent 373 Rights of Agent Against Third Person 373 Chapter Summary 373 Cases 375 Questions 382 Problems 382 PART 4 Sales 385 21 Introduction to Sales and Leases 386 Nature of Sales and Leases 386 Definitions 387 Fundamental Principles of Article 2 and Article 2A 388 Formation of Sales and Lease Contracts 391 Manifestation of Mutual Assent 391 Consideration 393 Form of the Contract 395 Chapter Summary 397 Cases 398 Questions 405 Problems 405 22 Performance 408 Performance by the Seller 408 Performance by the Buyer 412 Obligations of Both Parties 414 Chapter Summary 417 Cases 419 Questions 425 Problems 425 23 Transfer of Title and Risk of Loss 429 Transfer of Title 429 Risk of Loss 433 Sales of Goods in Bulk 436 Chapter Summary 437 Cases 438 Questions 443 Problems 443 24 Products Liability: Warranties and Strict Liability in Tort 446 Warranties 446 Types of Warranties 446 Obstacles to Warranty Actions 449 Strict Liability in Tort 452 Requirements of Strict Liability 453 Contents viii [...]... Law rules for enforcing substantive law Public and Private Law • Public Law law dealing with the relationship between government and individuals • Private Law law governing the relationships among individuals and legal entities Civil and Criminal Law • Civil Law law dealing with rights and duties the violation of which constitutes a wrong against an individual or other legal entity • Criminal Law law... primarily private law SOURCES OF LAW CIVIL AND CRIMINAL LAW The civil law defines duties the violation of which constitutes a wrong against the party injured by the violation In contrast, the criminal law establishes duties the violation of which is a wrong against the whole community Civil law is a part of private law, whereas criminal law is a part of public law (The term civil law should be distinguished... entire community SOURCES OF LAW Constitutional Law fundamental law of a government establishing its powers and limitations Judicial Law • Common Law body of law developed by the courts that serves as precedent for determination of later controversies • Equity body of law based upon principles distinct from common law and providing remedies not available at law Legislative Law statutes adopted by legislative... of Africa and Asia COMMON LAW The courts in common law systems have developed a body of law, known as ‘‘case law, ’’ ‘‘judge-made law, ’’ or ‘‘common law, ’’ that serves as precedent for determining later controversies In this sense, common law is distinguished from other sources of law such as legislation and administrative rulings To evolve steadily and predictably, the common law has developed by application... COLUMN: ª PHOTOGRAPHEROLYMPUS CLOUDS: ª KERTLIS CHAPTER 2 Business Ethics and the Social Responsibility of Business CHAPTER 3 Civil Dispute Resolution CHAPTER 4 Constitutional Law CHAPTER 5 Administrative Law CHAPTER 6 Criminal Law CHAPTER 7 Intentional Torts CHAPTER 8 Negligence and Strict Liability C H A P T E R 1 Introduction to Law NATURE OF LAW The law has evolved slowly, and it will continue to change... the areas of law are so highly interrelated, an individual who intends to study the several branches of law known collectively as business law should first consider the nature, classification, and sources of law as a whole This enables the student not only to comprehend better any given branch of law but also to understand its relation to other areas of law Chapter 1 3 Introduction to Law administrative... means by which the law enforces the decisions of the courts Law and Morals are different but overlapping; law provides sanctions, while morals do not Law and Justice are separate and distinct concepts; justice is the fair, equitable, and impartial treatment of competing interests with due regard for the common good CLASSIFICATION OF LAW Substantive and Procedural Law • Substantive Law law creating rights... rules of contract law that determine when a binding contract is formed are rules of substantive law This book is principally concerned with substantive law On the other hand, procedural law establishes the rules for enforcing those rights that exist by reason of substantive law Thus, procedural law defines the method by which one may obtain a remedy in court PUBLIC AND PRIVATE LAW Public law is the branch... substantive law that deals with the government’s rights and powers in its political or sovereign capacity and in its relation to individuals or groups Public law consists of constitutional, administrative, and criminal law Private law is that part of substantive law governing individuals and legal entities (such as corporations) in Chapter 1 5 Introduction to Law their relations with one another Business law. .. QUESTIONS 1 2 3 4 5 Identify and describe the basic functions of law Distinguish between law and justice Distinguish between law and morals Define and discuss substantive and procedural law Distinguish between public and private law 6 7 8 9 10 Distinguish between civil and criminal law Identify and describe the sources of law Distinguish between law and equity Explain the principle of stare decisis Identify . constitutional law, banking law, employment law, and business associa- tions. He has been a reviewer and staff editor for the American Business Law Journal. He is coauthor of Business Law and the. Busi- ness Law and the Regulation of Business (Tenth Edition), Essentials of Business Law and the Legal Environment (Tenth Edition), and Contemporary Business Law. Barry S. Roberts received a B.S. in Business. of Business 1 1 Introduction to Law 2 2 Business Ethics and the Social Responsibility of Business 13 3 Civil Dispute Resolution 41 4 Constitutional Law 64 5 Administrative Law 86 6 Criminal Law