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183 terms

Business Law Final

Oral Contracts
-legally enforceable
-no writing is required for a services contract that can be performed within one year after the date of the agreement
-also includes oral extension of a contract
Statute of Frauds
statute that, in order to prevent fraud through the use of perjured testimony, requires that certain kinds of transactions be evidenced in writing in order to be binding or enforceable
-either the contract itself must be in writing and signed by both parties, or there must be a sufficient written memorandum of the oral contract signed by the person being sued for breach of contract
Part Performance Doctrine
exception to the statute of frauds when the plaintiff's part performance is unequivocally referable to the oral agreement
Contracts that Must be in Writing
1) agreement that cannot be performed within one year after the contract is made (part performance exception cannot apply, statute of frauds not applicable when contract may be terminated at will by either party)
2) agreement to sell or a sale of an interest of land (mortgages, selling land or buildings, leases)
3) promise to answer for the debt or default of another (promisors promise is a collateral or secondary promise, exception: when main purpose of promisor's promise to pay debt of another is to benefit the promisor then statute of frauds is not applicable and oral promise to pay the debt is binding)
4) promise by the executor or administrator of a decedent's estate to pay a claim against the estate from personal funds
5) promises made in consideration of marriage (ex: prenup)
6) sale of goods (priced at $500 or more)
7) promisory estoppel
undertaking to pay the debt or be liable for the default of another
Personal Representative
administrator or executor who represents decedents under UPC
person (man, woman) named in a will to administer the estate of the decedent
person (man, woman) appointed to wind up and settle the estate of a person who has dies without a will
person whose estate is being administered
1) must be signed by the party sought to be bound by the contract
2) must contain all of the essential terms of the contract so the court can determine just what was agreed
Effect of Noncompliance
person who is prevented from enforcing a contract bc of statute of frauds entitled to recover from the other party the value of any services or property furnished or money given under the oral contract
- other party to restore to the plaintiff what was received in order to prevent unjust enrichment at the plaintiff's expense
-only a party to the oral contract may raise a defense that it is not binding bc there is no writing that satisfies the statute of frauds
Parol Evidence Rule
rule that prohibits the introduction into evidence of oral or written statements made prior to or contemporaneously with the execution of a complete written contract, deed, or instrument, in the absence of clear proof of fraud, accident, or mistake causing the omission of the statement in question
-based on the theory that either there never was an oral agreement or if there was the parties abandoned it when they reached the stage in negotiations of executing their written contract
-**rule will not apply when there is 1) ambiguity 2)fraud, duress, or mistake 3)modification of contract
having more than one reasonable interpretation
Intention of the Parties
1) meaning of words(ordinary words are to be interpreted according to their ordinary meaning) 2) incorporation by reference
Incorporation by Reference
contract consisting of both the original or skeleton document and the detailed statement that is incorporated in it
Rules of Construction and Interpretation
in interpreting contracts, courts are aided by certain rules
1) intention of the parties 2) whole contract(provisions of a construct must be construed as a whole) 3) contradictory and ambiguous terms 4) implied terms 5)conduct and custom 6) avoidance of hardship
Contradictory and Ambiguous Terms
1) nature of writing(ex:when conflict btwn printed part and typewritten part typewritten part prevails, when a clause typewritten on a printed form conflicts with what is stated by the print the typewritten clause controls, when conflict btwn amount/quantity expressed both in words and figures like on check amount expressed in words prevails) 2)ambiguity 3)strict construction against drafting party (an ambiguous contract is interpreted strictly against the party who drafted it)
Good Faith
absence of knowledge of any defects or problems (part of implied terms)
Conduct and Custom
1) conduct of the parties(when performance has been repeatedly tendered and accepted without protest, neither party will be permitted to claim that the contract was too indefinite to be binding) 2)custom and usage of trade
Usage of Tradery
language and customs of an industry
Intended Beneficiary
third person of a contract whom the contract is intended to benefit
-not necessary to be identified by name but has to be clear at time of formation of contract that the parties intended to impose a direct obligation with respect to the third person
-if contract contains an express provision allowing a change of a change of beneficiary or cancellation of the contract can do this without the intended third party beneficiary's consent
Third Party Beneficiary
third person whom the parties to a contract intend to benefit by the making of the contract and to confer upon such person the right to sue for breach of contract
Creditor Beneficiary
when the promisee's primary intent is to discharge a duty owed to the third party
-intended beneficiary sometimes classifies as this
Donee Beneficiary
whom the promisee's primary intent in contracting is to give a benefit to
-type of intended beneficiary
-example: life insurance contract, money goes to beneficiary
Incidental Beneficiary
when the benefit was not intended
-whether or not a third party is an intended or incidental beneficiary comes down to determining whether or not a reasonable person would believe that the promisee intended to confer on the beneficiary an enforceable benefit under the contract in question, intent must be clear and definite or expressed in the contract itself
legal capacity to require another person to perform or refrain from an action
obligation of law imposed on a person to perform or refrain from performing a certain act
transfer of a right; generally used in connection with personal property rights, as rights under a contract, commercial paper, an insurance policy, a mortgage, or a lease (parties: assignor, assignee)
-the party owing a duty or deft under the contract is the obligor or debtor, and the party to whom the obligation is owed is the obligee, party making the assignment is the assignor, third party to whom the assignment is made is the assignee
-may be in any form, some statutes require that certain kinds of assignment be in writing or be executed in a particular form, any words (whether written or spoken) that show an intention to transfer or assign will be given the effect of an assignment, takes effect the moment it is made
buyer on credit (i.e., a borrower)
promisee who can claim the benefit of the obligation
party who assigns contract rights to a third party
-the making of an assignment does not relieve the assignor of any obligation of the contract
-when the assignment is made for a consideration the assignor is regarded as providing an implied warranty that the right assigned is valid, the assignor also warrants that the assignor is the owner of the claim or right assigned and that the assignor will not interfere with the assignee's enforcement of the obligation
third party to whom contract benefits are transferred
-unless restricted by the terms of the assignment or applicable law, the assignee acquires all rights of the assignor
-the assignee of the right to money may have no direct relationship to the original debtor except with respect to receiving payments, consumer protection laws in most states may subject the assignee to some liability for the assignor's misconduct
-assignee's rights are no greater than those of the assignor
-rights acquired by the assignee remain subject to any limitations imposed by the contract
-certain kinds of assignments must be in writing or be executed in a particular form
-any words (spoken or written) that show an intention to transfer or assign will be given the effect of an assignment
-takes effect the moment it is made
Assignment of Right to Money
-assignments generally made to raise money
-future and expected rights to money may be assigned
-the assignment of the right to money may be a complete transfer of the right that gives the assignee the right to collect and keep the money, OR assignment may be held for security which in this case means the assignee may hold the money only as a security for some specified obligation
-express contractual prohibitions on assignments are ineffective against 1) the assignment of rights to payment for goods or services, including accounts receivable 2) the assignment of the rights to damages for breach of sales contract
right to payment
Cause of Action
right to damages or other judicial relief when a legally protected right of the plaintiff is violated by an unlawful act of the defendant
Nonassignable Rights
if the transfer of a right would materially affect or alter a duty or the rights of the obligor, an assignment is not permitted
1) assignment increasing burden of performance 2) personal services 3) credit transaction (the person to whom credit is extended to cannot assign any rights under the contract to another)
substitution for an old contract with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party
Implied Warranty
warranty that was not made but is implied by law
Delegation of Duties
transfer of duties by a contracting party to another person who is to perform them
-if the performance of a party to a contract involves personal skills, talents, judgement or trust the delegation of duties is barred unless consented to by the person entitled to the performance (example: physicians, dentists, lawyers, celebrities, artists, etc.)
-a contract may prohibit a party owing a duty of performance under a contract from delegating that duty to another
-an assignment of rights does not in itself delegate the performance of duties to the assignee, can be viewed to see if it was intended
-with contracts for the sale of goods an assignment of the contract or of all the rights under the contract is an assignment of rights and it is a delegation of performance of the duties of the assignor and in acceptance by the assignee constitutes a promise to perform those duties
transfer to another of the right and power to do an act
stipulation or prerequisite in a contract, will, or other instrument
-the occurrence or nonoccurrence of an event as expressed in a contract that affects the duty of a party to the contract to perform=the event is called a condition
-conditions are classifies as conditions precedent, conditions subsequent, and concurrent conditions(the parties mutual duties of performance under the contract are to take place simultaneously)
Condition Precedent
event that if unsatisfied would mean that no rights would arise under a contract
Condition Subsequent
event whose occurrence or lack there of terminates a contract
goods have arrived, are available for pickup, and buyer is notified
-an offer to perform
-if performance of the contract required the doing of an act, the refusal of a tender discharges the party offering to perform and is a basis for that party to bring a lawsuit
Substantial Performance
equitable rule that if a good faith attempt to perform does not precisely meet the terms of the agreement, the agreement will still be considered complete if the essential purpose of the contract is accomplished
action of one party to a contract to set the contract aside when the other party is guilty of a breach of the contract
substitution of a new contract between the same parties
Accord and Satisfaction
agreement to substitute for an existing debt some alternative form of discharging that debt, coupled with the actual discharge of the debt by the substituted performance
release or relinquishment of a known right or objection
Operation of Law
attaching of certain consequences to certain facts because of legal principles that operate automatically as contrasted with consequences that arise because of the voluntary action of a party designed to create those consequences
procedure by which one unable to pay debts may surrender all assets in excess of any exemption claim to the court for administration and distribution to creditors, and the debtor is given a discharge that releases him from the unpaid balance due on most debts
Statute of Limitations
statute that restricts the period of time within which an action may be brought
failure to act or perform in the manner called for in a contract
Anticipatory Breach
promisor's repudiation of the contract prior to the time that performance is required when such repudiation is accepted by the promisee as a breach of the contract
Anticipatory Repudiation
repudiation made in advance of the time for performance of the contract obligations
release or relinquishment of a known right or objection
Reservation of Rights
assertion by a party to a contract that even though a tendered performance (e.g., a defective product) is accepted, the right to damages for nonconformity to the contract is reversed
action or procedure that is followed in order to enforce a right or to obtain damages for injury to a right
Specific Performance
action brought to compel the adverse party to perform a contract on the theory that merely suing for damages for its breach will not be an adequate remedy
-part of remedies for breach of contract
-ordinarily granted only if the subject matter of the contract is "unique"(for special performance of a contract to see personal property can be obtained only if the article is of unusual age, beauty, unique history, or other distinction)
-when the damages sustained by the plaintiff can be measured in monetary terms, specific performance will be refused
Compensatory Damages
sum of money that will compensate an injured plaintiff for actual loss
-have 2 branches: direct damages and consequential (or special) damaged
Nominal Damages
nominal sum awarded the plaintiff in order to establish that legal rights have been violated although the plaintiff in fact has not sustained any actual loss or damages
Punitive/Exemplary Damages
damages, in excess of those required to compensate the plaintiff for the wrong done, that are imposed in order to punish the defendant because of the particularly wanton or willful character of wrongdoing
Direct/General Damages
losses that are caused by breach of a contract
-includes incidental damages: extra expenditures made by the injured party to rectify the breach or mitigate damages
Consequential/Special Damages
damages the buyer experiences as a result of the seller's breach with respect to a third party
-may be recovered only if it was reasonably foreseeable to the defendant that the kind of loss in question could be sustained by the nonbreaching party if the contract were broken
***see example on page 441**
order of a court of equity to refrain from doing (negative injunction) or to do (affirmative or mandatory injunction) a specified act. Statute use in labor disputes has been greatly restricted
Liquidated Damages
provision stipulating the amount of damages to be paid in the event of default or breach of contract
-stipulated in the contract
Liquidated Damages Clause
specification of exact compensation in case of a breach of contract
-to be valid must show (1)the situation must be one in which it is difficult or impossible to determine the actual damages and (2)the amount specified must not be excessive when compared with the probable damages that would be sustained
-when clause is held valid the injured party cannot collect more than the amount specifies by the clause
-if the liquidated damages clause calls for a payment of a sum that is clearly unreasonably large and unrelated to the possible actual damages that might be sustained the clause will be held to be void as a penalty (see example on page 445)
-when clause is held invalid the effect is to erase the clause from the contract and the injured party may proceed to recover damages for breach of the contract
Exculpatory/Limitation of Liability Clause
provision in a contract stating that one of the parties shall not be liable for damages in case of breach
-limitation of liability: when a monetary limit to damages for breach of contract is set forth in the contract
-if these clauses caused by negligent conduct liability is neither excluded nor limited if the conduct alleged is found to be grossly negligent, willful, or wanton
-release forms signed by participants in athletic and sporting events declaring that the sponsor, proprietor, or operator of the event shall not be liable for injuries sustained by participants because of its negligence are generally binding
Commercial Paper
written, transferable, signed promise or order to pay a specified sum of money; a negotiable instrument
Negotiable Instruments
drafts, promissory notes, checks, and certificates of deposit that, in proper form, give special rights as "negotiable commercial paper"
-an unconditional promise or order to pay a fixed amount of money if it (1)is payable to bearer or order (2)is payable on demand or at a definite time and (3)does not state any other undertaking or instruction to do any act in addition to the payment of money
-a record of a signed promise or order to pay a specified sum of money
-kinds of instruments: promissory notes, certificates of deposit(CD), drafts, checks
-parties to instruments: maker, drawer, drawee, payee, acceptor, accommodation party
-there are primary and secondary parties for every negotiable instrument
Promissory Note
unconditional promise in writing made by one person to another, signed by the maker engaging to pay on demand, or at a definite time, a sum certain in money to order or to bearer
-parties: maker, payee
Certificate of Deposit (CD)
promise to pay instrument issued by a bank
Draft/Bill of Exchange
an unconditional order in writing by one person upon another, signed by the person giving it, and ordering the person to whom it is directed to pay upon demand or at a definite time a sum certain in money to order or to bearer
-party who gives the order is called the drawer, party to whom the order to pay is drawn is the drawee, the party to whom payment is to be made is the payee
-drawer may also be named as the payee
order by a depositor on a bank to pay a sum of money to a payee; a bill of exchange drawn on a bank and payable on demand
-order by a depositor(the drawer) on a bank or credit union(the drawee) to pay a sum of money to the order of another party(the payee)
Cashier's Check
draft drawn by a bank on itself
Teller's Check
draft drawn by a bank on another bank in which it has an account
Traveler's Check
check that is payable on demand provided it is countersigned by the person whose specimen signature appears on the check
Money Order
draft issued by a bank or a nonbank
person involved in a legal transaction; may be a natural person, an artificial person (e.g., a corporation), or an unincorporated enterprise (e.g., a governmental agency)
party who writes or creates a promissory note, thereby promising to pay the amount specified in the note
person who writes out and creates a draft or bill of exchange, including a check
person to whom the draft is addressed and who is ordered to pay the amount of money specified in the draft
-on a check the bank is the drawee
-credit union is the drawee on a share draft but has no responsibility under the draft until it has accepted that instrument
party to whom the payment is to be made
-example: on a check with the words "pay o the order of John Jones", Jones is the payee
-payee has no rights in the instrument until the drawer or the maker has delivered it to the payee, payee not liable on the instrument in any way until the payee transfers the instrument to someone else
drawee who has accepted the liability of paying the amount of money specified in a draft
Accommodation Party
person who signs an instrument to lend credit to another party to the paper
-a party who is not originally named in an instrument who allows her name to be added to it for the benefit of another party in order to add strength to the collectability of the instrument, assumes a liability role
-revised Article 3 now refers to drawer, indorsers, and accommodation parties as secondary obligors
quality of an instrument that affords special rights and standing
-the characteristic that distinguishes commercial paper and instruments from ordinary contracts or what makes such paper and instruments special paper
-that an instrument is negotiable means that certain rights and protections may be available to the parties of the instrument
-if an instrument is negotiable it may be transferred by negotiation that permits the transferee to acquire rights greater than those afforded assignees of contracts under contract law
**-to be negotiable an instrument (1)must be evidenced by a record(can be partly printed and partly typewritten) and (2)must be signed by the maker or the drawer(signature, symbol, initials, can also be by agent that has to disclose on the instrument the identity of the principal and the fact that the authentication was done in a representative capacity) (3)must contain an unconditional promise or order to pay (4)must pay a sum certain (5)must be payable in money (6)must be payable on demand or at a definite time(instrument is payable on demand when it expressly states that it is or does not state any time of payment, if instrument is not dated it is deemed dated on the day it is issued to the payee) and (7)must be payable to order or bearer
-omitting a date of execution or postdating, and provisions relating to collateral has no effect on an instrument's negotiability
-statute of limitations: 3 years for most actions involving negotiable instruments, 6 years for suits on CDs and accepted drafts
Nonnegotiable Instrument
contract, note, or draft that does not meet negotiability requirements of Article 3
Representative Capacity
action taken by one on behalf of another, as the act of a personal representative on behalf of a decedent's estate, or action taken both on one's behalf and on behalf of others, as a shareholder bringing a representative actions
-if an instrument fails to show the representative capacity of the person who is authenticating or fails to identify the person then the individual who authenticates the instrument is personally liable on the instrument to anyone who acquires superior rights; because the instrument is a final agreement the parol evidence rule applies
-in order to avoid personal liability the party authenticating must indicate on the face of the instrument his or her role in the principal
Sum Certain
amount due under an instrument that can be computed from its face with only reference to interest rates
-an exact amount of money
Definite Time
time of payment computable from the face of the instrument
Payable to Order
term stating that a negotiable instrument is payable to the order of any person described in it or to a person or order
person in physical possession of commercial paper payable to bearer, a document of title directing delivery to bearer, or an investment security in bearer form
Order Paper
instrument payable to the order of a party when by its terms it is payable to the order of any person described in it (example:"pay to the order of K.Read)
Bearer Paper
instrument with no payee, payable to cash or payable to bearer
-an instrument is payable to bearer when it is payable (1)to bearer or the order of bearer (2)to a specified person or bearer (3)to cash, the order of cash, or any other designation that does not purport to identify a person or when (4)the last or only indorsement is a blank indorsement
to insert or place on an instrument a later date than the actual date on which it was executed
property pledged by a borrower as security for a debt
having more than one reasonable interpretation
-rules: 1)words control figures where conflict exists 2)handwriting supersedes conflicting typewritten and printed terms 3)typewritten terms supersede preprinted terms 4)if there is a failure to provide for the payment of interest or if there is a provision for the payment of interest but no rate is mentioned, the judgment rate at the place of payment applies from the date of the instrument
Holder in Due Course
a holder who has given value, taken in good faith without notice of dishonor, defenses, or that instrument is overdue, and who is afforded special rights or status
-when a negotiable instrument is transferred by negotiation the transferee becomes the holder of the paper, if this holder meets certain additional requirements may also be a holder in due course
-the original payee of a note is not an HDC unless that note is transferred to others and then back to the payee
-one of the key reasons for attaining HDC status is to be able to obtain payment on the negotiable instrument free of any underlying problems between the original parties to the instrument
-not subject to limited defenses but subject to universal defenses
-taker of a negotiable instrument is denied the status and protections of an HDC when there is: participating transferee(when transferee is working with the lender or seller to obtain a negotiable instrument from the buyer/borrower conflicts with the close connection doctrine and prevents a transferee with intimate knowledge of the transferor's business practices from becoming a HDC), Federal Trade Commission Rule(rule protects consumers who purchase goods or services for personal, family, or household use on credit, when a notice preserving consumer defenses is included in a negotiable instrument no subsequent person can be a holder in due course of the instrument)
the transfer of commercial paper by indorsement and delivery by the person to whom it is then payable in the case of order paper and by physical transfer in the case of bearer paper
-negotiable instruments are transferred by this process
someone in possession of an instrument that runs to that person (i.e., is made payable to that person, is indorsed to that person, or is bearer paper)
-a holder who seeks payment of the instrument is required only to produce the instrument and show that the signature of the maker, drawer, or indorser is genuine
-can recover from any of the parties who are liable on the instrument, regardless of the order of the signatures on the instrument
Delivery/Negotiation of Bearer Instruments
-delivery:constructive or actual possession
-if an instrument qualifies for bearer status, then it is negotiated by delivery to another
-even though a bearer instrument may be negotiated by a mere transfer of possession, the one to whom the instrument is delivered may require the bearer to indorse the instrument
-delivery can be accomplished by actual transfer of possession wherein the transferee has possession of the instrument, or constructive transfer, whereby the transferee has exclusive access
signature of the payee on an instrument
Blank Indorsement
an indorsement that does not name the person to whom the paper, document of title, or investment security is negotiated
-when the indorser merely signs a negotiable instrument
-turns an order instrument into a bearer instrument
-person who possesses an instrument on which the last indorsement is blank is the holder
Special Indorsement
consists of the signature of the indorser and words specifying the person to whom the indorser makes the instrument payable
party to whom special indorsement is made
Qualified Indorsement
an indorsement that includes words such as "without recourse" that disclaims certain liability of the indorser to a maker or a drawee
Restrictive Indorsement
an indorsement that restricts further transfer, such as in trust for or to the use of some other person, is conditional, or for collection or deposit
Alternative Payees
those persons to whom a negotiable instrument is made payable, any one of whom may indorse and take delivery of it
Forged/Unauthorized Indorsement
instrument indorsed by an agent for a principal without authorization or authority
-not a valid indorsement
-if payment of an instrument is made to one claiming under or through a forged indorsement the payor ordinarily remains liable to the person who is the rightful owner of the paper
Impostor Rule
an exception to the rules on liability for forgery that covers situations such as the embezzling payroll clerk
-rule applies when: 1) impersonating payee 2) dummy payee(when the preparer of the instrument intends that the named payee will never benefit from the instrument) 3)dummy payee supplied by employee
-if one of the three impostor exceptions applies the instrument is still effectively negotiated
-when the impostor rule is applicable, any person may indorse the name of the payee
-does not apply when there is a valid check to an actual creditor for a correct amount owed by the drawer and someone later forges the payee's name
-for the rule to apply, the holders or the takers of the instrument must show that they took the instrument (1) in good faith and (2) for payment or collection
Problems in Negotiation of Instruments
1) forged and unauthorized indorsements
2) quasi forgeries: the impostor rule
3) effect of incapacity or misconduct on negotiation (negotiation is effective even though 1)it was made by a minor or any other person lacking capacity 2)it was an act beyond the powers of a corporation 3)it was obtained by fraud, duress, or a mistake of any kind 4)the negotiation was part of an illegal transaction or was made in breach of duty)
4) lost instruments (if the lost instrument is order paper the finder does not become the holder because the instrument has not been indorsed and delivered by the person to whom it was then payable, if the lost instrument is in bearer form when it is lost the finder is the holder and is entitled to enforce payment)
consideration or antecedent debt or security given in exchange for the transfer of a negotiable instrument or creation of a security interest
-part of holder in due course
-transferee takes an instrument for value when (1)the holder has promised to do something in exchange (2)the transferee takes the instrument as security for a loan(such as when a debtor transfers a promissory note payable to him to the transferee) or (3)the transferee receives the instrument as payment for a debt already due
-courts do not consider whether the value is enough; they determine only whether some value has been given
-bank does not give value for a deposited check when it credits the depositor's account the amount of the deposit, but rather gives vale to the extent that the depositor is permitted to withdraw funds against that deposit
Good Faith
absence of knowledge of any defects in or problems; "pure heart and an empty head"
Close Connection Doctrine
circumstantial evidence, such as an ongoing or a close relationship, that can serve as notice of a problem with an instrument
Holder Through a Holder in Due Course
holder of an instrument who attains holder-in-due-course status because a holder in due course has held it previous to him or her
Fraud in the Inducement
fraud that occurs when a person is persuaded or induced to execute an instrument because of fraudulent statements
Universal Defenses
defenses that are regarded as so basic that the social interest in preserving them outweighs the social interest of giving negotiable instruments the freely transferable qualities of money; accordingly, such defenses are given universal effect and may be raised against all holders
-fraud as to the nature or essential terms of the instrument, forgery or lack of authority, duress depriving control, incapacity. illegality, alteration
unauthorized change or completion of a negotiable instrument designed to modify the obligation of a party to the instrument
-part of universal defenses
-if an alteration to the instrument was made fraudulently the person whose obligations under the instrument are affected by that alteration is discharged from liability on the instrument but the instrument can be enforced according to its original terms or its terms as completed
Primary Party
party(maker of a note) to whom the holder or holder in due course must turn first to obtain payment
party who writes or creates a promissory note
-the primary party on a note or CD
person to whom the draft is addressed and who is ordered to pay the amount of money specified in the draft
-primary party on a draft
Secondary Parties
called secondary obligors under revised Article 3; parties to an instrument to whom holders turn when the primary party, for whatever reason, fails to pay the instrument
secondary party (or obligor) on a note
person who writes out and creates a draft or bill of exchange, including a check
formal request for payment by the primary party on an instrument requested by the holder or HDC
status when the primary party refuses to pay the instrument according to its terms
Notice of Dishonor
notice that an instrument been dishonored; such notice can be oral, written, or electronic but is subject to time limitations
Limited Defenses
defenses available to secondary parties if the presenting party is a holder in due course
Bad Check Laws
laws making it a criminal offense to issue a bad check with intent to defraud
Demand Draft
draft that is payable upon presentment
Time Draft
bill of exchange payable at a stated time after sight or at a definite time
Money Order
draft issued by a bank or a nonbank
Substitute Check
electronic image of a paper check that a bank can create and that has the same legal effect as the original instrument
negative balance in a drawer's account
USA Patriot Act
federal law that, among other things, imposes reporting requirements on banks
Stale Check
a check whose date is longer than 6 months ago
Stop Payment Order
order by a depositor to the bank to refuse to make payment of a check when presented for payment
Certified Check
check for which the bank has set aside in a special account sufficient funds to pay it; payment is made when the check is presented regardless of amount in the drawer's account at that time; discharges all parties except certifying bank when holder requests certification
Wrongfully Dishonored
error by a bank in refusing to pay a check
person or firm who is authorized by the principal or by operation of law to make contracts with third persons on behalf of the principal
the relationship that exists between a person identified as a principal and another by virtue of which the latter may make contracts with third persons on behalf of the principal (parties: principal, agent, third person)
Encoding Warranty
warranty made by any party who encodes electronic information on an instrument; a warranty of accuracy
Electronic Funds Transfer Act (EFTA)
federal law that provides consumers with rights and protections in electronic funds transfers
Electronic Funds Transfer (EFT)
any transfer of funds (other than a transaction originated by a check, draft, or similar paper instrument) that is initiated through an electronic terminal, telephone, computer, or magnetic tape so as to authorize a financial institution to debit or credit as account
Intermediary Bank
bank between the orginator and the beneficiary bank in the transfer of funds
Credit Transfer
transaction in which a person making payment, such as a buyer, requests payment be made to the beneficiary's bank
Debit Transfer
transfer in which a beneficiary entitled to money requests payment from a bank according to a prior agreement
Funds Transfer
communication of instructions or requests to pay a specific sum of money to the credit of a specified account or person without an actual physical passing of money
party who originates the funds transfer
person to whom the proceeds of a life insurance policy are payable, a person for whose benefit property is held in trust, or a person given property by a will; the ultimate recipient of the benefit of a funds transfer
Beneficiary's Bank
the final bank, which carries out the payment order, in the chain of a transfer of funds
Payment Order
direction given by an originator to his or her bank or by any bank to a subsequent bank to make a specified funds transfer
promise or performance that the promisor demands as the price of the promise
-promises to make a gift are unenforceable promises under the law of contracts because of lack of consideration (charity finances are binding because charity relays on promise)
-bargained for exchange: in order for consideration to exist, something of value must be given or promised in return for the performance or promise of performance of the othera
-benefit detriment approach: this defines consideration as a benefit received by the promisor or a detriment incurred by the promisee
-may also consist of forbearance
refraining from doing an act
Illusory Promise
promise that in fact does not impose any obligation on the promisor
-party making a promise is not bound because he or she has made no real promise, therefore the effect is that the other party who has made a real promise is also not bound because he or she has received no consideration
-includes cancellation provisions and conditional promises
Cancellation Provision
crossing out of a part of an instrument or a destruction of all legal effect of the instrument, whether by act of party, upon breach by the other party, or pursuant to agreement or decree of court
-a promise may authorize a party to cancel the agreement under certain circumstances on giving notice by a certain date but such a provision does not make this party's promise illusory for the party does not have a free way out and is limited to living up to the terms of the cancellation provision
Composition of Creditors
agreement among creditors that each shall accept a part payment as full payment in consideration of the other creditors doing the same
Past Consideration
(part of special situations)
something that has been performed in the past and which, therefore, cannot be consideration for a promise made in the present
Promissory Estoppel
doctrine that a promise will be enforced although it is not supported by consideration when the promisor should have reasonably expected that the promise would induce action or forbearance of a definite and substantial character on the party of the promised and injustice can be avoided only by enforcement of the promise
sometimes called the doctrine of detrimental reliance is applicable when (1)the promisor makes a promise that lacks consideration (2)the promisor intends or should reasonably expect that the promisee will rely on the promise (3)the promisee in fact relies on the promise in some definite and substantial manner and (4)enforcement of the promise is the only way to avoid injustice
-damages recoverable in a case of promissory estoppel are not the profits that the promisee expected, but only the amount necessary to restore the promisee to the position he or she would have been in had the promisee not relied on the promise
Conditional Promises
a promise that depends on the occurrence of a specified condition in order for the promise to be binding
-part of illusory promises
Preexisting Legal Obligation
(special situation)
doing or promising to do what one is already under a legal obligation to do is not consideration, promise to refrain from doing what one has no legal right to do is not consideration
-completion of contract (except if there is a good faith adjustment for contract for sale of goods, or enforcement of a second promise to pay a contractor a higher amount for the performance of the original contract when there are extraordinary circumstances caused by unforeseeable difficulties and when the additional amount promised the contractor is reasonable under the circumstances)
-compromise and release of claims: the rule that doing or promising to do what one is already legally bound to do is not consideration applies to a part payment made in satisfaction of an admitted or liquidated debt
-part payment checks: when there is a good faith dispute about the amount of a debt and the debtor tenders a check that states on its face paid in full and references the transaction is dispute, but the amount of the check is less than the full amount the creditor asserts is owed, the cashing of the check by the creditor discharges the entire debt
-composition of creditors
Moral Obligation
(part of special situations)
promises made to another based on moral obligation lack consideration and are not enforceable, they are considered gratuitous promises and unforceable
Exceptions to Consideration
1) charitable subscriptions
2) uniform commercial code: in some situations the Uniform Commercial Code abolishes the requirement of consideration, not required for (1)a merchant's written, firm offer for goods stated to be irrevocable (2)a written discharge of a claim for an alleged breach of a commercial contract and (3)an agreement to modify a contract for the sale of goods
3) promissory estoppel
Discharge by Performance
when it is claimed that a contract is discharged by performance, questions arise as to the nature, time, and sufficiency of the performance
-normal discharge of contracts: a contract is usually discharged by the performance of the terms of the agreement, also discharged by the expiration of time period specified in the contract
-nature of performance: tender, payment
-time of performance: no time specified (if not specified then an obligation to perform within a reasonable time is implied), when time is essential(time is of the essence when the contract relates to property that is perishable or that is fluctuating rapidly in value), when time is not essential(unless a contract so provides, time is ordinarily not of the essence and performance within a reasonable time is sufficient), waiver of essence of time limitation
-adequacy of performance: substantial performance (a party in good faith that provides this may sue to recover the payment specified in the contract), fault of complaining party(a party cannot complain that a performance was defective when the performance follows the terms of the contract required by the complaining party), performance to the satisfaction of the contracting party or a third party
Discharge by Action of Parties
-discharge by unilateral action: one party can discharge contract when they give notice to the other party, consumer protection rescission (gives the debtor the right to rescind a credit transaction within 3 business days)
-discharge by agreement: may be a discharge by (1)the terms of the original contract, such as a provision that the contract should end on a specified date (2)a mutual cancellation, in which the parties agree to end their contract (3)a mutual rescission, in which the parties agree to annul the contract and return both parties to their original positions before the contract has been made (4)the substitution of a new contract between the same parties (5)a novation or substitution of a new contract involving a new party (6)an accord and satisfaction (7)a release or (8)a waiver
Discharge by External Causes
-discharge by impossibility: must show (1)the unexpected occurrence of an intervening act (2)that the risk of the unexpected occurrence was not allocated by agreement or custom and (3)that the occurrence made performance impossible, destruction of particular subject matter, change of law, death or disability (rule does not apply when the acts may be as well performed by others or the contracts terms contemplate continuance of the obligations after the death of one of the parties), act of other party (when the promisee prevents performance or otherwise makes performance impossible)
-developing doctrines: commercial impracticability, frustration of purpose doctrine(because of change of circumstances the purpose of the contract may have no value to the party entitled to receive performance), comparison to common law rule
Remedies for Breach of Contract
-remedies upon anticipatory repudiation: (1)do nothing beyond stating that performance at the proper time will be required (2)regard the contract as having been definitely broken and bring a lawsuit against the repudiating party without waiting to see whether there will be proper performance when the performance date arrives or (3)regard the repudiation as an offer to cancel the contract
-remedies in general and the measure of damages:quasi contractual/restitution remedy, specific performance
-monetary damages
-action for specific performance
-action for an injunction
-reformation of contract by a court(when a written contract does not correctly state the agreement already made by the parties, either party may seek to have the court reform or correct the writing, party seeking reformation must clearly prove both the grounds for reformation and what the agreement actually was)
Quasi Contractual/Restitution Remedy
remedy in which a contract is unenforceable because it lacked definite and certain terms or was not in compliance with the statute of frauds, yet one of the parties performed services for the other
-measure of damages in these and other quasi contract cases is the reasonable value of the services performed
-in cases when a person retains money or when a contemplated contract is not properly formed and no work is performed, the party retaining the benefit is obligated to make restitution to the person conferring the benefit
Monetary Damages
when there is a breach of contract, the regular remedy is an award of monetary damages
-the sum of money that will place the injured party in the same position that would have been attained if the contract had been performed
-the injured party will be given the benefit of the bargain by the court
-classified as compensatory damages, nominal damages, and punitive damages
Mitigation of Damages
-damages must not be permitted to increase if an increase can be prevented by reasonable efforts
when one party commits a material breach of the contract, the other party may rescind the contract; if the party in default objects, the aggrieved party may bring an action for rescission
-a breach is material when it is so substantial that it defeats the object of the parties in making the contract
-an injured party who rescinds a contract after having performed services may recover the reasonable value of the performance rendered under restitutionary or quasi-contractual damages, money paid by the injured party may also be recovered; purpose is to restore the injured party to the position occupied before the contract was made, but the party seeking restitutionary damages must also return what this party has received from the party in default
Contract Provisions Affecting Remedies and Damages
-limitation of damages
-liquidated damages
-attorneys' fees(allows recovery of attorneys' fees for the the prevailing party, court has this discretion to award this money)
-limitation of liability clause
Negotiation of Order Instruments
-order paper that can be negotiated only through indorsement and transfer of possession of the paper
-blank indorsement, special indorsement, qualifies indorsement, restrictive indorsement, bank indorsement(bank can indorse with its Federal Reserve Systyem numer instead of using its name, can also indorse if customer failed to indorse it), agent or officer indorsement(instrument made payable to the oder of an officeholder)
-misspelled name: payee or indorsee indorses the wrong name, the correct name, or both, applies also to fictitious, assumed, or trade names
-no negotiation when the holder fails to indorse it
Warranties in Negotiation
-warranties of the unqualified indorser provides that the warrantor is person entitled to enforce the instrument, that all signatures on the instrument are authentic and authorized, that the instrument has not been altered, that the instrument is not subject to a defense or claim, that the drawer of the draft has authorized the issuance of the item in the amount for which the item is drawn, and that the warrantor has no knowledge of any insolvency proceeding with respect to the maker or acceptor
-those who present an instrument for payment, or the last party in line before the payor, makes 3 warranties: that the warrantor is entitled to enforce the draft or authorized to obtain payment or acceptance of the draft, that the draft has not been altered, and that the warrantor has no knowledge that the signature of the drawer of the draft is unauthorized
-if a forged indorsement has appeared during the trasnfer of the instrument and there is a refusal to pay bc of that problem, the last party who is a holder may turn to her transferor to recover on the basis of these implied warranties
-these warranties do not guarantee that payment of the instrument will be made but promise that the signatures on the instrument are not forged and that no one has altered the amount of the instrument, warranties about the nature of the instrument
-implied warranties of the unqualified indorser pass to the transferee and any subsequent transferees
-may be disclaimed when the instrument is not a check
-warranty liability of a qualified indorser same as that of an unqualified indorser, qualified indorsement means that the indorser does not assume liability for the payment of the instrument as written(indorses with"without recourse")
-when the negotiable instrument is negotiated by delivery without indorsement, the warranty liability of the transferor runs only to the immediate transferee
Defenses to Payment of a Negotiable Instrument
-holder in due course or a holder through an HDC are not subject to certain defenses called limited defenses(1.defenses that could be raised in a breach of contract claim cannot be raised against an HDC, defenses of lack, failure, misrepresentation, or illegality of consideration to the instruments underlying transaction cannot be asserted against the HDC, 2.maker's or drawer's lack of capacity except minors may not be raised as a defense to payment to a HDC but can be a defense if the incapacity is at a legal level that makes the instrument a nullity, 3.fraud in the inducement, 4.miscellaneous defenses:prior payment or cancellation of the instrument, nondelivery, conditional or special purpose delivery, breach of warranty, duress consisting of threats, unauthorized completion, and theft of a bearer instrument
-universal defenses: a class of defenses that may be asserted against any party
order by a depositor on a bank to pay a sum of money to a payee; a bill of exchange drawn on a bank and payable on demand
-nature of a check: sufficient funds on deposit, demand paper, form of the check, delivery not assignment
-presentment for obtaining payment on a check: no secondary obligor is liable on an instrument until presentment has been made, party presents the check or a record of payment, if a check is presented to the drawee bank for payment and paid the drawer has no liability because payment has been made, presentment must be made within a reasonable time after the drawers and indorsers have signed the check(determined by the nature of the instrument, by commercial usage, and by the facts of the particular case, failure to make timely presentment discharges all secondary obligors who were prior indorsers of the instrument, if check is not certified and is both drawn and payable within the US it is presumed that 90 says after the date of the check or the date of its issuance is the reasonable period to make presentment for payment in order to attach secondary liability to the drawer, 30 days with respect to attachment of the liability of an indorser)
-dishonor of a check: if the bank refuses to make payment the drawer is then subject to the same secondary liability as the drawer of an ordinary draft, overdraft
-stopping payment of a check: stop payment orders(often used when check is lost or mislaid), invalid for some forms of checks, can be either oral or by record
-a check is wrongfully dishonored by the drawee bank if the bank refuses to pay the amount of the check although (1)it is probably payable and (2)the account on which it is drawn is sufficient to pay the item
-when a bank cashes a check deposited by its customer or cashes a check drawn by its customer based on an amount from a deposited check it is a holder of the check deposited by its customer
Customer-Bank Relationship
-payment: stale checks(a bank acting in good faith may pay a check presented more than 6 months after its date nut unless the check is certifies the bank is not required to do so), payment after depositor's death(bank can continue to pay items for up to 10 days unless someone else halts payments)
-the parties in the bank collection process may modify their rights and duties by agreement but a bank cannot disclaim liability for lack of good faith or failure to exercise ordinary care nor can it limit the measure of damages for such lack of care
Liability of a Bank
-premature payment of a postdated check
-payment over a stop payment order
-payment on a forged signature of drawer(bank cannot be held liable if the customer's negligence substantially contributed to the making of the forgery
-payment on a forged or missing indorsement(must recredit the customer's account upon the drawer's discovery of the forgery, without proper indorsements for an order instrument and special indorsements the person presenting the check for payment is not the holder of the instrument and is not entitled to demand or receive payment therefore the bank can turn to the indorsers and transferors of the instrument for breach of warranty liability in that all signatures were not genuine or authorized and they did not have a title so that liability will eventually rest with the party who first accepted the forged indorsement, bank can indorse on behalf of the depositor when a customer deposits a check but does not endorse it unless the check expressly requires the customer's indorsement)
-alteration of a check: if the face of a check has been altered so that the amount to be paid has been increased the bank is liable to the drawer for the amount of the increase when it makes payment of the greater amount, drawer may be barred from claiming there was an alteration if there was negligence in writing the check or reporting its alteration
-unauthorized collection of a check
-time limitations: forgery and alteration reporting time(can view original check within 40 days of the delivery of their monthly bank statements or that date on which the substitute check was made available to them for examination and/or review, customers precluded from asserting unauthorized signatures or alterations if they do not report them within 1 year from the time the bank statement is received, forged indorsement must be reported within 3 years), unauthorized signature or alteration by same wrongdoer(the customer is protected only as to those items that were paid by the bank before it received notification from the customer and during that reasonable amount of time that the customer has to examine items or statements and to notify the bank, if the customer failed to exercise reasonable promptness and failed to notify the bank but the customer can show the bank failed to exercise ordinary care in paying the items the loss will be allocated between the customer and the bank), statute of limitations(an action to enforce a liability must be commenced within 3 years after the cause of action accrued)
Consumer Funds Transfer
-Electronic Funds Transfer: 1)ATM 2)pay by phone system(consumer calls the bank and directs the transfer of funds to a designated 3rd party) 3)point of sale terminal(allows a business with such a terminal to transfer funds from a consumer's account to the store's account) 4)internet banking
-consumer who notifies the issuer of an EFT card within 2 days after learning of a loss or theft of the card can be held to a maximum liability of $50 for unauthorized use of the card
Funds Transfer
-parties include originator, beneficiary, intermediary bank, and beneficiary's bank
-rules: when parties enter into an agreement for a funds transfer they may designate the law that is to apply in interpreting the agreement, if banks involved members of the same clearinghouse they will be bound by the lawful rules and regulations of the house
-after the beneficiary's bank accepts the payment order it and every bank ahead of it in the funds transfer chain is entitled to reimbursement of the amount paid to or for the beneficiary(the originator's bank and ultimately the originator makes payment of this reimbursement amount)
-error in funds transfer: wrong beneficiary or account number, excessive amount, duplicating amount, underpayment; (when one of the first 3 the bank committing the error bears the loss because it caused the item to be wrongfully paid, when error is underpayment the bank making the mistake can make a supplementary order for the amount)
-liability for loss: unauthorized order(if a bank executes or accepts an unauthorized payment order it is liable to any prior party in the transfer chain for the loss caused), failure to act(a bank that fails to carry out a payment order is usually liable at the most for interest loss and expenses)