Chapter 12 Contracts and Sales: Performance, Remedies,
and Collection
Its Legal, Ethical, and its Global Environment
Marianne M. Jennings
Business
11th Ed.
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12-1
Defenses
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12-2
Both Parties to a Valid Contract Must Have Capacity, Which Includes Age (18) and Mental Capacity
Age Capacity
In most states age is 18
Before that, the party is an infant or minor
Defenses: Capacity
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12-3
Capacity – Age
Contracts are voidable − minor can get out at his/her option
Liable in quasi-contract for necessaries
Some exceptions − student loans; military service
Defenses: Capacity
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12-4
Capacity, Necessities, and Parents
Case 12.1 Yale Diagnostic Radiology v. Estate of Fountain (2003)
What was the nature of the medical care?
Why was there money available for payment?
Why does the court see unfairness in excusing the minor and the minor’s parent?
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12-5
Person Understands Contracts are Enforceable and Significance of Legal Documents
Understands Contracts Involve Costs and Litigation
If Declared Legally Incompetent – Contracts are Void!
Otherwise, If No Legal Capacity, Contracts are Voidable
Defenses: Mental Capacity
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12-6
Elements
Misstatement of a material fact
Reliance
Damages
Remedy Can Be Rescission – Contract is Set Aside
Must Have Been Material
Cannot Be Sales Puffing (Opinion)
Misrepresentation
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12-7
Elements
Knowing and intentional use of false information
Knowing and intentional failure to disclose
Many states have statutes exempting the disclosure of a murder or AIDS victims as previous owners or residents
However, if there is an inquiry by the potential buyer, the information cannot be withheld
Fraud
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12-8
Fraud: The Failure to Disclose Material Information Can Be Fraud or Misrepresentation
Case 12.2 Reed v. King (1983)
What does Mrs. Reed need to establish to be entitled to recession and damages?
Would the information about the house make a difference to you in making a buying decision?
Fraud
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12-9
Regulation Z Gives Three-Day Cooling-Off Period
Home Equity Loan Consumer Protection Act of 1988/Home Ownership and Equity Protection Act of 1994
Penalties under TILA
Two times the amount of finance charges
Minimum of $100 and maximum of $1,000
Class action = $500,000 or 1 percent of creditors’ net worth (the lesser of)
Canceling Credit Contracts
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12-10
Three-Day Cancellation Notice
H-9 Rescission Model Form (Refinancing)
NOTICE OF RIGHT TO CANCEL
Your Right to Cancel
You are entering into a new transaction to increase the amount of credit provided to you. You are entering into a new transaction to increase the amount of credit provided to you. We acquired a [mortgage/lien/security interest] [on/in] your home under the original transaction and will retain that [mortgage/lien/security interest] in the new transaction. You have a legal right under federal law to cancel the new transaction, without cost, within three business days from whichever of the following events occurs last:
(1) the date of the new transaction, which is ______; or
(2) the date you received your new Truth-in-Lending disclosures; or
(3) the date you received this notice of your right to cancel.
If you cancel the new transaction, your cancellation will apply only to the increase in the amount of credit. It will not affect the amount that you presently owe or the [mortgage/lien/security interest] we already have [on/in] your home. If you cancel, the [mortgage/lien/security interest] as it applies to the increased amount is also cancelled. Within 20 calendar days after we receive your notice of cancellation of the new transaction, we must take the steps necessary to reflect the fact that our [mortgage/lien/security interest] [on/in] your home no longer applies to the increase of credit. We must also return any money you have given to us or anyone else in connection with the new transaction.
You may keep any money we have given you in the new transaction until we have done the things mentioned above, but you must then offer to return the money at the address below. If we do not take possession of the money within 20 calendar days of your offer, you may keep it without further obligation.
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12-11
Three-Day Cancellation Notice
HOW TO CANCEL
If you decide to cancel the new transaction, you may do so by notifying us in writing, at
(creditor's name and business address).
You may use any written statement that is signed and dated by you and states your intention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no later than midnight of (date) (or midnight of the third business day following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time.
I WISH TO CANCEL
________________________ ____________________
Consumer's Signature Date
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12-12
Duress – Contract Voidable
Physical force or threats
Party is deprived of a meaningful choice
Has right of rescission
Voidable
Duress
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Undue Influence
Undue Influence – Contract Voidable
Must have confidential relationship
Attorneys/clients
Elderly parents
12-13
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12-14
Illegal Subject Matter
Contract is void
Contracts in violation of criminal statutes
Examples: Contract to have someone killed; contract to pay for a vote
Illegality – Public Policy
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Illegality – Public Policy
Case 12.3 Durrett v. ACT, Inc. (2011)
Did applicant agree to ACT terms?
Were the contract provisions fair or oppressive?
12-15
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12-16
Contracts in Violation of Licensing Statutes Must Be Competency-Based as Opposed to Revenue-Raising For Contracts to Be Void
Contracts in Violation of Usury Laws Charging Interest in Excess of Statutory Maximum
Illegality – Public Policy
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Contracts in Violation of Public Policy
Exculpatory clauses − full liability elimination is generally invalid
Covenants not to compete must be reasonable in time and geographic scope
Unconscionable contracts
Illegality – Public Policy
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Illegality – Public Policy
Case 12.4 Hawkins v. Globe Life Insurance (2015)
Explain the full history of the insurance policy
Discuss whether the mother should have disclosed more
12-18
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12-19
When is Performance Due
Conditions precedent
Conditions concurrent
Conditions subsequent
Contract Performance
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12-20
Standards for Performance
Complete performance is required
Substantial performance allowed in contract cases
Substantial Performance = Nonmaterial Breach
Contract Performance
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12-21
E-Commerce: Payments
Credit Cards
Digital Cash
Person-to-Person Payment (or PayPal)
Contract Performance
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12-22
When Performance is Excused
Impossibility − contract cannot be performed
Example: Cannot build house if the land is washed away
Commercial impracticability − UCC-2-615
Basic assumptions parties made are no longer true
Can protect themselves by putting in force majeure clause − covers problems such as wars, embargoes, depressions
Performance: Excuse
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Case 12.5 Sons of Thunder, Inc. v. Borden, Inc. (1997)
What impact does “good faith” have on termination of a contract?
What are the damages when there is a lack of good faith in the termination of a conduct?
Performance: Good Faith
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12-24
Novation
Two original parties agree, along with third party, to substitute one party for another
Accord and Satisfaction
Agreement reached to discharge a disputed obligation
Substitute Performance
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12-25
Requires Monthly Statement on Open-End Transactions
Bill Must Have Address to Write for Errors
Debtors Must Write Bill Objections to Get Damages
Must send within sixty days of bill’s receipt
Creditor has thirty days to acknowledge
Creditor has ninety days to take action
Fair Credit Billing Act
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12-26
Fair Credit Billing Act
Debtor need not pay protested amount or finance charges during protest period
Once resolved, must pay
If creditor does not comply with time limits, debtor need not pay (even if creditor is correct)
Fair Credit Billing Act
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12-27
Collection Rights of the Creditor
Regulated by FDCPA (Fair Debt Collections Practices Act) if it is a consumer debt
Application
Third party collection agencies
Attorneys
Prohibits unreasonable collection practices by collection agencies
Collection
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12-28
Collection Rights
Collectors’ obligations
Must provide written verification of debt if debtor asks or within five days after contact with debtor
Must include amount of debt, name of creditor, debtor’s right to disputed debt
Collection
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12-29
Collection Rights
Collector’s restrictions
Debtor contact
Third party contact
Prohibited Acts
Penalties or FDCPA violations
FTC responsible for enforcement
Injunction
Debtor may collect actual damages
Debtor may collect up to $1,000 in additional damages
Collection
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12-30
Case 12.6 Litt v. Portfolio Recovery Associates LLC (2015)
What violations of FDCPA does the court find?
What policies should collectors develop on phone calls?
Collections
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12-31
Suits to Enforce Debts
Reduce to judgment
Use garnishment for wages, accounts, and so on
Limits wage garnishments to 25 percent of wages (50 percent for child support)
Enforcement
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12-32
The End of the Line on Enforcement of Debts: Bankruptcy
Debts discharged in bankruptcy except
Alimony
Child support
Student loans (seven years)
Taxes (three years)
Enforcement
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12-33
Fair Credit Reporting Act
Applies to consumer reporting agencies: third parties (not creditors)
Limitations on disclosure
Can disclose to debtor his/her own report
Can disclose to creditor with signed credit application
Can disclose to potential employer
Can disclose for court subpoena
Fair Credit Reporting Act
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12-34
Limitations on Content
No bankruptcies longer than ten years ago
No lawsuits finalized longer than seven years ago
No disclosures of criminal convictions finalized more than seven years ago UNLESS applying for $50,000 in credit or $20,000/year job
Debtor’s right of correction
Notify agency
If no connection, debtor can write 100-word statement of clarification
Fair Credit Reporting Act
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Fair Credit Reporting Act
Case 12.7 Smith v. E-Backgroundchecks, Inc. (2015)
Explain the impact of credit report errors
What are the damages in a case such as this?
12-35
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12-36
Types of Damages
Compensatory − put party in same position they would have been in without the breach
Example: Sales − buyer has to buy car for $7,000 as opposed to original $6,000 − gets $1,000 in damages
Incidental damages, e.g., cost of finding the other car; attorney’s fees
Contract Remedies
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Types of Damages
Consequential damages
Damages experienced in relation to third parties
Late fees or loss of income for delays
Liquidated damages
Parties agree on damage amount in advance
Contract Remedies
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12-38
Assignments
Original party to contract assigns his/her benefits under the contract to another
Example: Credit company sells credit contract for present value to another who undertakes its collection
Assignee has same rights as original party
Delegation
Transfer of obligations under contract
Third Party Rights
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12-39
Third Party Rights
Third Party Beneficiary
Originally named in the contract to benefit from the contract
Insurance beneficiaries are third party beneficiaries
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12-40
Assuring Payment
Use a bill of lading
Title to goods controlled
Used in connection with letter of credit or draft
Letter of Credit issued by buyers bank to seller
Seller may draw on L/C to receive payment
International Issues
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12-41
Assuring Performance
Need force majeure clause
Stability of currencies
International Issues
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FINC 355 RETIREMENT AND ESTATE PLANNING
Estate Planning Case Study #2
1
A couple, Carol and Al French, in their mid-60s, New York State residents, have seen their
net worth balloon from $3 million to more than $6.5 million during the last four years, chiefly
through rapid appreciation of a stock portfolio primarily invested in large-capitalization growth
stocks. The client had read articles in financial publications about the ·near total confiscation of
IRAs upon the death of the last to die of the account holder or spouse. The client has
approximately $1.25 million in these types of plans, with his wife listed as the beneficiary. He
had planned to hold the stock portfolio for life in order to get a step up in basis, avoiding capital
gains taxes for himself and his heirs. He also planned to name his wife as beneficiary of all
IRAs in order to assure her of a source of income if she survived him. The client also had a
number of charitable bequests in his will.
The client had more than 40% of his investment holdings in a single large- cap stock and
was growing concerned about the lack of diversification. He wanted to diversify his portfolio while
avoiding federal and state long-term capital gains taxes. Calculations determined that there were
potentially tremendous net after-tax benefits available to the client's children if they, rather than
the spouse, were named as primary beneficiary on some or all of these IRAs. However, the
client remained concerned about his wife's financial well-being if his IRAs were left solely to
the children.
The client had several competing objectives:
1. Diversifying the investment portfolio, selling off $1-1.5 million of the single large-cap stock which dominated the portfolio. (He would still maintain over $1 million of that
stock after these sales.)
2. Minimizing and, if possible, avoiding capital gains tax on the sale of any stock.
3. Assuring sufficient cash flow for the rest of the client's and wife's lives (about 30 years).
4. Minimizing transfer and income taxes so that the children and grandchildren receive the greatest amount of net assets possible from the estate.
Reflect on the assigned readings for the week. Identify what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding.
Also, provide a graduate-level response to each of the following questions:
1) Discuss the various defenses in contract formation, stating what is required to establish each individual defense, and providing examples of when the defense may be found valid.
2) Sly Salesperson sells cars. While selling a car, Sly Salesperson tells the potential buyer that “this is the best car around. It’s a great car and sips gas.” The car has an average fuel rating. Has Sly Salesperson committed a misrepresentation? Fraud? Why or why not? Does the analysis change if Sly Salesperson says the car get 40 miles per gallon, but in fact the car only gets 30 miles per gallon?
[It should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]
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