TOPIC 18: BUSINESS LAW in VS .NET

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TOPIC 18: BUSINESS LAW
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The Contracts, Agency, and Negotiable instruments sections were taken from CPA Fast Track Examination Review, 2nd ed (Joe Ben Hoyle, New York: John Wiley & Sons, Inc, 2001) 1 Contracts A De nitions that are important to contract law (1) Offeree Person to whom an offer is made (2) Offeror Person who makes an offer
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Topic 18: Business Law - 53 B Legal requirements for contracts For a valid contract to exist, ve elements must exist: offer and acceptance, genuine assent, adequate consideration, capacity, and legality (1) Offer and acceptance One party must make a de nite, unquali ed offer, and the other party must accept this offer in total Three conditions must exist for there to be a valid offer: intent, communication, and de niteness Three conditions must exist for there to be a valid acceptance: bilateral contract or a unilateral contract, content, and communication (2) Genuineness of assent It is important that both parties are bound by their promises There are certain conditions that would cause a lack of assent so that no valid contract exists: (a) Misrepresentation (b) Duress, indicating a condition of coercion (c) Undue in uence, indicating a lack of assent by the offeree (d) A unilateral mistake, whereby one party knows or should realize that the other party is relying on a mistaken belief or incorrect information (e) A mutual mistake, indicating a contract that contains latent ambiguities and can be avoided by either the offeror or the offeree (f) A lack of mutuality exists in a situation in which a statement has been made that sounds like a promise but does not, in reality, bind the person making the statement to do anything (3) Adequate consideration Consideration is something that is bargained for and exchanged in a contract (4) Legal capacity The parties to an enforceable contract must be capable of entering into the contract in the eyes of the law There are certain parties who lack legal capacity (a) A minor lacks legal capacity (b) An insane person lacks legal capacity (c) An intoxicated person may lack legal capacity (5) Legality The terms of a contract cannot require any laws to be broken C Types of contracts (1) Nature of the promise (a) Bilateral contract The promise of one party is exchanged for the promise of the other party Both parties make promises that are legally enforceable (b) Unilateral contract The promise of one party is exchanged for the other party s performing some act or refraining from some act Only one party can be forced to comply with the contract For example, insurance contracts are unilateral Only the insurer is legally bound to do something The insured makes no promise to do anything Of course, if the insured does not pay the renewal premium, the policy is canceled (2) Legal validity and enforceability (a) Enforceable contract All conditions and elements are present and clear (b) Void contract A void contract has no legal standing because it lacks one or more of the requirements speci ed by law for a valid contract (c) Voidable contract A voidable contract is a legally enforceable contract, but one from which at least one of the parties can escape liability because of lack of capacity, lack of mutuality, duress, misrepresentation, undue in uence, or mistake
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54 - General Principles of Financial Planning (d) Quasi-contract Not actually a contract, but can act like one It serves as a remedy where someone has unjustly received a bene t but where there was no contract (e) Unenforceable contract A contract can exist because it has all of the elements of a valid contract However, at least one of the parties may have a defense that can be used to render it unenforceable, such as the Statute of Frauds or a material breach of contract D Two topics in contract law, which are unrelated to each other, concern written agreements (1) The Statute of Frauds states in general that a contract does not have to be in writing in order to be enforceable However, there are exceptions to this general rule The following contracts must be in writing to be enforceable: (a) A promise to answer for debts of another For example, one person promises to pay a debt and another person guarantees that promise The guarantee must be in writing to be enforceable (b) A contract to transfer an interest in real estate must be in writing (c) A contract that cannot, by its terms, be performed within one year from the date of agreement must be in writing (d) The Uniform Commercial Code (UCC) on the sale of goods of $500 or more must be in writing (2) The parol evidence rule also impacts written contracts When a contract is in writing, this rule limits the evidence that can be introduced at trial to prove what the terms of the contract are The contract as written will be binding on both parties E Any nonperformance of a contract is a breach of the contract However, there are times when nonperformance of the terms of a contract is excused (1) If one party has committed a material breach, the other party is excused from performance (2) Death excuses a party from the duty to perform services, but not from the contractual duty to deliver goods or convey real estate (3) If a breach of contract has occurred, there are various remedies available to the nonbreaching party The nonbreaching party can be awarded monetary damages (a) The general measure of monetary damages is the amount of money that will put the nonbreaching party in the position that he or she would have occupied had there been no breach Such damages are known as compensatory damages (b) Punitive damages are damages aimed at punishing the breaching party rather than merely compensating the nonbreaching party Punitive damages are not usually allowed in breach-of-contract cases (c) Liquidated damages are damages for breach of contract where the monetary amount was agreed to at the time the contract was made Courts allow such damages only if the amount is reasonable (d) Under certain circumstances, the nonbreaching party can be awarded equity 2 Torts A A person can commit two classes of wrongs: public and private (1) A public wrong is a violation of one of the laws that govern the relationships of the individual with the rest of society It is called a crime and is subject to criminal law (2) A private wrong is an infringement of the rights of another individual A private wrong is called a tort, and the person who commits such a wrong is called a tortfeasor A tort
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Topic 18: Business Law - 55 may give the person whose rights were violated a right of action for damages against the tortfeasor This action is called a civil action B Torts are divided into two types: intentional and unintentional (1) Intentional torts include infringements on the rights of others such as assault and battery, libel, slander, false arrest or imprisonment, trespass, and invasion of privacy Individuals who suffer injury as a result of these intentional torts have the right to sue for damages (2) Unintentional torts are those that result from negligence or carelessness, and in these cases, the injured party may also be entitled to damages in a civil action even though the tortfeasor had no malicious intent as in an intentional tort C An individual s exposure to nancial loss associated with liability may arise from three sources: (1) criminal acts, (2) torts, and (3) legal liability arising out of breach of contract D Liability insurance is rarely concerned with the legal penalties resulting from criminal behavior or intentional torts In liability insurance, we are concerned primarily with unintentional torts or losses arising from negligence 3 Agency A The term agency refers to a two-party relationship in which one party (an agent) is authorized to act on behalf of the other (a principal) B Certain general characteristics are found in this type of relationship: (1) In acting for a principal, the agent has a duciary duty to act for the bene t of the principal and not in the agent s own self-interest (2) The agent may be subject to the control of the principal (a) If the agent is an independent contractor, the principal has no control (b) If the agent is an employee of the principal, the agent is subject to the control of the principal C The principal will be bound by an agent s contracts made with third parties as long as the agent has one of the following kinds of authority: (1) Express authority Authority speci cally granted by a principal to an agent by means of an agency agreement (2) Implied authority The authority that an agent has as necessary to carry out acts needed to exercise his or her express authority (3) Apparent authority Authority that, in the absence of contrary action by the principal, appears to a reasonable person to be possessed by the principal s agent D A principal is liable for all torts committed by its agents in the scope of employment E An agent will have liability to a third party for the agent s own torts and contracts (1) An agent is liable along with the principal for the agent s own torts (2) For contracts, the general rule is that the principal is liable and the agent is not, as long as the agent acted within the scope of the agent s authority and the identity of the principal was fully disclosed This rule holds regardless of how authority arose F The relationship between a principal and an agent can be terminated The relationship can be terminated by operation of law The following automatically terminate an agency: (1) Death of either the principal or the agent (2) Insanity of either the principal or the agent (3) Bankruptcy of the principal (4) Illegality of agency purpose
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56 - General Principles of Financial Planning 4 Negotiable instruments A A negotiable instrument is a written contract that can be used as a substitute for money In general, there are two types of negotiable instruments: (1) A promissory note is a written promise to make payment (2) A draft is a written order to make payment, but three parties are involved Even if a single party occupies two of these positions, it is still a three-party instrument B A holder in due course of a negotiable instrument is entitled to payment despite most defenses that the maker or drawer may have There are several exceptions to the rule that a holder in due course takes the negotiable instrument free of personal defenses: (1) Infancy is a defense against a holder in due course Thus, a minor who signs a promissory note cannot be held liable (2) An exception arises if the instrument was created under extreme duress (3) An exception arises in case of bankruptcy of the party designated to make payment (4) An exception arises if a fraud occurred that the signer of the instrument had no opportunity to detect C Several steps are necessary for a party to become a holder in due course of a negotiable instrument (1) A document is considered a negotiable instrument only if it has a particular form (a) It must be in writing and signed by the maker or drawer (b) It must contain an unconditional promise or order to pay (c) It must be for a sum certain in money (d) It must be payable at a de nite time or on demand (e) It must be payable to order of a party or payable to the bearer of the instrument (except for checks) (f) It must contain no other obligation, promise, or requirements (2) The person trying to assert status as a holder in due course of the instrument must be a holder The person is a holder if the instrument was properly negotiated to him or her D The relationship that exists between a bank and its customers is also important The bank (the drawee on a check) has an obligation to a customer (the drawer of a check) A bank must also follow a customer s order not to pay (1) An oral stop order is valid for 14 days (2) A written stop order is valid for six months E A person who presents an instrument for payment and a person who transfers an instrument to another party make, by operation of law, certain warranties regarding the instrument The warranties in these two cases differ slightly, but, in general, they are as follows: (1) The person has good title to the instrument that is being presented or transferred (2) All signatures are genuine or authorized (3) There are no known defenses to the instrument 5 Professional liability A Because of the nature of a practitioner-client relationship, services and recommendations provided by nancial planning practitioners carry a certain level of liability exposure; it is inherent to the profession The Practice Standards, however, should assist the practitioner in managing that risk B The potential of common law liability to clients includes liability based on (1) breach of contract, (2) tort or negligence, and (3) fraud
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Topic 20: Monetary Settlement Planning - 57 C According to federal securities laws, the nancial planner can also have liability under the Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisors Act of 1940, Investment Advisors Supervision Coordination Act of 1996, and National Association of Security Dealers D There are two forms of insurance used to protect professionals from nancial loss as a result of being sued for professional lapses First, malpractice insurance is used by those who can cause physical harm to others (such as physicians, dentists, and surgeons) Second, errors and omissions insurance protects those (attorneys, accountants, architects, real estate agents, and insurance agents) where risk involves property damage (includes intangible property) 6 Fiduciary liability A duciary is similar to a trustee in that the duciary must act for the bene t of the bene ciary of the duciary relationship There is no need for a trust to exist as there is for trustees Fiduciaries are held to a very high standard of responsibility 7 Arbitration and mediation are alternatives to litigation In arbitration, a disinterested third party hears both sides and makes a binding determination as to the resolution of a dispute In mediation, a disinterested third party helps the two sides come to an agreement The mediator makes no judgment
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