PRINCIPLE OF LAW

CHAPTER 1: What is law?

1.1 What is law?
Legal Definition:
▪ Enforceable rules governing relationships among individuals and between individuals & their society
▪ The Law sets out rights, duties and obligations of citizens

Result = “Stability and Predictability”

Why? The Law regulates conduct in society
1. Personal Level:
Citizens need to be able to determine “right from wrong”
2. Business Level:
Degree of “Legal Certainty” in business dealings

It’s No Exaggeration:
Fortunes are made and lost on legal questions such as:
- Can I rely on my counterparty?
- What if this deal turns sour?
- Will we end up in court?
- Will the Law stand behind us?

From an international business point of view, what is legally right and wrong?
 It depends

Simple Answer?
How stable is the legal environment where you intend to do business?
 Look to the particular country where you are sitting at particular moment in history
 The Law has dealt with business issues in very different ways at different times and places in history

▪ The Law is constantly evolving:

- Nomadic tribes
- Code of Hammurabi (Ancient Babylonian)
- Greek concepts of Democracy
- Roman Code (533)
- Early Common Law courts (1066)
- Napoleanic Code (1804)
- Today’s modern laws/court decisions

▪ Reflects values and beliefs of society or its ruling group

▪ Close relationship between morality and any rule that society will enforce

1.2 Influences on the law

▪ Especially important in the international business context
- What is the current Legal Environment?
- Society’s current attitudes?
- Can the Law be “behind the times”?

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 - Noteworthy trends?

Your Role in Business: Key Questions for International Business Persons

How will the local, legal environment affect my business decision making?
- Degree of predictability?
- Business implications?
- Many different laws can affect a single business decision

Question:
Congratulations, you are the President & CEO of a manufacturing company that intends to expand overseas.
How will the local laws of various countries influence your decision on where to build a new manufacturing plant?
Give examples.: Sales, agency, banking, competition, employment, contracts

1.3 International private law

▪ Set of rules or procedural law that regulates relationships between persons (or entities) of different
nationalities
▪ Determines which legal systems and law of which jurisdiction will apply to a legal dispute among individuals
involving a foreign element
▪ Also known as “Conflict of Laws”

1.4 International law

▪ Transnational rules that national courts use to regulate three primary relationships:
- relationship between two nations
- relationship between a nation and an individual
- relationship between persons/entities from different countries
Sources:
- int’l conventions & treaties; customs/general practice
- widely accepted general principles of law and
- all other sources used in national law (such as judicial decisions & scholarly writings)
Examples of international conventions & treaties?

1.5 Civil vs common law

1. Civil Law: “Continental European Approach”
- Oldest & most influential legal system
- Roman-Germanic: codified law based on Roman Code
- Legal rules set out in one comprehensive & systemized code and accompanying statutes
Ex: family law, property law, succession law, law of obligations, commercial law, labor law, criminal law, etc.

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 2. Common Law: “Anglo-Saxon Tradition”
- Law is found on a “case-by-case basis”
- Law is based on court decisions rather than formal codes: “precedent”
- Overall accumulation of judicial decisions - law is developed and pronounced by courts
- Stare Decisis (stand by the decision): requires courts to follow their own precedents; binds all of the lower
courts of a jurisdiction to determinations of the highest court in that same jurisdiction

▪ ▪ Civil
Civil
LawLaw ▪ Common Law
- - Argentina,
Argentina,Brazil,
Brazil,Chile,
Chile,Venezuela
Venezuela - Australia
- - Austria
Austria - Bangladesh
- - China
China - Canada & South Africa (mixed)
- - Egypt
Egypt - Ghana
- - Finland,
Finland,Sweden
Sweden - India
- - Germany
Germany - Israel
- - Greece
Greece - Jamaica
- - Indonesia
Indonesia - Kenya
- - IranIran - Malaysia
- - Italy
Italy - New Zealand
- - Japan
Japan - Nigeria
- - Mexico
Mexico - Singapore
- - Poland
Poland - United Kingdom
- - South
SouthKorea
Korea - United States
- - Tunisia
Tunisia - Zambia

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CHAPTER 2: Case Study on Conflict of Laws: Yahoo! vs La Ligue Contre Le
Racisme et l’Antisémitisme
Learning Objectives
▪ Yahoo!: the distinction between law and fact
▪ First Amendment to US Constitution
▪ Conflict of Laws: - Apply principles of Conflict of Law to Yahoo!
▪ Free speech vs Hate speech - Where do you stand?

2.1 Yahoo! vs French League (2001 Landmark case)

Facts of the Case
The year is 2001. Yahoo.com operates an online auction site where Nazi memorabilia have been offered for sale. In
France, the display of any objects representing symbols of Nazi ideology subjects the person or entity displaying
such objects to both criminal and civil liability. The International League Against Racism and Anti-semitism filed suit
in Paris against Yahoo for displaying Nazi memorabilia and offering them for sale via its web site.

The French court, in which the suit was filed, asserted jurisdiction over the U.S. based company on the ground that
the materials on the company’s U.S. based servers could be viewed on a web site accessible in France.

Yahoo! (con’t): Facts of the Case

The French court ordered Yahoo to eliminate all Internet access in France to the Nazi memorabilia offered for sale
through its online auctions.

Yahoo took the case to a federal district court in the U.S. to resolve a larger issue: Can a foreign court dictate what
will or will not appear on a U.S. company’s website? Does such an order violate the U.S. constitutional right to
freedom of speech and expression?

Discussion: Based on the facts above,

▪ Group A: What arguments would help to validate Yahoo’s position?
▪ Group B: What arguments would strengthen The League’s position?

Yahoo!: Questions for your review

▪ What were the key arguments for Yahoo! and La Ligue incthis case?
▪ What was the court’s 2001 holding and the reasoning for its decision?
▪ Based on the Yahoo! case study, explain what is meant by the term “Conflict of Laws?”
▪ Why is this case considered a landmark case?
▪ Why is the Yahoo! case relevant today? Why is this especially important from a marketing perspective?
Provide an example to illustrate your point.

2.2 U.S. Declaration of Independence

U.S. Declaration of Independence
▪ Document that declared the American colonies independent from England
▪ July 4, 1776

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Constitution of the United States of America:
▪ U.S. Constitution: Fundamental law of the U.S. which was ratified by the states in 1788
- Creates three branches of government
- Protects individual rights by limiting the government’s ability to restrict those rights

2.2.1 Bill of Rights

▪ First 10 amendments to U.S. Constitution
▪ Guarantees fundamental rights and protects these rights from intrusive government action
▪ First Amendment: Includes freedom of speech, freedom to assemble, freedom of the press and freedom of
religion

2.2.2 Freedom of Speech

▪ Right to engage in oral, written, and symbolic speech protected by the First Amendment
▪ Categories
- Fully protected speech: Cannot be prohibited or regulated by the government
- Exceptions: Hate Speech

2.3 Freedom of Speech vs Hate Speech

Exception to First Amendment:
Hate Speech
▪ Dangerous speech or words that are likely to provoke a hostile or violent response
▪ Speech that incites the violent or revolutionary overthrow of the government
▪ Must be “likely to cause violence or harm before it can be deemed criminal”

Exceptions: Other Examples of Unprotected Speech

- Defamatory language
- Child pornography
- Obscene speech
2.3.1 European Union Approach to Unprotected Speech
▪ Speech can be prohibited even if it is only “abusive, insulting or likely to disturb public order”
▪ However, European laws on the issue are not uniformly applied across the EU

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2.4 Conflicts of laws
▪ Also known as “Private International Law:” concerns relations across different legal jurisdictions between
persons and sometimes companies or other legal entities
▪ Definition: a set of procedural rules that determine which legal system, and the law of which jurisdiction,
applies to a given dispute

▪ Yahoo! Inc vs La Ligue Contre Le Racisme et l’Antisémitisme: US vs French laws

▪ Case of First Impression
▪ “Landmark Case”: Internet and First Amendment Freedom of Speech & Expression
▪ Court’s Holding? Why?

Questions for your Review

i) Where do you stand on the question of censoring online free speech? Do social media platforms owe a
responsibility to its users and the public at large to censor online speech?
ii) Where do you draw the line with hate speech, if at all?
iii) What are the most effective cultural & educational strategies/policies that can be used at the EU and
international level to raise awareness of online hate speech? Support your position with concrete argumentation.

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 CHAPTER 3: What is a Contract? Capacity & Legality
Additional reading: Cultural Differences in Contracts
How do cultural differences play a role in contract formation? Compare and contrast USA, Germany/France and
Japan.

All Contracts are Agreements but not all Agreements are Contracts
Remember: People can agree on just about anything but the Courts will not necessarily enforce it!
▪ Minors & Incapacitated persons
▪ Social arrangements
▪ Illegal/immoral conduct
▪ “against public policy”

3.1 Proof of existence

You must be able to prove that a contract exists!
- A Meeting of the Minds has occurred
- All legally required elements are present

3.2 Capacity of Parties

Definition: the legal ability of contracting parties to enter into a contractual relationship; eligibility to enter into a
contract
Question for the Court:
Are both parties Legally Empowered & Capable of entering into and carrying out of terms of contract?
1. of Legal Age
2. of Sound Mind
3. Limitations of Corporate Powers

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3.2.1 Capacity of Parties/Legality of Contract
Void, Voidable & Valid Contracts
1. A contract is Valid if:
- The contract has all the necessary elements to entitle at least one of the parties to enforce it in court
- See, 4 Elements of a Contract
2. A contract is Voidable if:
- It is a valid contract but can be avoided at the option of one or both of the parties
- If the contract is voided, both parties are released from it.
- Examples: contracts with minors (generally); fraud, duress; undue influence
3. A contract is Void if:
- It produces NO legal obligations on the part of any of the parties
- Example: illegal purpose

Capacity
Contractual capacity: People who do not have contractual capacity
- Minors: “of legal age”
- Insane persons
- Intoxicated persons – sometimes, it depends (although they are not in “protected class” like Minors and
Insane Persons)

Minor: a person who has not yet reached the age of the Majority
Age of Majority: generally, 18 years of age for both males and females (see local rules!)

▪ Beware: A contract entered into by a Minor is generally voidable at the option of that minor.
▪ See Valid, Voidable and Void contracts: 3 categories for minors

Disaffirmance by Minors General Warning

A person who deals with a minor does so at his/her peril. The adult party to the contract is bound by the bargain;
generally, the minor is not (exceptions for necessities).

Infancy Doctrine
▪ Allows minors to disaffirm most contracts they have entered into with adults
- Minors can choose whether to enforce a contract
▪ Disaffirmance - May be done orally, in writing, or by the minor’s conduct
- Disaffirm: Act of a minor to rescind a contract under the Infancy Doctrine

Exception to Infancy Doctrine

▪ Contracts for Necessaries:
Generally, contracts for food, clothing, shelter may be purchased by a Minor, who remains liable for the
reasonable value of goods or services
- See 3 part test: Valid Contracts (Section 4.4.1.1)

Quasi Contract: Minors do not have mental ability to make an express or implied-in-fact contracts. Any
obligation owed will be based on unjust enrichment principles.

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Ratification
▪ The act of a minor after the minor has reached the age of majority by which he or she accepts a contract
entered into when he or she was a minor
▪ Expressed verbally, in writing, or implied from the minor’s conduct

Ratification (con’t)
▪ Just after his 17th birthday, Murdock Minor signs a contract with Scholarship Books, Inc. for a correspondence
course in Business
▪ Law. The cost of this course is $1,000, payable in 20 monthly installments of $50 each. There are 20 units, each
to be completed monthly.
▪ Murdock completes 14 units and makes payments promptly. In the 15th month, he seeks to rescind the
contract.
Q: Can he do so? Ratification on attaining majority is not permitted as minor agreement/contract is void-ab-
initio. As a minor’s agreement is void, he could not validate it through ratification on attaining majority.

Capacity of Parties (con’t)

What about contracts entered into by Drunkards and Intoxicated Persons?

Capacity of Parties Intoxication

General Rule re Intoxication: (see 2 part test: Chapter 4.2.2):
Contract may be voidable at the option of the intoxicated person.
▪ Courts look at objective indications to determine if contract is voidable. Intoxication must:
1. Be such as to deprive the person of the ability to understand the nature of the agreement and
2. be apparent to the other party.
▪ Intoxicated person has the option to disaffirm the contract or
▪ He/she may ratify the contract expressly or impliedly.

Capacity of Parties (con’t)

What about contracts entered into with Mentally Incompetent Persons?
Examples: Alzheimer’s disease, senility, Schizophrenia, chronic drug dependency, intellectual disabilities, etc

Mentally Incompetent Persons

▪ Protected by law from enforcement of contracts
▪ Law requires a person to have been legally insane at the time of entering into the contract
▪ Legal insanity: State of contractual incapacity as determined by law

Capacity of Parties
Insane/Mentally Incompetent Persons
General Rules in dealing with the Insane & “Mentally Incompetent”:
1. A contract is Valid if:
- If person is able to understand the nature and effect of entering into a contract yet lacks capacity to
engage in other activities
2. A contract is Voidable if:
- A Question of Proof - If the person does not know he/she is entering into the contract or lacks the mental
capacity to comprehend its nature, purpose, and consequences
3. A contract is Void if:

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 - “Legal Insanity” - If a person has been adjudged mentally incompetent by a Court of Law and a guardian
has been legally appointed

3.3 Legality of Contract

▪ Lawful contract: A contract that has a lawful object & all necessary elements to form a contract
 Result: “legal, valid, and binding” - enforceable in a court of law
▪ Illegal contract: A contract that has an illegal object
 Result: void. Examples?

Definition: A contract to do something prohibited by law is illegal and therefore void (never existed).
1. Carrying out of a contract cannot force parties to act illegally.
2. Check local laws - Can this contract be locally enforced ?
3. Enforceable Agreements must not call for the performance of any act that is criminal, illegal or otherwise
opposed to public policy.

A contract to do something prohibited by law is illegal and therefore void (never existed).
- Contract to commit a crime
- Unconscionable Contracts or clauses
- Acts contrary to public policy

Contracts in Restraint of Trade

- Anti-Competitive Agreements are void.
 Exception: Covenant not to Compete and Sale of Business
Courts look to 3 factors (see text, Section 6.4.3.1)
 Exception: Covenant not to Compete in Employment
Exceptions:
▪ Withdrawal from an Illegal Agreement
▪ Severable or Divisible Contracts

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 CHAPTER 4: What is a contract?
Learning objectives:
▪ Definition of Contract
▪ Essential elements to establish a Contract
▪ Nature, Classification & Formation
▪ Mutual Agreement: Offer & Acceptance
▪ Consideration: The bargained for exchange

4.1 What is a contract?

When was the last time you entered into a contract?
1. Borrow money from bank
2. Enroll in a health club
3. Employment contract
4. Rental contract
5. Signed up for phone plan
6. Credit card
7. Purchased a car
8. Marriage
9. Metro/bus ticket
10. Sandwich & drink?

What is a Contract? Definition

- Promise or Agreement
- Creates legal obligation to do or not to do particular thing
- Each party enjoys a “right” but also has a burden to perform a “duty”
Legal definition: A contract is formed by a meeting of the minds of at least two parties, a mutual assent resulting
from the expression of an offer by the one and an acceptance of precisely that offer by the other ...

Defintion:
- Promise or Agreement
- Creates legal obligation to do or not to do particular thing
- Each party enjoys a “right” but also has a burden to perform a “duty”
- *Legally binding agreement between 2 or more parties; enforceable in a court of law*

Benefits to Society?
“The Law sets out rights, duties and obligations .....“
Contract = Lawful expectations met + Remedies enforced

- Essential to Legal System: Trust, Predictability & Consistency

- Modern business could not exist without contracts
- Basis of all Commercial dealings: “enforceable agreements” as voluntarily agreed upon between individuals

Proof of Existence
You must be able to prove a contract exists!
Q: Are all legally required elements present within the terms of this agreement?

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Contract Formation
Q: What are the four essential elements of a contract?

Four Essential Elements

1. Capacity of Parties (textbook Section 4.4)
2. Mutual Agreement: Offer & Acceptance (textbook: Section 3.1 & 3.2)
3. Consideration (book: Section 4.2)
4. Legality of Contract

Proof of Existence
Q: Must a contract always be in writing to be legally enforceable?
A: It depends

4.1.1 Express vs Implied Contracts

There are two main types of contracts: Express & Implied.
Both may be legally enforceable, IF they meet the necessary legal requirements.
1. Express Contracts: a written or oral statements
An agreement that is expressed in written or oral words; terms are generally “clear & definite"
- Example: personal and business contracts such as employment contract; rental contract; membership at
your gym; buying a new car; purchasing Professor Gardner’s pen, etc.
- *Hint: Look for the language of Offer + Acceptance (written or oral)
2. Implied Contracts: manifested by conduct rather than express language (“implied“ in action conduct)
- A contract in which the agreement between parties has been inferred from their conduct an surrounding
facts & circumstances
- Examples: you get into a taxi; order a meal at a restaurant (maybe you didn’t even look at the menu or
prices); grab an apple at the market
- *Hint: Does this pass the “reasonable person” test?

Proof of existence
Express vs Implied contracts
Q.: Can I be held to something that I did not agree to?
A: It depends!
I. Implied-in-Fact Contracts
II. Implied-in-Law (“Quasi Contract“)

4.2 Mutual Agreement

Meeting of the Minds
Offer + Acceptance = Contract

4.2.1 The Offer

1. Promise / commitment communicated by Offeror to Offeree
2. To perform or refrain from performing some specific act in the future
▪ Manifestation of willingness to enter into a legally binding agreement

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 ▪ Offeror: Person who makes an offer
▪ Offeree: Person to whom the offer is made

Q: What about Auctions?

Who is the Offeror and who is the Offeree?
Q: At what moment during the auction is a Contract formed?
A: See, special case of Auctions (text 3.1)

Are you making me an offer?

Generally, Courts look for 3 factors:
1. Clear intent
2. Sufficiently definite terms
3. Clearly communicated
Q: Is an Advertisement an Offer?

Carlill v Carbolic Smoke Ball Co. (1892)

Text: Section 3.1.2, Advertisements
On 13 November 1891, Carbolic Smoke Ball Co (‘Carbolic’) placed an advertisement in a local gazette which stated
the following:
“100£ reward will be paid by the Carbolic Smoke Ball Co. to any person who contracts the increasing epidemic
influenza, colds, or any diseases caused by taking cold, after having used the ball three times daily for two weeks
according to the printed directions supplied with each ball. 1,000£ is deposited with the Alliance Bank, Regent
Street, showing our sincerity in the matter.”
Based on the advertisement, Mrs. Carlill purchased a smoke ball and used it as instructed for two months, at which
time she caught influenza. Carlill contacted Carbolic claiming the 100£ reward.
Carbolic refused to pay the reward. Carlill sued for damages for breach of contract.

Carlill v Carbolic Smoke Ball Co.

Carbolic refused to pay based on 3 grounds:
I. The advertisement was merely a “sales puff”
II. You can’t make an offer to the world
III. Carlill never notified the company of her acceptance
You be the judge: Based on the facts, was the advertisement an offer?

4.2.2 Offers vs invitation treat

Advertisements UK / USA: Advertisements are not offers but “Invitations to Treat”
Note: “Invitation to Treat” = invitation to negotiate/make a deal.
This is NOT AN OFFER!
Exception: Advertisement will be considered an offer if:
I. it is definite and aimed at a specific person or identifiable group of persons
II. it apparent that the advertiser has the intent to bind himself to the terms of the advertisement
*This is illustrated by the Carbolic Smoke Ball landmark case*

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4.2.3 Advertisement as Offers

$^
Reward & special offers
Reward: award given performance of service or attainment
To collect it, the offeree must:
- Have knowledge of it prior to completing the act
- Performance the requested act
This is a unilateral contract (a promise for an act)

1. Bilateral Contract: a promise for a promise

“Almost all contracts are bilateral (two-sided) because both sides make a contractual promise to each other.”
(Section 3.1.3)
2. Unilateral Contract: “IF contracts”
“However, a person who makes an offer in a unilateral contract agrees to be bound if the Offeree performs some
act, rather then if the Offeree promises to perform the act.” (Section 3.1.3)
*Acceptance = fulfilment of requirements of the Offer

4.2.4 Termination of an Offer

▪ Revocation: Withdrawal of an offer by the Offeror that terminates the offer
- General rule: An offer is like an outstretched hand, it may be revoked at any moment prior to acceptance
▪ Rejection: Express words or conduct by the offeree to reject an offer terminates the offer

4.2.5 The Counteroffer

See text, Section 3.2.2: Hyde v Wrench
Definition: Response by an Offeree that contains terms and conditions different from or in addition to those of the
offer
Legal Effect: Terminates the previous offer (rejects original offer + at the same time makes a new offer)
Q: At which point can I revoke my offer before it has been accepted?
A: It depends!
- US: Generally, an offer may be revoked any time prior to acceptance
- PECL (Principles of European Contract Law): “reasonable person test“

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4.2.6 Acceptance of an Offer

1. Voluntary agreement by Offeree to be bound by the terms of the Offer

2. Mirror Image Rule
Terms of Offer = Terms of Acceptance
4. When does Acceptance occur?
Common Law: Mailbox rule - The contract is formed when acceptance is dispatched by Offeree.
Civil Law: Receipt Rule - The contact is not formed until the acceptance is received by Offeror.

Parties to a Contract
General Rule:
If an offer is made and accepted in a business or commercial context, there is a strong presumption that parties
intended to make a contract.
In contrast: Social or domestic agreements (see Section 4.1.2)

4.3 Consideration
(See text, Section 4.2)
Common Law Concept
1. Bargained for Exchange - Benefit each party receives by entering into a contract
2. Mutuality of Obligation - Each party must get something out of it or the contract is not enforceable
a) Gifts; past acts
b) Right to terminate / refuse to perform at will?

Consideration
Causa: Civil Law Concept
1. Civil law consideration = "causa” (i.e., the reason
for the parties' consent; each party expects a result)
2. Example: (1) contracts without cause or with an illegal cause are void; (2) a false cause invalidates the contract
3. Generally, cause is presumed to exist and is legitimate under Civil law, even if not expressly stated in the
contract
“Adequacy of Consideration” (Text: Section 4.2.2)
 The Pope’s Motorcycle

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Promises that Lack Consideration
No Mutuality of Obligation

Contracts: comparison of legal systems

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 CHAPTER 5: Laws, ethics and morality
Learning objectives:
▪ The Shipwreck case
▪ Ethics, Morality and the Law
▪ The Dilemma and Your turn

5.1 The shipwreck case

The Shipwreck case: The Queen v Dudley & Stephens 14 Q.B.D. 273 (1884)
The Facts
On July 5, 1884, a British yacht sank in a storm off the Cape of Good Hope. There were four members of the crew –
Dudley (the captain), Stephens and Brooks (crew) and Parker (a 17 year old boy with little sailing experience). The
four were cast adrift in a small lifeboat far from shore.
After 3 days, they ran out of food and water. On the 4th day, they caught a turtle on which they fed until the 12th
day. On the 18th day, after being without food & water for a week, Dudley and Stephens proposed that four sailors
draw lots to see who should be killed so that they others could eat his body and live. Brooks refused to draw lots.
Dudley and Stephens suggested that they kill Parker, who was lying at the bottom of the boat weak from hunger.
Brooks disagreed. Dudley and Stephens told Brooks to go to the other end of the boat, which he did. Dudley and
Stephens said a prayer and then slit the boy’s throat with a knife. Dudley, Stephen’s and Brook fed on the boy until
they were rescued 4 days later. England sued Dudley and Stephens, charging them with the crime of murder.

Based on the facts above, support your team’s position:

TEAM A “the Prosecution”:
- Dudley and Stephens are GUILTY of murder. Their actions were not morally justifiable.
- Given the circumstances, Brooks (did or did not – your choice) act ethically in refusing to participate in the
killing but then feeding on the boy.
TEAM B “the Defense”:
- Dudley and Stephens are NOT GUILTY of murder. Their actions were morally justifiable.
- Given the circumstances, Brooks (did or did not – your choice) act ethically in refusing to participate in the
killing but then feeding on the boy.

The Queen v Dudley and Stephens

The Shipwreck case
This case tested the ethics, morality and legality of taking another’s life to increase one’s own chances of survival

5.2 Law, ethics and morality

▪ What is Law?: Enforceable rules governing relationships among individuals and between individuals & their
society
- The Law sets out rights, duties and obligations of citizens
- Reflects values and beliefs of society or its ruling group; close relationship between morality and any rule
that society will enforce
▪ Ethics: rules that a social system provides us with; most of us try to act according to what society believes is
right
▪ Morality: one’s own principles: your own beliefs about what is right and wrong, even if these are different
from society’s standards

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5.2.1 Difference between Law and Ethics & Morality

5.2.2 The dilemma

The Dilemma: Just because it’s legal doesn’t make it ethical.
Some examples:
1. Most kinds of lying are perfectly legal, but lying is generally recognized as being
unethical;
2. Breaking promises is generally legal, but is widely thought of as unethical;
3. Cheating on your husband or wife or boyfriend or girlfriend is legal, but unethical, though the rule against it is
perhaps more honoured in the breach;

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 CHAPTER 7: Misrepresentation, Mistake, Duress & Undue Influence
Did the Minds Really Meet?
Mutual Assent may be lacking:
1. Misrepresentation (including Fraud)
2. Mistake
3. Duress
4. Undue Influence

1.Misrepresentation
Untrue statement of fact made by one of the parties to the contract which induced the other party to enter the
contract
Two Requirements:
i) The untrue statement was one of fact
ii) The untrue statement induced the other party to enter the contract
See Spice Girls case, Section 6.1.1.1: untrue representation made by conduct

1.Misrepresentation (con‘t)
Fraudulent Misrepresentation
Requirements for a finding of Fraud:
- False representation of Material Fact
- Made Knowingly: must have known or made recklessly
- Intent to Deceive: Defendant intended that the Innocent Party should act in reliance on the
representation
- Reliance on the Misrepresentation by the Innocent Party and suffered loss

Mutual Assent may be lacking:

2. Mistake
- Only a Mistake of Fact allows a contract to be cancelled.
- Q: What sort of “mistakes” DO or DO NOT void a contract?

3 Types of Mistakes:
▪ Bilateral (Mutual) Mistakes of Material Fact can be rescinded by either party.
▪ Unilateral Mistakes cannot be cancelled unless: If other party to the contract knows or should have known
that a mistake of fact was made (eg., mistake was due to innocent mathematical mistake)
▪ Mistake in Value/Quality: Generally, the contract is enforceable by either party.

Mutual Assent may be lacking:

3. Duress
▪ Forcing a party to enter into a contract under fear or threat makes the contract voidable by Innocent Party.
▪ Threatened act must be wrongful or illegal.
▪ Improper Threat
- Economic, physical, psychological, etc.

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Mutual Assent may be lacking:
4. Undue Influence
- Contract is Voidable by Innocent Party.
- Confidential or Fiduciary Relationship
- Relationship of dependence
- Influence or Persuasion
- Weak party is talked into doing something not beneficial to him/herself.
 Presumption of Undue Influence by more “powerful” party
 See, the case of Huguette Clark

Other Examples of Undue Influence?

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 CHAPTER 8: Contractual Excuses
A closer look at Impossibility, Frustration and Force Majeure

8.1 Contractual Excuses

▪ All legal systems generally provide “relief” for a party who is unable to perform under the contract, despite
good faith intentions.
▪ Although technically in breach of contract, courts will sometimes excuse/discharge the breaching party from
claims of damages by the non-breaching party.
– Doctrine of Impossibility: The contracting party is objectively prevented from performing (ex:
destruction of subject matter; death or incapacitating illness of performer; supervening illegality – the
purpose of your contract has become illegal)
– Doctrine of Frustration: Performance may still be objectively possible but the reason for performance
no longer exists (ex: coronation cases of King Edward VII; Superbowl: hotel rooms rented at 4-5x the
normal prices and Superbowl is cancelled due to tornado)

What is Force Majeure?

i) an “extraordinary event” that makes it impossible for one of the parties to perform the terms of the contract
ii) A clause in the contract that excuses the breaching party from liability for non-performance

Common Law
Force Majeure (FM) clauses list the types of events, as expressly agreed by the parties to the contract, that allow
parties an excuse out of the contract.
▪ Simply put, FM clauses allow a party to terminate its obligations under the contract (discharge) due to the
occurrence of something described in the contract. FM leads to termination of the entire contract.
▪ FM generally include “Acts of God” (hurricanes, tornadoes, volcanic eruptions, etc.) wars, blockades, strikes,
government interference, fire, terrorist attack, transportation problems, etc.
▪ Other examples ….? Pandemics?
▪ Note: Under Common Law, the parties to the contract are free to recognize any event as one to be given FM
effect (Meeting of the Minds).
 These events should take into account the type of industry, countries and transportation involved, if any.

Civil Law: The availability of contractual excuses varies in civil law countries.
▪ Germany: Courts will look to the “basis of the contract.” If courts hold that the “basis” has evaporated, the
breaching party will be discharged from performance. Alternatively, the contract will be adjusted in light of
the changed circumstances.
▪ France & Belgium: pacta sunt servanda (or Sanctity of the Contract) prevails over any request for excuse.
Contracts will be generally enforced without any modification to the terms, absent a Force Majeure event as
determined by the judge.
- Belgian contract law (Articles 1147 & 1148 of Civil Code): a party may invoke Force Majeure if he/she is
unable to perform his obligations due to a change in circumstances beyond his control.
- Note, a temporary impossibility does not render the contractual obligations null & void; rather, it may
only temporarily suspend the obligations

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International Chamber of Commerce (ICC) has developed an elaborate FM clause:
A party is not liable for a failure to perform if he can prove that: 1) the failure was due to an impediment beyond his
control, 2) he could not have reasonably foreseen the impediment at the time of contract formation, and 3) covuld
not have reasonably avoided or overcome its effects.
An impediment includes but is not limited to:
a) War, hostilities and acts of piracy
b) Natural disasters
c) Explosions, fires and destruction of machinery
d) Boycotts, strikes, lock-outs and work stoppages which occur in the enterprise of the party seeking relief
e) Acts of authority.
A party seeking relief pursuant to this clause shall give notice as soon as practicable …

Force Majeure events require 4 criteria under most national laws:

1) External event: the event must be external to the transaction and the parties
2) Renders performance radically different from that originally contemplated
3) Unforeseeable: the event must have been objectively unforeseeable
4) Beyond Control: the event must be beyond the control of the parties to prevent its occurence
Note, the changed circumstances must be objectively unforeseeable at the time of contract formation. In contrast,
if they were foreseeable,

Duty to Mitigate:
Imposes a duty to exercise reasonable diligence and ordinary care in attempting to minimize the damages/injuries
due to the FM event
Mitigation in law is the principle that a party who has suffered loss has to take reasonable action to minimize the
amount of the loss suffered.
Put another way: What can you do to try to perform under the contract?
Did you act in a commercially reasonably manner?

Contractual excuses: Corona virus

COVID and Force Majeure
Question:
■ In your view, does the Covid-19 pandemic meet the 4 criteria of Force Majeure?
■ Why are corporate lawyers in especially high demand as COVID has hit business?
See also: Break Your contract with Corona Virus via Force Majeure clause
https://youtu.be/b9okEnDMQwo

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 CHAPTER 9: Forms of Business Organizations
Introduction to Corporate Law:
“No individual contemplating a career in the business world can escape the legal environment of business.”

Forms of Business Organizations: 3 Basic Legal Structures

1. Sole Proprietorship
2. Partnership
3. Corporation

3 Basic Legal Structures

Question: Which is the BEST structure?
Answer: It depends.
- What are your business requirements?
- Do you have enough facts?
- There are pro’s and con’s of each!

Regardless of the Legal Structure, always consider key Business & Legal Factors:
i) In setting up a business
ii) Assessing risks involved
iii) Knowing your counterparty
iv) Running your business

Business & Legal Factors

1. Control & Management
2. Personal Liability
3. Continuity & Transferability
4. Creation, Formalities & Costs
5. Financing
6. Tax Structure
7. Termination

1. Control & Management

- Who is behind this Biz?
- Who owns, controls and manages the Biz?
- Who makes the decisions?
Is Management = Ownership?
- Do owners have direct control over the Biz?
- Who has responsibility for the day to day management of the Biz? Long term strategy?

2. Personal Liability
- Who is responsible for the Biz obligations?
- What happens if the Biz fails or experiences losses?
- Degree of liability of owners for Biz debts or actions?

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- As owner/manager of a Biz, can I be sued?
- Can I be held personally liable for any lawsuits against the Biz? If so, to what extent?
3. Continuity & Transferability
- How long do I want this Biz to last? Predetermined period of time or indefinite?
- How can I be sure that this Biz will continue?
- Will management remain in place?
- Transfer of an owner‘s interests: As Biz owner, can I sell out or transfer my interest to another?

4. Creation, Formalities & Costs

- Costs to set up the Biz and maintain it?
- Some structures are more finanacially burdensome than others to put in place.
- Licenses, governmental authorisations and other necessary legal & regulatory requirements?
- What is the timing involved?
Remember, time is money!

5. Financing
- Ability to raise CAPITAL
- Ease at which you can obtain funding/loans/ investment capital to help finance the Biz?
- Once rumors begin regarding any financial weakness of your Biz, the results can be devastating!
Remember: Liquidity is the lifeblood of a company.

6. Tax Structure
- How will the BIZ PROFITS be taxed?
- How will profits and losses be accounted for?
- What are the advantages / disadvantages from a tax point of view?
- Tax havens? A country or territory where certain taxes are imposed at a low rate (or not at all), making it
attractive for a Biz to move to such areas

7. Termination
- Given the high rate of Biz failures, wise to acknowledge the possibility to GET OUT.
- Your Biz structure affects how easily you sell out, exit and can even affect the kind of bankruptcy you can file.
- Alternatively, will you be notified if your counterparty sells/goes bust? What are your rights as a potential
creditor? Local bankruptcy laws?

Question: Which of these 7 factors present Legal Issues?

STEPHANIE’S DOG WALKING SERVICE

Sole Proprietarship
Legal Definition:
the simplest form of business, in which a sole owner and his/her business are not legally distinct entities, the
owner being personally liable for business debts.

Sole Proprietarship: Business and legal factors

1. Control & Management
- Created “at will“ by Owner: Full & complete control over all management decisions
- Owner and Biz are not legally distinct

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- Easy and inexpensive to set up: One Biz, One Owner
- Just start operating your Biz (and maintain it)
- Highly Flexible
- Generally operated under Owner‘s name

2. Personal Liability
- Unlimited Personal Liability
- Sole owner of profits but also solely liable for all debts
- Biz Liabilities = Personal Liabilities
- Personal assets vulnerable: Creditors can seize your personal assets for the debts of your Biz
- Why? No legal distinction between Biz Assets and Personal Assets

3. Continuity & Transferability

- How long will the Biz last? As long as you continue to run it
- Determined by Owner
- Dissolved at Owner‘s death
- Sell or inherit? No transfer of interest: Sole Proprietarship ends, New Sole Proprietarship must be put in
place

4. Creation, Formalities, & Costs

- Simplest form of Biz, easy & inexpensive to start and operate
- Biggest Advantage: Low costs & organizational fees
- No specific formalities & legal organization (except open separate bank account, obtain necessary license,
permit, zoning, insurance, etc.)
- “DBA“: Doing Business As
Biz Name ≠ Your Name (necessary to file & register with local authorities)

5 and 6. Financing & Taxes

- Personal financing (life‘s savings, family loan, inheritance, etc.); getting a loan depends on your personal
financial strength or ability to obtain guarantees
- Generally, Personal Income Tax = Biz Income

7. Termination
- Sale, voluntary cessation, death, or incapacity of Proprietor
- Insolvency: Personal Bankruptcy (all personal assets at risk)
- Chapter 13: Liquidation of assets

General Partnerships: STEPHANIE & CINDY‘S DOG WALKING SERVICE

Legal Definition
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit

General partnerships: Business and legal factors

1. Control & Management
- Created by agreement of Partners: Express or Implied
- Presumption of shared control & management (unless otherwise expressly agreed in P.Agreement)
- One Partner, One Vote

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- Pro Rata share in profits/losses
- As Sole Proprietarship, Partnerships generally operate under the Partners‘ names
2. Liability: Joint and Several Liability
Definition: Liability in which all parties are concurrently liable, but each is also individually liable for the debts of
the Partnership

2. Joint and Several Liability (con’t)

Result?
- Creditors can sue one, some or ALL Partners (or any combination)
- Any partner can bind both the Partnership and the individual Partners to contracts and legal obligations,
without the approval of the other Partners
Exception?
Limited Partnership creates Limited Liability for Limited Partners who agree to the following:
- No voice in management
- Liability is limited to amount invested in Partnership (ie, no further personal liability)
- General Partners continue to have Joint and Several Liability
- see textbook, Section 15.10

3. Continuity & Transferability

Q. How long does a Partnership last?
A. Determined by terms of the Partnerhsip Agreement: Generally, as long as Partners continue to agree to run
(see, Partnership Agreement)
Q. How is a Partnership dissolved?
A. Agreement of Partners, Court Order/Official Dissolution, Partner‘s withdrawl or death (entitled to accounting in
order to determine his share of profits/losses)
Q. Can a Partner sell his share of the Partnership?
A. Generally, no transfer of interest without the unanimous consent of all General Partners

4. Creation, Formalities & Costs

- By Agreement of Partners (see, text Section 15.4 +
- “ Simple Partnership Agreement“ 15.4 )
- Low Costs: Generally, easy and inexpensive to set up
- Few Legal Formalities & Requirements: Partnership
Agreement + costs of organization (such as open separate bank account, organizational fee, obtain necessary
license, permit, zoning, insurance, annual reports, etc.)

5. Financing
- Personal financing: often life‘s savings, family loan, inheritance, etc.; getting a loan depends on Partners‘
personal financial strengths or ability to obtain guarantees
- May require adding a new Partner in order to raise capital (note, upon unanimous consent of General
Partners)

6. Taxes
- No separate tax for Partnership: the Partnership itself is not responsible for paying taxes on the income it
generates
- A Partnership Tax Return may be filed but “for information purposes“ only

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- Instead, each Partner individually pays taxes on his/her share of profits (Pro Rata share)
- Partnerhip Profits = personal income for each Partner

7. Termination: See text, Section 15.9

- Terms of Partnership Agreement (or subsequent agreement of Partners)
- Sale, death, incapacity, voluntary cessation or withdrawl by Partner(s)
- Insolvency: Bankruptcy may be brought directly against Partnership as well as any or all individual Partners

Canine Globe trotters, Inc.

Corporation
Legal definition
A company is an artificial being created by law, with an existence distinct from the shareholders who own it (see
text, Chapter 16)

Public vs Private Companies (see, text, Section 16.4.1) (CORPORATION)

1. Control & Management
2. Personal Liability
3. Continuity & Transferability
4. Creation, Formalities & Costs
5. Financing
6. Tax Structure
7. Termination

1. Articles of Incorporation
2. Corporate By-laws
3. Stock Certificates / Shares of Stock

Corporations
Articles of Incorporation (Corporate charter)
- Formally establishes the Corporation
- Reflects Company name & purpose
- Names and addresses of incorporators
- Number of authorized shares

Corporate By laws
- Written by Board of Directors
- Adopted by the Company
- States the rules of internal governance
- Obligation of persons within the Company
- Company‘s official structure, routine matters, etc.

Stock Certificates
- A share, physical evidence of share ownership
- Written evidence of investment in the Company
- Resulting rights & liabilities

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3. Corporation
= artificial being created by law, with an existence distinct from the shareholders who own it

• Control & management

− Seperate legal entity creted by operation of law
− Artificial ‘person’ with legal rights and onligations
− Owned by its shareholders
− Management is generally seperate from owners

• Limited liability
− Law treats companies as persons which can sue or be sued, make contracts,
own property, etc.
− Seperate ‘person’ is liable for its debts/obligations
− Limited personal liability: your personal liability for the company’s actions is
limited
− Exception: Pierce the corporate Veil (courts put aside limited liability and hold
shareholders/directors personally liable for corporation’s actions/debts)

• Continuity & transferability

− Perpetual existence (pass on to heirs, new directors will be named)
− Shares are ‘freely transferable’ –> can be sold at will, survive death of investor

• Creation formalities & costs

− Seperate legal entity created by Law
− Minimum capital requirements, issued by law/local authorities

• Financing
− 3 F’s (family, friends and fools)
− easier to obtain funding for operations/expansions
− small co’s: if your co has few shareholders, is new or has no financial record,
you will have to personally guarantee any debts –> could be as liable as Sole P

• Taxes
− Co can be taxed as a ‘person’
− USA: double taxation: co pays income taks on net profit+ shareholders pay
income taks on dividents received

• Termination
− Perpetual existence
− Continues despite sale, death, incapacity of withdrawal by officers, directors
and shareholders
− 2 bankruptcy types: chapter 7, chapter 11

Private companies:
=privately held & usually owned by the founders, a small group of investors or management
− Must rely on private capital: can’t raise funds by selling stocks on a stock exchange

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− Shareholders often more involved in the business than with a public company
− Also commonly referred to as ‘close corporations’
− Ex: EY, IKEA, ALSO, Huawei

Public companies:
=sold to the public in parts of full, usually traded on stock exchange
− Can rely on public capital markets to rase funds by selling stocks and bonds
− Strict disclosure requirement
− Must get apporval of hsareholders for major decisions
− Ex: Delhaize, GSK, ABInBev, etc.

Definition of a Security Section 2(1) of U.S. Securities Act

“Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest
in oil, gas, or other mineral rights or in general, any interest or instrument commonly known as a “security,” or any
certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant
or right to subscribe to or purchase, any of the above foregoing.”

In sum, a Security is:

- investment
- in a common enterprise
- reasonable expectations for profits
- derived primarily or substantially from other’s managerial or entrepreneurial efforts

Stocks Bonds
1) Ownership 1) Debt
2) No Fixed Dividends 2) Fixed Return
3) Stockholders elect BofD 3) No voice or control in management
4) No Maturity Date 4) Maturity Date
5) Not necessarily issued
5) Most Co’s issue shares
6) Bondholders’ claims preceed shareholders
6) “Residual position” in overall financial structure

MEET THE PLAYERS (see , text Chapters 17 & 18)

- The Players –
1. Board of Directors
2. Officers
3. Shareholders

- The Corporate Players–

The Shareholders (see text, Chapter 18)
Owners of corporation‘s stock: As owners, they elect Directors (and remove), amend By-laws & Articles of
Incorporation, and vote on other basic issues

Board of Directors (see text, Chapter 17)

Set corporate policy and make long-term decisions for the company

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The Officers
Manage the day-to-day operations of the business and implement Board policies

Corporate Responsibility: Duties and Obligations

Duties of Directors (see text, Section 17.1.9 and “Seven General Statutory Duties“)
1. Act within powers granted
2. Promote success of company
3. Use Independent Judgment
4. Use reasonable care, skill & diligence
5. Avoid Conflict of Interest
6. Do not accept benefits from 3rd parties
7. Declare interest in proposed transaction/deal

I. Directors
- Participation and Inspection
- Compensation and Indemnification

II. Officers Duties and Rights

- See, Employment Contract

Corporate Responsibility: Standard Shareholder Rights

Many investors who buy securities are unaware of the standard rights that come with stock ownership.
Specific Shareholder rights depend on many factors.
For example: type of security (common or preferred shares), laws of “Place of Incorporation,” By-laws and
Corporate Charter

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Standard Shareholder Rights
1. Voting Rights
2. Preemptive Rights
3. Right to Transfer Shares
4. Dividend Rights
5. Inspection Rights
6. Shareholders‘ Derivative Suit
7. Rights on Dissolution

Forms of Business Organizations YOUR TURN:

Maschmeier vs South Side Press - Rights of Minority Shareholders

1. Carlill vs The Carbolic Smoke Ball Company

The Carbolic Smoke Ball Company offered a hundred pounds to anyone who used their product correctly and then
caught the flu anyway. To show their sincerity they even deposited a 1000 pounds in the bank. Mrs Carlill caught the
flu and claimed her prize. The defendants refused, claiming it was only a vague sales puff. In the end Carlill won the
case and received her 100 pounds. It was a unilateral contract made to the whole world.
2. La Ligue vs Yahoo!
Yahoo offered Nazi memorabilia for sale, this is against the French law. The International League Against Racism and
Antisemitism filed suit in Paris. The French court decided that Yahoo should take it of the site. Yahoo went to the
American Court, does this violates freedom of speech. In the Yahoo case there is a conflict of laws. It is a landmark
case at it is the first of its kind.
3. Hyde vs Wrench
Wrench offered to sell Hyde a property for 1000 dollars. Hyde said he would pay 950 and Wrench refused it. Then
Hyde said he would pay the 1000 but Wrench still refused it. The original offer had been revoked after Hyde gave a
counteroffer.

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Hyde v Wrench (1840) 3 Beav 334
On 6 June 1840 the defendant offered to sell his farm to the claimant for £1 000. The defendant asked for a reply by
return of post as he had another buyer in mind. The claimant’s agent called on the defendant and offered £950 for
the farm on the claimant’s behalf. The defendant replied that he would need to think about this and assured the
agent that he was not carrying on negotiations to sell to anyone else. On 27 June the defendant wrote to the
claimant’s agent declining the offer of £950. On 29 June the claimant wrote back accepting the original offer to sell
the farm at £1 000. The defendant refused to sell at this price. Held. There was no contract. The claimant’s
counteroffer of £950 had revoked the defendant’s original offer. COMMENT It might seem strange that the
counteroffer was held to have revoked the original offer, but this must be the correct decision. If a business offers
to sell an asset for a certain price and this offer is rejected by the offeree making a counteroffer, the business is likely
to sell the asset to someone else. It would be very harsh if the offeree, having refused the original offer, could now
accept it and make the offeror liable for breach of contract.
4. Hadley vs Baxendale
Hadley ordered a new crankshaft for the mill. Baxendale promised to deliver it the next day. However, it took 5 days
before it got delivered. Hadley sued Baxendale for the lost profits of the mill during that period. Hadley was awarded
the damages. Baxendale appealed, saying he did not know that money would be lost. Consequential damages.
5. The Queen vs Dudley and Stephens
Tom Dudley, Edwin Stephens, Edmund Brooks and Richard Parker, a seventeen-year-old orphan were stranded on
a lifeboat in the sea. After two weeks Dudley and Stephens suggested all of them should draw lots to see who should
be killed so the others could eat his body. Brooks refused. Dudley and Stephens then decided to kill Parker, who was
very weak. Brooks refused. After they killed him, Brooks fed on the boy as well as them. 4 days later they were
rescued. Dudley and Stephens were sued for murder, but Brooks was not.
6. Huguette Clark
Huguette Clark remained in a hospital for 20 years until her death while all her mansions remained unoccupied. After
Huguette Clark died in 2011 at age 104, 19 relatives challenged her will, claiming she was mentally ill and had been
defrauded by her nurse, attorney and accountant.
7. Sherwood vs Walker
Sherwood contracted to buy a cow from Walker. Walker believed it to be barren and they agreed on a price of 80
dollars. If the cow had not been barren it would have been worth 750 to 1000 dollars. Later, Walker discovered the
cow was pregnant and refused to continue the transaction. Sherwood sued. The judge returned a verdict in favour
of Sherwood. Walker appealed.
8. Spice Girls Ltd vs Aprilia World Service BV
The Spice Girls made a contract agreeing to advertise for Aprilia’s scooters. Before the contract, the girls knew that
one of them was going to leave soon. After they filmed the advertisement, one of the girls left, and the company
had no reason to believe that someone would leave. Because of this, it was an actionable misrepresentation.
9. Schroeder Music Publishing Co Ltd vs MacAuley
A songwriter made a contract with a music company and gave them the copyright to all of his songs, and he received
the royalties. If the royalties exceeded 5000 pounds after the first five years, then the contract would be renewed.
The publishers could terminate the agreement with one month’s notice, but the songwriter could not. The publishers
could assign their rights under the agreement, but the songwriter could not without consent of the publishers. The
agreement was void.
DeVinck vs Benson
DeVinck faxed Benson to sell his motorhome to him for 17500 dollars. However, he accidentally typed 15700 in the
fax machine. Benson accepted. Because of DeVinck’s unilateral mistake, he had to sell the motorhome to Benson for
15700 dollars.
Chi vs Bev

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Chi buys a violin from Bev for 250 dollars. An antique dealer later tells both parties this violin is worth thousands of
dollars. The contract cannot be rescinded because they both believed it was worth 250.
Fletcher vs Krell
A governess worked as a governess for 100 pounds a year. Later the employer discovered she had been divorced
and refused to take her on. It was no misrepresentation because she had never been asked if she was divorced when
making the contract.
ABC Clothiers vs Taylor & Sons
ABC Clothiers has a contract with Taylor & Sons, a retailer, to deliver 1,000 summer suits to Taylor’s place of business
on or before May 1. On April 1st, Taylor receives a letter from ABC informing him that ABC will not be able to make
the delivery as scheduled. Taylor wants to file suit against ABC immediately, on April 1. However, Taylor’s son, Tom,
tells his father that filing a lawsuit is not proper until ABC actually fails to deliver the suits on May 1.

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