Test Your Business Legal Skills

 These are not trick questions, but they do point out some of the issues that can occur in the context of business law. The answers are below.

 Question 1:

 In response to a large increase in your market, you call a machinery manufacturer and order an additional material handling machine at an agreed price of $180,000. The manufacturer tells you that the system will be delivered to you in two months. You don’t hear anything from him for a few weeks, so you call again. He tells you that he can’t deliver for an additional few months. Later, you learn through a business contact that the machine that you ordered is going to be shipped to one of your competitors for a higher price. If your competitor upgrades first, you will lose a lot of business.

True or false?: You can compel the manufacturer to sell the machine to you for $180,000.

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Questions 2 & 3:

You own a specialty machine shop that designs and manufactures custom equipment for the pharmaceutical industry. One of your best customers is George Smith who is the principal of XYZ Pills, Inc. You went to high school with George and the two of you have been doing business on a handshake for years.

A little more than nine months ago, George ordered some equipment for you at a price of $160,000. He promised to pay a $40,000 down payment and the balance in three quarterly installments. You filled the order in two months and received timely payments. Last week, you received a notice from the United States Trustee in bankruptcy of XYZ demanding that you return the last two payments totaling $80,000 and notifying you that you can file a claim as a general creditor.

 True or false?: You have to return the $80,000.

 True or false?: You can reclaim the equipment and resell it.

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 Question 4:

 You are the manager of a business. You have developed a unique inventory management method that gives you an edge over the competition. You contact Whizkidz, Inc., a computer programming firm, to write software for you so that you can get the system up and running. In response to your call, Whizkidz replies with a letter stating that they will supply services to write a computer program according to your specifications at a fixed hourly rate. You hire them and deliver a written specification to them which you have had copyrighted. They deliver a working computer program on time and within budget. Last month, you learned that Whizkidz is selling an improved version of the program to your competitors along with their written description of your method.

 True or false?: You can sue to prevent Whizkidz from selling further versions of your software and recover damages for your loss of business.

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 Question 5:

 You manufacture parts for a new design of fish-finding sonar. Your customer has made some modifications to the components so that it can be sold to the Coast Guard for harbor navigation. Yesterday, you received an inquiry from a company in Belgium requesting that you provide technical data and placing an order for a sizable number of parts to be filled within three months.

 True of false?: You should send the data and fill the order?

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 Question 6:

 You are the owner of a franchise for a national fast-food retailer. Your night supervisor, Joe, has been with you for several years and is a good and reliable worker. Over the summer, you have hired several college students. One of them, Amy, works on Joe’s shift. He seems attracted to her, but she is not interested in him. Lately, you notice that Amy seems to be getting the worst jobs. You trust Joe and think that Amy’s assignments are just a coincidence, but she seems unhappy.

True or false?: You need to have a talk with Joe.

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 Question 7:

 You buy an auto parts business from your friend, Bart for $50,000. You have inspected his inventory and records and know that there is at least $50,000 worth of parts on hand. You give Bart a check for the price and receive back a bill of sale. Bart retires to Florida . Within two months, you receive a notice from Bart’s bank that it intends to attach the inventory in foreclosure on a loan that Bart had with them. You also receive a claim from a supplier for $30,000 that Bart owed to them.

 True or false?: Your new business is in trouble.

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 Question 8 & 9:

 You purchase some land and the buildings that are on it for $650,000. In the contract of sale, the seller represented that there were no underground oil storage tanks on the land. After the settlement, you discover that there are underground oil storage tanks that have leaked and caused pollution.

 True or false?: You must report the pollution to the State and pay for the cleanup.

 True or false?: You can recover your costs from the seller.

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 Question 10:

You are in the business of providing office equipment maintenance services to your customers. Last year, you received a purchase order from MNO, Inc. to maintain their inventory of Xanar copiers. You replied with your confirmation. In the fine print on the back of the MNO purchase order under “Other Terms and Conditions” there was a paragraph that reads “MNO can cancel this contract with thirty days notice to the contractor.” On the back of your confirmation was a paragraph that reads “This contract shall continue from year-to-year unless the customer shall notify us of termination within 90 days of the anniversary date of the contract.” Fourteen months into the relationship, MNO gives notice of the termination of the contract. They did this because they believed that they had a lower cost provider. That provider was not ready. You deny MNO’s right to terminate the contract and you continue to provide on-call services for three months before being politely invited off the site. You leave and sue for the value of the contract for the balance of the year.

 True or false?: You will win your suit and recover the contract price.

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Answers

Answer to Question 1:

False.

Under the Uniform Commercial Code, which is generally common among the States, sales of goods or personal property over a certain value must be evidenced by a writing signed by the person to be held responsible. The traditional limit is $500.00.  You do not have an enforceable contract because you do not have written confirmation of your order. So, you’re out of luck because you don’t have an enforceable contract for the machine.

Note that a conventional signature with a pen is not required. The official version of the Code says that “’Signed’ includes any symbol executed or adopted by a party with present intention to authenticate a writing.” The requirement for a signed writing might have been satisfied simply by a name on an email confirmation.

Let’s suppose for the moment that you did have a signed, written confirmation of your order. Can you compel the manufacturer to ship the machine to you rather than to your competitor? The answer is: Perhaps. But, if you intend to take this course, you must act quickly. You probably know that if the machine gets to your competitor before you can get another one, you will lose business and that the amount of loss might not be subject to calculation. Two of the elements for injunctive relief are irreparable harm and the inadequacy of an economic remedy. But a judge is not likely to compel a transfer to you once the machine has been shipped to your competitor.

Again supposing that you did have an enforceable contract, do you have a claim against the manufacturer for breach of contract? The answer is: Yes. You can claim for the difference between the contract price and any additional amount that you may have to pay to obtain a substitute machine. Your damages may include any premiums that you have to pay to have your machine delivered on the original delivery date. They may also include other damages that are incidental to seller’s breach or arise from a consequence of it.

You may also have a direct claim against your competitor (which is always very satisfying). This will succeed if you can show that the competitor knew of the contract between you and the manufacturer and intentionally interfered with it by inducing the manufacturer to breach its contract with you.

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Answer to Questions 2 & 3:

You have to return the $80,000 and you cannot reclaim the equipment for resale. A trustee in bankruptcy has the right to avoid certain payments made within ninety days of the filing of a petition in bankruptcy. Your problem is that you extended credit without protecting yourself by filing a UCC financing statement. As a result, you do not have a security interest in the equipment and the last two payments would have been within the ninety day period and not a contemporaneous transfer for value and in the ordinary course of business. You are a general creditor of the bankrupt company and will probably receive only a small fraction of what is owed to you.

You could have protected yourself by having a contract with XYZ and a financing statement that was timely filed and recorded. In that case, you would have been considered a secured creditor and the Trustee could not have avoided the payments and demanded the return of the money.

As for your friend, George, your exercise of caution would have not have harmed him. As it is, your loss will only benefit the other general creditors; George will neither gain nor lose by it. However, had you the foresight to protect your investment, you may have been in a position to help George reestablish his business because you could regain title to the machinery that he needs.

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Answer to Question 4:

False. You can always sue, but you are probably wasting your time. When an independent contractor is engaged to write a computer program, any copyright in the program belongs to the contractor absent some very special circumstances that are prescribed in the copyright statutes. You could have contracted for an assignment of the copyright to you and for other rights in the program, but since you didn’t, they own it and they own the copyright. You have only the right to use your one copy and to make a backup of it. Their copyright also gives them the right to make derivative works which, in this case, are the improvements. Your copyright in the specification does not protect you. Copyrights protect only the expression of ideas, not the ideas themselves.  So, the copyright does not protect your business method. Further, you did not negotiate a confidentiality agreement with Whizkidz. So, there is nothing you can now do about them using your idea and selling it to your competitors via the improved computer program

You could have protected yourself by having a written agreement with Whizkidz that required them to assign any copyright in their computer programs to you. You should have also had a confidentiality agreement with them to prevent your business secrets from being disclosed to your competitors. Had you done that, you would be in the driver's seat instead of them.

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Answer to Question 5:

False, at least for now. Before you do either, you should obtain export authority from either the Department of State or the Department of Commerce. Both your product and the technical data arguably come under the coverage of the Munitions List and are probably regulated export articles. This is true even though Belgium is an ally of the United States . To be safe, you should at least apply for an export license and let the government decide whether one is required. Don’t try to evade the issue by traveling to Belgium and showing the potential customer the technical data.. Even if you bring it all back, you have still “exported” the technical data within the meaning of the regulations and subjected yourself to criminal and civil penalties.

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Answer to Question 6:

True. You need to talk with Joe. You also need to have a talk with Amy. While the battle between the sexes may be a fact of life, recent statutes and court decisions make it clear that it doesn’t belong in the workplace at least if it causes a “hostile working environment.” Amy has the right to work without feeling pressured to have an outside relationship with Joe. It is important that they both understand that.. It is also important for your franchise and company that you instruct Joe that he cannot use his position to pressure Amy into a relationship that she does not welcome. You should emphasize to Amy that she can come to you with any problems. Those talks should be separate, but depending on your assessment of the seriousness of the problem, you may want to have a reliable witness with you. You should document the conversation, at least in your own notes. You may be overreacting, but as a good manager, you know how to express a concern without making the issue worse. The cost of under-reacting could be high.

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Answer to Question 7:

True. When you bought the business from Bart, you neglected at least two of the many important things that needed to be done.  First, you didn’t have a UCC lien search done to determine if there were any security interests in the business property. Apparently, Bart borrowed money using the inventory as collateral and defaulted on the loan. If the bank recorded a UCC filing statement, it has rights superior to yours and will likely be able to foreclose on the inventory. Secondly, you did not send the notices to claimants required by the Bulk Sales chapter of the UCC. The supplier will be able to recover damages from you for the amount that it would have received had its claim been paid from the money that you gave to Bart.

How about a claim against Bart? You’re probably out of luck there too. Since Bart seems not to have made any warranties or other statements to you concerning his interest in the business property, there is no fraud. You just paid a lot more for the business than it was worth, but the law will not protect you after the fact for such a mistake

You should have protected your investment by ensuring that you were actually buying a business and inventory free and clear of liens. You should have also gotten warranties from Bart so that you could recover your losses from him.

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Answer to Questions 8 & 9:

True. If the land is in New Jersey and in many other States you must report the pollution or subject yourself to serious penalties. Under many regulatory schemes, you will be responsible for the cleanup and for paying the administrative costs to the State during the cleanup process. Your insurance will probably not cover the loss. Make no mistake; this is going to be very expensive.

Probably false, but worth a try. The general rule is that the representations made in a contract for the sale of land “merge into the deed” at the time of settlement. If you wanted a continuing warranty as to the absence of underground oil storage tanks that survived the giving of the deed, the contract would have to be specific on that point. There is always the possibility of a suit based on fraud, but that generally requires that you show that the seller knew or should have known of the condition.

Some States have regulatory schemes that provide for an environmental certification prior to sale, but these generally protect only the seller. If there is any possibility of prior pollution or use of land for industrial purposes, the buyer should obtain adequate warranties that survive the settlement from the seller and should engage a responsible engineering firm to perform a study of the land.

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Answer to Question 10:

True. You will win your suit, but you may not recover the full contract price.

The Uniform Commercial Code is on its terms applies to the sale of goods, not services. However, many courts apply the same principles to the sale of services. The lesson is that if you are involved in the sale of services, it is much more important for you to have written agreements with your customers.

Assuming that that the court will treat your services as if they were goods, you are involved in what has been called the “battle of the forms.” Your form says one thing and your customer’s form says something else. The Code has an answer. It provides that, in such circumstances, “the terms consist of those terms on which the writings of the parties agree together with any supplementary terms incorporated under any other provisions of this Act.” That means that both your termination clause and the customer’s termination clause will be stricken and the provisions of the Code will be substituted as a default.. Unfortunately for you, that probably means that the contract becomes one that the customer can terminate at will. However, you will receive the fair market value of the services that you provide from the date of termination. That’s not a good result, but it probably pays costs. So, your employees and creditors get a payday, but you do not.

If you are in the business of providing services, you should be highly motivated to have formal contracts with your customers. The UCC works well for goods, but it has not been tailored for the sale of services and it may not work well for you even if the courts feel comfortable in applying it. The best course is to have a written agreement tailored to the needs of your business.

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All names used in these questions and answers are fictional and not intended to represent any real person or organization .