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Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Essentials of
BUSINESS LAW
and the Legal Environment
THIRTEENTH EDITION
Richard A. Mann Barry S. Roberts

The University of North Carolina at Chapel Hill The University of North Carolina at Chapel Hill
Member of the North Carolina Bar Member of the North Carolina and Pennsylvania Bars
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Essentials of Business Law and the Legal © 2019, 2016 Cengage Learning®
Environment, Thirteenth Edition
Richard A. Mann and Barry S. Roberts Unless otherwise noted, all content is © Cengage
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Print Number: 01 Print Year: 2017
About the Authors
RICHARD A. MANN received a B.S. in mathematics from the University of North

Carolina at Chapel Hill and a J.D. from Yale Law School. He is professor emeritus of
Business Law at the Kenan-Flagler Business School, University of North Carolina
at Chapel Hill, and is past president of the Southeastern Regional Business Law
Association. He is a member of Who’s Who in America, Who’s Who in American Law,
and the North Carolina Bar (inactive).
Professor Mann has written extensively on a number of legal topics, including
bankruptcy, sales, secured transactions, real property, insurance law, and business
associations. He has received the American Business Law Journal’s award both for the
best article and for the best comment and has served as a reviewer and staff editor for
the publication. Professor Mann is a coauthor of Smith and Roberson’s Business Law
(seventeenth edition), as well as Business Law and the Regulation of Business (twelfth
edition) and Contemporary Business Law.
BARRY S. ROBERTS received a B.S. in business administration from Pennsylvania

State University, a J.D. from the University of Pennsylvania, and an LL.M. from Harvard
Law School. He served as a judicial clerk for the Pennsylvania Supreme Court prior to
practicing law in Pittsburgh. Barry Roberts is professor emeritus of business law at the
Kenan-Flagler Business School, University of North Carolina at Chapel Hill, and is a
member of Who’s Who in American Law and the North Carolina and Pennsylvania
Bars (inactive).
Professor Roberts has written numerous articles on such topics as antitrust,
products liability, constitutional law, banking law, employment law, and business
associations. He has been a reviewer and staff editor for the American Business Law
Journal. He is a coauthor of Smith and Roberson’s Business Law (seventeenth edition), as
well as Business Law and the Regulation of Business (twelfth edition) and Contemporary
Business Law.
iii
Contents in Brief
Part I Part I V
Introduction to Law and Ethics 1 Sales 331
1 Introduction to Law 2 19 Introduction to Sales and Leases 332

2 Business Ethics 13 20 Performance 351
21 Transfer of Title and Risk of Loss 370
22 Product Liability: Warranties and Strict Liability 385
Part I I
The Legal Environment of Business 43 23 Sales Remedies 409
3 Civil Dispute Resolution 44 Part V

4 Constitutional Law 68 Negotiable Instruments 431
5 Administrative Law 88 24 Form and Content 432
6 Criminal Law 104 25 Transfer and Holder in Due Course 448
7 Intentional Torts 121 26 Liability of Parties 476
8 Negligence and Strict Liability 139 27 Bank Deposits, Collections, and Funds Transfers 494
Part V I
Part I I I
Agency 517
Contracts 161
28 Relationship of Principal and Agent 518
9 Introduction to Contracts 162
10 Mutual Assent 177 29 Relationship with Third Parties 537
11 Conduct Invalidating Assent 196
Part V I I
12 Consideration 213
Business Associations 561
13 Illegal Bargains 230
14 Contractual Capacity 245 30 Formation and Internal Relations of General
15 Contracts in Writing 258 Partnerships 562
16 Third Parties to Contracts 281 31 Operation and Dissolution of General Partnerships 587
17 Performance, Breach, and Discharge 298 32 Limited Partnerships and Limited Liability
Companies 611
18 Contract Remedies 313
iv
Contents in Brief v
33 Nature and Formation of Corporations 634 45 Environmental Law 925

34 Financial Structure of Corporations 656 46 International Business Law 946
35 Management Structure of Corporations 675
36 Fundamental Changes of Corporations 704 Part X
Property 965
Part V I I I
47 Introduction to Property, Property Insurance,
Debtor and Creditor Relations 723 Bailments, and Documents of Title 966
37 Secured Transactions and Suretyship 724 48 Interests in Real Property 993
38 Bankruptcy 757 49 Transfer and Control of Real Property 1011
50 Trusts and Wills 1026
Part I X
Regulation of Business 789 APPENDICES
39 Securities Regulation 790 A The Constitution of the United States
40 Intellectual Property 827 of America A-2
41 Employment Law 847 B Uniform Commercial Code (Selected
42 Antitrust 872 Provisions) B-1
43 Accountants’ Legal Liability 891 C Dictionary of Legal Terms C-1
44 Consumer Protection 902 INDEX I-1
Contents
Part I: Introduction To Law And Ethics 1 Concept Review: Subject Matter Jurisdiction 51
Jurisdiction over the Parties 51
Chapter 1: Introduction to Law 2
Civil Dispute Resolution 53
Nature of Law 2
Civil Procedure 53
Classification of Law 4
Alternative Dispute Resolution 59
Concept Review: Comparison of Civil and Criminal Law 5
Concept Review: Comparison of Court Adjudication,
Sources of Law 6 Arbitration, and Mediation/Conciliation 60
Concept Review: Comparison of Law and Equity 8 Business Law in Action 62
Going Global: What is the WTO? 10 Going Global: What about international dispute resolution? 63
Legal Analysis 10
Chapter 4: Constitutional Law 68
Applying the Law: Introduction to Law 11
Basic Principles 69
Chapter 2: Business Ethics 13 Powers of Government 72
Limitations on Government 76
Law Versus Ethics 14
Concept Review: Limitations on Government 77
Ethical Theories 14
Ethical Dilemma: Who Is Responsible for Commercial Speech? 83
Ethical Standards in Business 17
Ethical Responsibilities of Business 18 Chapter 5: Administrative Law 88
Business Ethics Cases 24 Operation of Administrative Agencies 89
Pharmakon Drug Company 24 Concept Review: Administrative Rulemaking 93
Mykon’s Dilemma 26 Limits on Administrative Agencies 95
Oliver Winery, Inc. 31 Ethical Dilemma: Should the Terminally Ill Be Asked to Await
JLM, Inc. 33 FDA Approval of Last-Chance Treatments? 100
Sword Technology, Inc. 35 Chapter 6: Criminal Law 104
Vulcan, Inc. 38 Nature of Crimes 105
Concept Review: Degrees of Mental Fault 106
Part II:The Legal Environment of Classification 106
Business 43 White-Collar Crime 107
Crimes Against Business 110
Chapter 3: Civil Dispute Resolution 44 Applying the Law: Criminal Law 111
The Court System 44 Going Global: What about international bribery? 114
The Federal Courts 44 Defenses to Crimes 115
State Courts 46 Criminal Procedure 115
Jurisdiction 47 Concept Review: Constitutional Protection for the Criminal
Subject Matter Jurisdiction 48 Defendant 117
vi
Contents vii
Chapter 7: Intentional Torts 121 Fraud 199

Harm to the Person 124 Nonfraudulent Misrepresentation 204
Harm to the Right of Dignity 126 Mistake 204
Business Law in Action 128 Concept Review: Misrepresentation 204
Concept Review: Privacy 131 Applying the Law: Conduct Invalidating Assent 205
Harm to Property 131 Concept Review: Conduct Invalidating Assent 207
Harm to Economic Interests 132 Chapter 12: Consideration 213
Concept Review: Intentional Torts 134 Legal Sufficiency 213
Ethical Dilemma: What May One Do to Attract Clients Concept Review: Consideration in Unilateral and Bilateral
from a Previous Employer? 134 Contracts 215
Chapter 8: Negligence and Strict Liability 139 Bargained-for Exchange 220
Negligence 140 Contracts Without Consideration 221
Breach of Duty of Care 140 Business Law in Action 225
Factual Cause 147 Ethical Dilemma: Should a Spouse’s Promise Be Legally
Scope of Liability (Proximate Cause) 148 Binding? 225
Harm 150 Chapter 13: Illegal Bargains 230
Defenses to Negligence 150 Violations of Statutes 230
Strict Liability 153 Violations of Public Policy 233
Activities Giving Rise to Strict Liability 153 Business Law in Action 239
Ethical Dilemma: What Are the Obligations of a Bartender Effect of Illegality 240
to His Patrons? 156 Ethical Dilemma: When Is a Bargain Too Hard? 241
Defenses to Strict Liability 156
Chapter 14: Contractual Capacity 245
Minors 245
Part III: Contracts 161
Business Law in Action 248
Chapter 9: Introduction to Contracts 162 Incompetent Persons 252
Development of the Law of Contracts 162 Intoxicated Persons 252
Going Global: What about international contracts? 164 Ethical Dilemma: Should a Merchant Sell to One Who Lacks
Definition of Contract 165 Capacity? 254
Requirements of a Contract 165 Chapter 15: Contracts in Writing 258
Classification of Contracts 167 Statute of Frauds 258
Promissory Estoppel 169 Contracts Within the Statute of Frauds 259
Quasi Contracts or Restitution 171 Going Global: What about electronic commerce and electronic
Concept Review: Contracts, Promissory Estoppel, and Quasi signatures in international contracts? 260
Contracts (Restitution) 171 Concept Review: The Statute of Frauds 267
Business Law in Action 172 Compliance with the Statute of Frauds 267
Chapter 10: Mutual Assent 177
Effect of Noncompliance 269
Offer 178
Parol Evidence Rule 270
Essentials of an Offer 178
The Rule 270
Duration of Offers 182
Situations to Which the Rule Does
Applying the Law: Mutual Assent 184 Not Apply 272
Acceptance of Offer 187 Supplemental Evidence 273
Communication of Acceptance 187 Interpretation of Contracts 274
Variant Acceptances 190
Ethical Dilemma: What’s (Wrong) in a Contract? 275
Concept Review: Offer and Acceptance 191
Chapter 16: Third Parties to Contracts 281
Business Law In Action 191
Assignment of Rights 281
Chapter 11: Conduct Invalidating Assent 196 Delegation of Duties 287
Duress 196 Applying the Law: Third Parties to Contracts 290
Undue Influence 198 Third-Party Beneficiary Contracts 290
viii Contents
Chapter 17: Performance, Breach, and Discharge 298 Strict Product Liability in Tort 393
Conditions 298 Concept Review: Warranties 394
Discharge by Performance 301 Requirements Under Second Restatement of Torts 394
Discharge by Breach 301 Obstacles to Recovery Under Second Restatement 398
Applying the Law: Performance, Breach, and Discharge 302 Business Law in Action 400
Discharge by Agreement of the Parties 304 Restatement (Third) of Torts: Products Liability 401
Discharge by Operation of Law 305 Concept Review: Product Liability 402
Ethical Dilemma: When Should a Company Order a Product
Chapter 18: Contract Remedies 313
Recall? 403
Monetary Damages 314
Business Law in Action 315 Chapter 23: Sales Remedies 409
Remedies in Equity 319 Remedies of the Seller 410
Restitution 321 Concept Review: Remedies of the Seller 415
Limitations on Remedies 323 Remedies of the Buyer 415
Remedies for Misrepresentation 325 Applying the Law: Sales Remedies 416
Concept Review: Remedies of the Buyer 421
Contractual Provisions Affecting Remedies 421
Part IV: Sales 331
Chapter 19: Introduction to Sales and Leases 332

Part V: Negotiable Instruments 431
Nature of Sales and Leases 333
Definitions 333 Chapter 24: Form and Content 432
Going Global: What law governs international sales? 335 Concept Review: Use of Negotiable Instruments 433
Fundamental Principles of Article 2 and Article 2A 336 Negotiability 433
Formation of Sales and Lease Contracts 339 Types of Negotiable Instruments 434
Manifestation of Mutual Assent 339 Formal Requirements of Negotiable Instruments 436
Consideration 343
Form of the Contract 344
Chapter 25: Transfer and Holder in Due Course 448
Transfer 448
Negotiation 448
Concept Review: Contract Law Compared with Law of Sales 346
Indorsements 453
Ethical Dilemma: What Constitutes Unconscionability
in a Business? 346 Concept Review: Indorsements 457
Applying the Law: Transfer of Negotiable Instruments 457
Chapter 20: Performance 351 Holder in Due Course 458
Performance by the Seller 351 Requirements of a Holder in Due Course 458
Performance by the Buyer 356 Holder in Due Course Status 463
Obligations of Both Parties 360 The Preferred Position of a Holder in Due Course 465
Going Global: What about letters of credit? 362 Limitations upon Holder in Due Course Rights 470
Ethical Dilemma: Should a Buyer Refuse to Perform a Contract Ethical Dilemma: What Responsibility Does a Holder Have
Because a Legal Product May Be Unsafe? 365 in Negotiating Commercial Paper? 471
Chapter 21: Transfer of Title and Risk of Loss 370 Chapter 26: Liability of Parties 476
Transfer of Title 370 Contractual Liability 476
Risk of Loss 375 Signature 477
Bulk Sales 379 Liability of Primary Parties 479
Ethical Dilemma: Who Should Bear the Loss? 381 Liability of Secondary Parties 480
Chapter 22: Product Liability: Warranties and Strict Concept Review: Contractual Liability 483
Liability 385 Business Law in Action 484
Warranties 386 Termination of Liability 484
Types of Warranties 386 Liability Based on Warranty 485
Obstacles to Warranty Actions 390 Warranties on Transfer 485
Contents ix
Warranties on Presentment 487 Forms of Business Associations 564

Ethical Dilemma: Who Gets to Pass the Buck on a Forged Concept Review: General Partnership, Limited Partnership,
Indorsement? 489 Limited Liability Company, and Corporation 566
Going Global: What about multinational enterprises? 567
Chapter 27: Bank Deposits, Collections, and Funds
Transfers 494 Formation of General Partnerships 567
Bank Deposits and Collections 494 Nature of Partnership 567

Collection of Items 495 Formation of a Partnership 568
Relationships Among Partners 575
Going Global: What about letters of credit? 496
Duties Among Partners 575
Relationship Between Payor Bank and Its Customer 500
Rights Among Partners 578
Electronic Funds Transfer 505
Types of Electronic Funds Transfer 505 Concept Review: Partnership Property Compared with Partner’s
Interest 580
Ethical Dilemma: When Is an Opportunity a Partnership
Consumer Funds Transfers 507 Opportunity? 582
Wholesale Funds Transfers 509
Concept Review: Parties to a Funds Transfer 512 Chapter 31: Operation and Dissolution of General
Ethical Dilemma: Can Embezzlement Ever Be a Loan? 512 Partnerships 587
Relationship of Partnership and Partners with
Third Parties 587
Part VI: Agency 517 Contracts of Partnership 588
Chapter 28: Relationship of Principal and Agent 518 Business Law in Action 591
Nature of Agency 519 Torts and Crimes of Partnership 591
Creation of Agency 521 Notice to a Partner 592
Duties of Agent to Principal 523 Liability of Incoming Partner 593
Duties of Principal to Agent 527 Dissociation and Dissolution of General
Partnerships Under the RUPA 594
Termination of Agency 528
Dissociation 594
Applying the Law: Relationship of Principal and Agent 531
Dissolution 595
Ethical Dilemma: Is Medicaid Designed to Protect
Inheritances? 532 Concept Review: Dissociation and Dissolution Under
the RUPA 598
Chapter 29: Relationship with Third Parties 537 Dissociation Without Dissolution 600
Relationship of Principal and Third Persons 537 Dissolution of General Partnerships Under
Contract Liability of Principal 538 the UPA 602
Business Law in Action 540 Dissolution 603

Winding Up 603
Continuation After Dissolution 604
Tort Liability of Principal 547
Criminal Liability of Principal 551 Ethical Dilemma: What Duty of Disclosure Is Owed to Incoming
Partners? 605
Relationship of Agent and Third Persons 551
Contract Liability of Agent 552
Chapter 32: Limited Partnerships and Limited Liability
Tort Liability of Agent 555 Companies 611
Rights of Agent Against Third Person 555 Limited Partnerships 611
Ethical Dilemma: When Should an Agent’s Power to Bind His Concept Review: Comparison of General and Limited
Principal Terminate? 555 Partners 617
Limited Liability Companies 618
Part VII: Business Associations 561 Applying the Law: Limited Partnerships and Limited Liability
Companies 622
Chapter 30: Formation and Internal Relations of Concept Review: Comparison of Member-Managed and
General Partnerships 562 Manager-Managed LLCs 623
Choosing a Business Association 562 Other Unincorporated Business Associations 627
Factors Affecting the Choice 563 Concept Review: Liability Limitations in LLPs 628
x Contents
Chapter 33: Nature and Formation Officers 691

of Corporations 634 Duties of Directors and Officers 692
Nature of Corporations 635 Business Law in Action 698
Corporate Attributes 635 Ethical Dilemma: Whom Does a Director Represent?
Classification of Corporations 636 What Are a Director’s Duties? 699
Chapter 36: Fundamental Changes of
Business Law in Action 640 Corporations 704
Formation of a Corporation 641 Amendments to the Articles of Incorporation 704
Organizing the Corporation 641 Combinations 705
Formalities of Incorporation 643 Dissolution 714
Recognition or Disregard of Concept Review: Fundamental Changes under the
Corporateness 644 RMBCA 715
Concept Review: Comparison of Articles of Incorporation Ethical Dilemma: What Rights Do Minority Shareholders
and Bylaws 644 Have? 718
Defective Incorporation 645
Piercing the Corporate Veil 647
Corporate Powers 649 Part VIII: Debtor and Creditor
Sources of Corporate Powers 649 Relations 723
Ultra Vires Acts 649
Chapter 37: Secured Transactions and Suretyship 724
Liability for Torts and Crimes 650
Secured Transactions in Personal Property 725
Chapter 34: Financial Structure of Corporations 656 Essentials of Secured Transactions 725
Going Global: What about foreign investment? 657 Classification of Collateral 726
Debt Securities 657 Attachment 728
Authority to Issue Debt Securities 657 Perfection 731
Types of Debt Securities 657 Concept Review: Applicable Method of Perfection 735
Business Law in Action 659 Concept Review: Requisites for Enforceability of Security
Equity Securities 660 Interests 735
Issuance of Shares 660 Priorities Among Competing Interests 735
Classes of Shares 663 Concept Review: Priorities 740
Concept Review: Debt and Equity Securities 664 Default 740
Dividends and Other Distributions 665 Business Law in Action 741
Types of Dividends and Other Distributions 665 Suretyship 743
Legal Restrictions on Dividends and Other Distributions 666 Nature and Formation 743
Applying the Law: Financial Structure of Corporations 667 Duties of Surety 745
Declaration and Payment of Distributions 669 Rights of Surety 746
Liability for Improper Dividends and Distributions 670 Defenses of Surety and Principal Debtor 747
Concept Review: Liability for Improper Distributions 671 Ethical Dilemma: What Price Is “Reasonable” in Terms
of Repossession? 750
Chapter 35: Management Structure of
Corporations 675 Chapter 38: Bankruptcy 757
Corporate Governance 675 Federal Bankruptcy Law 758
Role of Shareholders 678 Going Global: What about transnational bankruptcies? 759
Voting Rights of Shareholders 678 Case Administration—Chapter 3 759
Concept Review: Concentrations of Voting Power 682 Creditors, the Debtor, and the Estate—Chapter 5 761
Enforcement Rights of Shareholders 682 Liquidation—Chapter 7 768
Role of Directors and Officers 686 Applying the Law: Bankruptcy 770
Function of the Board of Directors 687 Reorganization—Chapter 11 772
Election and Tenure of Directors 689 Adjustment of Debts of Individuals—Chapter 13 776
Exercise of Directors’ Functions 690 Concept Review: Comparison of Bankruptcy Proceedings 780
Contents xi
Creditors’ Rights and Debtors’ Relief Outside of Concept Review: Federal Employment Discrimination Laws 861
Bankruptcy 781 Ethical Dilemma: What (Unwritten) Right to a Job Does an
Creditors’ Rights 781 Employee Have? 866
Debtors’ Relief 781
Chapter 42: Antitrust 872
Ethical Dilemma: For a Company Contemplating Bankruptcy,
When Is Disclosure the Best Policy? 783 Sherman Antitrust Act 872
Going Global: Do the antitrust laws apply outside the United
States? 874
Part IX: Regulation of Business 789 Concept Review: Restraints of Trade Under Sherman Act 879
Chapter 39: Securities Regulation 790 Clayton Act 881
The Securities Act of 1933 792 Robinson-Patman Act 884
Definition of a Security 792 Federal Trade Commission Act 886
Registration of Securities 794 Ethical Dilemma: When Is an Agreement
Anticompetitive? 887
Exempt Securities 796
Exempt Transactions for Issuers 796 Chapter 43: Accountants’ Legal Liability 891
Exempt Transactions for Nonissuers 801 Common Law 891
Concept Review: Exempt Transactions for Issuers Under the Federal Securities Law 895
1933 Act 802 Applying the Law: Accountants’ Legal Liability 896
Liability 803
Concept Review: Accountants’ Liability Under Federal Securities
The Securities Exchange Act of 1934 806 Law 897
Disclosure 807
Chapter 44: Consumer Protection 902
Concept Review: Disclosure Under the 1934 Act 811
State and Federal Consumer Protection Agencies 903
Consumer Purchases 908
Liability 812
Concept Review: Consumer Rescission Rights 910
Going Global: What about international securities
regulation? 818 Consumer Credit Transactions 910
Concept Review: Civil Liability Under the 1933 and 1934 Business Law in Action 917
Acts 820 Creditors’ Remedies 917
Ethical Dilemma: What Information May a Corporate Ethical Dilemma: Should Some Be Protected from High-Pressure
Employee Disclose? 821 Sales? 919
Chapter 40: Intellectual Property 827 Chapter 45: Environmental Law 925
Trade Secrets 827 Common Law Actions for Environmental
Trade Symbols 830 Damage 925
Trade Names 834 Nuisance 925

Copyrights 835 Trespass to Land 926
Patents 839 Strict Liability for Abnormally Dangerous Activities 926
Problems Common to Private Causes of Action 927
Going Global: How is intellectual property protected
internationally? 841 Federal Regulation of the Environment 927
Concept Review: Intellectual Property 841 The National Environmental Policy Act 927
Ethical Dilemma: Who Holds the Copyright on Lecture The Clean Air Act 928
Notes? 842 The Clean Water Act 932
Hazardous Substances 935
Chapter 41: Employment Law 847
Concept Review: Major Federal Environmental Statutes 940
Labor Law 847
International Protection of the Ozone Layer 940
Concept Review: Unfair Labor Practices 849
Ethical Dilemma: Distant Concerns 941
Employment Discrimination Law 849
Business Law in Action 859 Chapter 46: International Business Law 946
Employee Protection 860 The International Environment 946
Going Global: Do Federal antidiscrimination laws apply outside Jurisdiction over Actions of Foreign Governments 949
the United States? 861 Transacting Business Abroad 951
xii Contents
Business Law in Action 954 Chapter 49: Transfer and Control of Real Property 1011
Forms of Multinational Enterprises 959 Transfer of Real Property 1011
Ethical Dilemma: Who May Seek Economic Shelter Under U.S. Contract of Sale 1012
Trade Law? 961 Deeds 1013
Secured Transactions 1014
Part X: Property 965 Adverse Possession 1016
Public and Private Controls 1016
Chapter 47: Introduction to Property, Property Zoning 1017
Insurance, Bailments, and Documents Eminent Domain 1018
of Title 966
Private Restrictions on Land Use 1020
Introduction to Property and Personal
Property 966 Ethical Dilemma: Where Should Cities House the
Disadvantaged? 1021
Kinds of Property 967
Concept Review: Kinds of Property 967 Chapter 50: Trusts and Wills 1026
Transfer of Title to Personal Property 970 Trusts 1026
Property Insurance 973 Types of Trusts 1026
Fire and Property Insurance 973 Creation of Trusts 1029
Business Law in Action 975 Termination of a Trust 1031
Nature of Insurance Contracts 975 Concept Review: Allocation of Principal and Income 1032
Bailments and Documents of Title 978 Decedent’s Estates 1032
Bailments 978 Wills 1032
Concept Review: Duties in a Bailment 981 Business Law in Action 1036
Documents of Title 983 Intestate Succession 1037
Ethical Dilemma: Who Is Responsible for the Operation Administration of Estates 1038
of Rental Property? 986 Ethical Dilemma: When Should Life Support Cease? 1038
Chapter 48: Interests in Real Property 993
Freehold Estates 993 Appendices
Concept Review: Freehold Estates 995
Appendix A: The Constitution
Leasehold Estates 996
of the United States of America A-2
Concurrent Ownership 1002
Concept Review: Rights of Concurrent Appendix B: Uniform Commercial Code
Owners 1003 (Selected Provisions) B-1
Nonpossessory Interests 1004
Appendix C: Dictionary of Legal Terms C-1
Applying the Law: Interests in Real
Property 1006 Index I-1
Table of Cases
Cases shown in red are new to this edition. Catamount Slate Products, Inc. v. Sheldon 179
Chapa v. Traciers & Associates 741
Christy v. Pilkinton 306
A Coastal Leasing Corporation v. T-Bar S Corporation 422
A.E. Robinson Oil Co., Inc. v. County Forest Products, Inc. 554 Cohen v. Mirage Resorts, Inc. 713
Alcoa Concrete & Masonry v. Stalker Bros. 231 Commerce & Industry Insurance Company v. Bayer
Aldana v. Colonial Palms Plaza, Inc. 285 Corporation 342
Alexander v. FedEx Ground Package System, Inc. 520 Conklin Farm v. Leibowitz 593
Alpert v. 28 Williams St. Corp. 710 Connes v. Molalla Transport System, Inc. 548
Alzado v. Blinder, Robinson & Company, Inc. 613 Conway v. Cutler Group, Inc. 1013
American Manufacturing Mutual Insurance Company v. Tison Cooke v. Fresh Express Foods Corporation, Inc. 716
Hog Market, Inc. 748 Cooperative Centrale Raiffeisen-Boerenleenbank B.A. v.
American Needle, Inc. v. National Football League 875 Bailey 443
Anderson v. McOskar Enterprises, Inc. 236 Coopers & Lybrand v. Fox 641
Any Kind Checks Cashed, Inc. v. Talcott 461 Cox Enterprises, Inc. v. Pension Benefit Guaranty
Arrowhead School District No. 75, Park County, Montana, v. Corporation 668
Klyap 316
Association for Molecular Pathology v. Myriad Genetics, Inc. 840
D
B Dahan v. Weiss 268
Davis v. Watson Brothers Plumbing, Inc. 480
Bagley v. Mt. Bachelor, Inc. 237 Denney v. Reppert 218
Beam v. Stewart 696 Department of Revenue of Kentucky, et al. v. Davis 74
Belden, Inc. v. American Electronic Components, Inc. 387 Detroit Lions, Inc. v. Argovitz 526
Berardi v. Meadowbrook Mall Company 197 DiLorenzo v. Valve & Primer Corporation 223
Berg v. Traylor 247 DIRECTV, Inc. v. Imburgia 61
Bigelow-Sanford, Inc. v. Gunny Corp. 418 Dixon, Laukitis and Downing v. Busey Bank 497
Border State Bank of Greenbush v. Bagley Livestock DJ Coleman, Inc. v. Nufarm Americas, Inc. 337
Exchange, Inc. 729 Dodge v. Ford Motor Co. 670
Borton v. Forest Hills Country Club 1004 Donahue v. Rodd Electrotype Co., Inc. 687
Bouton v. Byers 170 Drake Mfg. Co., Inc. v. Polyflow, Inc. 637
Brehm v. Eisner 693 Dunnam v. Burns 233
Brentwood Academy v. Tennessee Secondary School Athletic
Association 71
Brown v. Board of Education of Topeka 82 E
Brown v. Entertainment Merchants Association 77 Eastman Kodak Co. v. Image Technical Services, Inc. 879
Bulova Watch Company, Inc. v. K. Hattori & Co. 960 Ed Nowogroski Insurance, Inc. v. Rucker 829
Burlington Northern & Santa Fe Railway Company v. White 850 Edmonson v. Leesville Concrete Company, Inc. 56
Burningham v. Westgate Resorts, Ltd. 206 Enea v. The Superior Court of Monterey County 577
Environmental Protection Agency v. EME Homer City
C
Generation, L. P. 929
Cappo v. Suda 1021 Ernst & Ernst v. Hochfelder 896
Carter v. Tokai Financial Services, Inc. 334 Estate of Countryman v. Farmers Coop. Ass’n 624
xiii
xiv Table of Cases
F Kimbrell’s of Sanford, Inc. v. KPS, Inc. 734

King v. VeriFone Holdings, Inc. 683
F. Hoffmann-La Roche Ltd v. Empagran S.A. 955
Kirtsaeng v. John Wiley & Sons, Inc. 836
Faragher v. City of Boca Raton 855
Klein v. Pyrodyne Corporation 154
FCC v. Fox Television Stations, Inc. 97
Korzenik v. Supreme Radio, Inc. 460
Federal Ins. Co. v. Winters 289
Ferrell v. Mikula 125
First State Bank of Sinai v. Hyland 253 L
Fox v. Mountain West Electric, Inc. 167
Frank B. Hall & Co., Inc. v. Buck 127 Leegin Creative Leather Products, Inc. v. PSKS, Inc. 877
Freeman v. Quicken Loans, Inc. 915 Lefkowitz v. Great Minneapolis Surplus Store, Inc. 181
FTC v. Wyndham Worldwide Corp. 904 Leibling, P.C. v. Mellon PSFS (NJ) National Association 501
Furlong v. Alpha Chi Omega Sorority 358 Louisiana v. Hamed 113
Love v. Hardee’s Food Systems, Inc. 146
G
M
Gaddy v. Douglass 530
Galler v. Galler 681 Mackay v. Four Rivers Packing Co. 264
Greene v. Boddie-Noell Enterprises, Inc. 397 Madison Square Garden Corp., Ill. v. Carnera 321
Mark Line Industries, Inc. v. Murillo Modular Group, Ltd. 477
H Maroun v. Wyreless Systems, Inc. 202
Martin v. Melland’s Inc. 379
Hadfield v. Gilchrist 979 Matrixx Initiatives, Inc. v. Siracusano 814
Hadley v. Baxendale 317 Mayo Foundation for Medical Education and Research v.
Hamilton v. Lanning 778 United States 91
Harris v. Looney 646 McDowell Welding & Pipefitting, Inc. v. United States
Harris v. Viegelahn 777 Gypsum Co. 304
Heinrich v. Titus-Will Sales, Inc. 374 Merritt v. Craig 324
Heritage Bank v. Bruha 439 Metropolitan Life Insurance Company v. RJR Nabisco, Inc. 658
Herron v. Barnard 968 Michael Silvestri v. Optus Software, Inc. 299
Hessler v. Crystal Lake Chrysler-Plymouth, Inc. 363 Midwest Hatchery v. Doorenbos Poultry 423
Hochster v. De La Tour 303 Miller v. McDonald’s Corporation 522
Home Rentals Corp. v. Curtis 999 Mims v. Arrow Financial Services, LLC 49
Hospital Corp. of America v. FTC 883 Mirvish v. Mott 971
Household Credit Services, Inc. v. Pfennig 912 Montana Food, LLC v. Todosijevic 620
Husky International Electronics, Inc., v. Ritz 765 Moore v. Kitsmiller 152
Morrison v. National Australia Bank Ltd. 956
I Moulton Cavity & Mold Inc. v. Lyn-Flex Ind. 354
In Re KeyTronics 572 Mountain Peaks Financial Services, Inc. v. Roth-Steffen 286
In Re L. B. Trucking, Inc. 389 Murphy v. BDO Seidman, LLP 893
In re Magness 284
In re The Score Board, Inc. 249 N
In the Matter of 1545 Ocean Ave., LLC 625
In the Matter of the Estate of Rowe 1030 NationsBank of Virginia, N.A. v. Barnes 441
Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC 648 Neugebauer v. Neugebauer 198
New England Rock Services, Inc. v. Empire Paving, Inc. 218
Northern Corporation v. Chugach Electrical Association 307
J
Jasdip Properties SC, LLC v. Estate of Richardson 172
O
Jasper v. H. Nizam, Inc. 862
Jenkins v. Eckerd Corporation 271 OBB Personenverkehr AG v. Sachs 950
Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA 918 Omnicare, Inc. v. Laborers District Council Construction
Industry Pension Fund 804
O’Neil v. Crane Co. 395
K Osprey L.L.C. v. Kelly-Moore Paint Co., Inc. 188
Kalas v. Cook 266
Keeney v. Keeney 1028 P
Kelo v. City of New London 1018
Kelso v. Bayer Corporation 396 Palsgraf v. Long Island Railroad Co. 149
Kenco Homes, Inc. v. Williams 412 Palumbo v. Nikirk 155
Keser v. Chagnon 251 Parker v. Twentieth Century-Fox Film Corp. 318
Table of Cases xv
Parker v. Twentieth Century-Fox Film Corp. 55 T

Parlato v. Equitable Life Assurance Society of the
Texaco, Inc. v. Pennzoil, Co. 132
United States 544
The Hyatt Corporation v. Palm Beach National Bank 450
Payroll Advance, Inc. v. Yates 234
Thomas v. Lloyd 574
Perez v. Mortgage Bankers Ass’n. 92
Thor Properties v. Willspring Holdings, LLC 185
Petition of Kinsman Transit Co. 149
Travelers Indemnity Co. v. Stedman 488
Philip Morris USA v. Williams 122
Triffin v. Cigna Insurance Co. 465
Pittsley v. Houser 335
Tucker v. Hayford 1000
Prestenbach v. Collins 320
Prine v. Blanton 1033
U
R Union Planters Bank, National Association v. Rogers 504
RadLAX Gateway Hotel, LLC v. Amalgamated Bank 775 United States v. Bestfoods 938
Ray v. Alad Corporation 706 United States v. E. I. du Pont de Nemours & Co. 880
Reed v. King 203
Ricci v. Destefano 853
V
RNR Investments Limited Partnership v. Peoples First
Community Bank 590 Vance v. Ball State University 851
Robertson v. Jacobs Cattle Co. 596 Vanegas v. American Energy Services 216
Robinson v. Durham 373
Rosewood Care Center, Inc., v. Caterpillar, Inc. 262
Rubin v. Yellow Cab Company 550 W
Ryan v. Friesenhahn 142 Waddell v. L.V.R.V. Inc. 359
Wal-Mart Stores, Inc. v. Samara Brothers, Inc. 832
S Warnick v. Warnick 601
Watson Coatings, Inc. v. American Express Travel Related
Sackett v. Environmental Protection Agency 96 Services, Inc. 464
Salman v. United States 816 Whatley v. Estate of McDougal 1035
Schoenberger v. Chicago Transit Authority 546 White v. Samsung Electronics 129
Schreiber v. Burlington Northern, Inc. 819 Williamson v. Mazda Motor of America, Inc. 69
Securities and Exchange Commission v. Edwards 793 Windows, Inc. v. Jordan Panel Systems Corp. 377
Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 502 Womco, Inc. v. Navistar International Corporation 391
Shaw v. United States 108 Wood v. Pavlin 1003
Shawnee Telecom Resources, Inc. v. Brown 712 World-Wide Volkswagen Corp. v. Woodson 51
Sherrod v. Kidd 182 Wyler v. Feuer 616
Soldano v. O’Daniels 144
South Florida Water Management District v. Miccosukee Tribe of
Indians 933 Y
Speelman v. Pascal 283
Young v. United Parcel Service, Inc. 858
State of Qatar v. First American Bank of Virginia 454
State of South Dakota v. Morse 111
Steinberg v. Chicago Medical School 166 Z
Stine v. Stewart 292
Strougo v. Bassini 685 Zelnick v. Adams 250
Table of Figures
Figure 1-1 Law and Morals 4 Figure 10-2 Mutual Assent 189
Figure 1-2 Classification of Law 4 Figure 12-1 Modification of a Preexisting Contract 219
Figure 1-3 Hierarchy of Law 7 Figure 12-2 Consideration 224
Figure 2-1 Kohlberg’s Stages of Moral Development 17 Figure 14-1 Incapacity: Minors, Nonadjudicated
Figure 2-2 The Stakeholder Model 21 Incompetents, and Intoxicated Persons 253
Figure 2-3 Pharmakon Employment 25 Figure 15-1 Parol Evidence Rule 273
Figure 2-4 Pharmakon Affirmative Action Program 26 Figure 17-1 Discharge of Contracts 308
Figure 2-5 Mykon R&D Expenditures 28 Figure 18-1 Contract Remedies 323
Figure 2-6 Global Summary of the AIDS Epidemic in Figure 19-1 Battle of the Forms 341
2015 29 Figure 20-1 Tender of Performance by the Seller 354
Figure 2-7 Regional Statistics for HIV and AIDS End Figure 20-2 Performance by the Buyer 361
of 2015 29 Figure 21-1 Void Title 373
Figure 2-8 Stock Price of Vulcan, Inc. 40 Figure 21-2 Voidable Title 373
Figure 2-9 Average Daily Volume of Vulcan, Inc., Stock Figure 21-3 Passage of Risk of Loss in Absence of
for Week 40 Breach 380
Figure 2-10 Purchases of Vulcan Stock by Selected Figure 24-1 Order to Pay: Draft or Check 435
Executives 41 Figure 24-2 Draft 435
Figure 3-1 Federal Judicial System 45 Figure 24-3 Check 436
Figure 3-2 Circuit Courts of the United States 46 Figure 24-4 Promise to Pay: Promissory Note or
Figure 3-3 State Court System 47 Certificate of Deposit 436
Figure 3-4 Federal and State Jurisdiction 50 Figure 24-5 Note 437
Figure 3-5 Stare Decisis in the Dual Court System 50 Figure 24-6 Certificate of Deposit 437
Figure 3-6 Jurisdiction 52 Figure 25-1 Bearer Paper 449
Figure 3-7 Stages in Civil Procedure 59 Figure 25-2 Negotiation of Bearer and Order Paper 450
Figure 4-1 Separation of Powers: Checks and Balances 71 Figure 25-3 Stolen Order Paper 451
Figure 4-2 Powers of Government 76 Figure 25-4 Placement of Indorsement 456
Figure 5-1 Limits on Administrative Agencies 95 Figure 25-5 Rights of Transferees 459
Figure 7-1 Intent 124 Figure 25-6 Effects of Alterations 468
Figure 8-1 Negligence and Negligence Per Se 142 Figure 25-7 Alteration 469
Figure 8-2 Defenses to a Negligence Action 151 Figure 25-8 Availability of Defenses Against Holders
Figure 9-1 Law Governing Contracts 164 and Holders in Due Course 469
Figure 9-2 Contractual and Noncontractual Promises Figure 25-9 Rights of Holder in Due Course Under the
165 Federal Trade Commission Rule 470
Figure 9-3 Validity of Agreements 166 Figure 26-1 Liability on Transfer 486
Figure 10-1 Duration of Revocable Offers 187 Figure 26-2 Liability Based on Warranty 489
xvi
Table of Figures xvii
Figure 27-1 Bank Collections 496 Figure 37-1 Fundamental Rights of Secured Party
Figure 27-2 Credit Transaction 511 and Debtor 726
Figure 28-1 Duties of Principal and Agent 527 Figure 37-2 Suretyship Relationship 744
Figure 29-1 Contract Liability of Disclosed Principal Figure 37-3 Assumption of Mortgage 745
538 Figure 37-4 Defenses of Surety and Principal Debtor 747
Figure 29-2 Contract Liability of Unidentified Principal Figure 38-1 Collection and Distribution of the Debtor’s
539 Estate 771
Figure 29-3 Contract Liability of Undisclosed Principal Figure 39-1 Registration and Exemptions Under the
540 1933 Act 797
Figure 29-4 Tort Liability 547 Figure 39-2 Registration and Liability Provisions
Figure 30-1 Business Entities 563 of the 1933 Act 806
Figure 30-2 Tests for Existence of a Partnership 571 Figure 39-3 Applicability of the 1934 Act 807
Figure 31-1 Contract Liability 588 Figure 39-4 Parties Forbidden to Trade on Inside
Information 815
Figure 31-2 Tort Liability 592
Figure 41-1 Charges Filed with the EEOC in 2010–2016
Figure 33-1 Promoters’ Preincorporation Contracts
860
Made in the Corporation’s Name 642
Figure 42-1 Sherman Act Violations Yielding a Corporate
Figure 34-1 Issuance of Shares 662
Fine of $300 Million or More 873
Figure 34-2 Key Concepts in Legal Restrictions upon
Figure 42-2 Meeting Competition Defense 886
Distributions 666
Figure 43-1 Accountants’ Liability to Third Parties
Figure 35-1 Management Structure of Corporations:
for Negligent Misrepresentation 893
The Statutory Model 677
Figure 44-1 Magnuson-Moss Warranty Act 909
Figure 35-2 Management Structure of Typical Closely
Held Corporation 677 Figure 48-1 Assignment Compared with Sublease 998
Figure 35-3 Management Structure of Typical Publicly Figure 49-1 Fundamental Rights of Mortgagor
Held Corporation 677 and Mortgagee 1015
Figure 35-4 Shareholder Suits 685 Figure 49-2 Eminent Domain 1019
Figure 36-1 Purchase of Shares 708 Figure 50-1 Trusts 1027
Figure 50-2 Per Stirpes and Per Capita 1037
Preface
The Tradition Continues

The thirteenth edition of Essentials of Business Law and the Legal Environment continues the tra-
dition of accuracy, comprehensiveness, and authoritativeness associated with its earlier editions.
This text covers the fundamentally important statutory, administrative, and case law that affects
business in a succinct, nontechnical but authoritative manner and provides depth sufficient to
ensure easy comprehension by students.
Topical Coverage
This text is designed for use in business law and legal environment of business courses generally
offered in universities, colleges, and schools of business and management. Because of its broad and
deep coverage, this text may be readily adapted to specially designed courses in business law or the
legal environment of business by assigning and emphasizing different combinations of chapters.
Uniform Certified Public Accountant Examination

Preparation
As updated effective January 1, 2018, the Uniform CPA Examination is composed of four sec-
tions: Auditing and Attestation (AUD), Business Environment and Concepts (BEC), Financial
Accounting and Reporting (FAR), and Regulation (REG). This textbook covers material included
in Area II (Business Law) of the Regulation section of the CPA Exam. See the inside back cover of
this text for a listing of the CPA exam topics covered in this text as well as the chapters covering
each topic.
In general, Area II of the REG section blueprint covers several topics of Business Law,
including the following:
• K nowledge and understanding of the legal implications of business transactions, particularly as
they relate to accounting, auditing and financial reporting
• Areas of agency, contracts, debtor–creditor relationships, government regulation of business, and
business structure
• The Uniform Commercial Code under the topics of contracts and debtor creditor relationships
• Nontax-related business structure content
• Federal and widely adopted uniform state laws and references as identified in [the following]
References
• Revised Model Business Corporation Act
• Revised Uniform Limited Partnership Act
• Revised Uniform Partnership Act
• Securities Act of 1933
• Securities Exchange Act of 1934
• Uniform Commercial Code
• Current textbooks covering business law
xviii
Preface xix
More specifically, Area II of the REG section blueprint includes the following topics, which
are covered in this textbook:
II Business Law
A. Agency
1. Authority of agents and principals
2. Duties and liabilities of agents and principals
B. Contracts
1. Formation
2. Performance
3. Discharge, breach, and remedies
C. Debtor–Creditor Relationships
1. Rights, duties, and liabilities of debtors, creditors, and guarantors
2. Bankruptcy and insolvency
3. Secured transactions
D. Government Regulation of Business
1. Federal securities regulation
2. Other federal laws and regulations
E. Business Structure
1. Selection and formation of business entity and related operation and termination
2. Rights, duties, legal obligations, and authority of owners and management
For more information, visit www.cpa-exam.org.
Business Ethics Emphasis

The text highlights how ethics applies to business. The Business Ethics case studies in Chapter 2
require students to make the value trade-offs that confront business people in their professional
lives. (We gratefully acknowledge the assistance of James Leis in writing the Mykon’s Dilemma
case.) Two-thirds of the chapters also contain an Ethical Dilemma, which presents a managerial
situation involving ethical issues. A series of questions leads students to explore the ethical dimen-
sions of each situation. We wish to acknowledge and thank the following professors for their con-
tributions in preparing the Ethical Dilemmas: Sandra K. Miller, professor of accounting, taxation,
and business law, Widener University, and Gregory P. Cermignano, associate professor of account-
ing and business law, Widener University. In addition, to provide further application of ethics in
different business contexts, an ethics question follows many cases. These questions are designed to
encourage students to consider the ethical dimensions of the facts in the case or of the legal issue
invoked by the facts.
New to This Edition

Updated and Expanded Coverage
The new edition has been extensively updated and includes coverage of
• The new Restatement (Third) of Torts: Liability for Economic Harm in Chapters 7, 8, 11, 18,
and 43
• Low-profit limited liability companies (L3Cs) in Chapter 32
• Benefit corporations in Chapter 33
• The 2016 Revised Model Business Corporation Act in Chapters 33–36
• The U.S. Securities and Exchange Commission’s new Regulation A+, Regulation Crowdfund-
ing, and intrastate exemptions as well as the 2017 amendments to Rules 147 and 504 in Chap-
ter 39
• The Defend Trades Secrets Act of 2016 and the 2016 amendments to the Economic Espionage
Act in Chapter 40
• The 2016 amendments to the Toxic Substances Control Act in Chapter 45
xx Preface
Additional End-of-Chapter Questions and Case Problems

Almost all chapters include one or more additional new end-of-chapter questions and/or case
problems.
New Cases
More than thirty recent legal cases are new to this edition (see Table of Cases). The new cases
include recent U.S. Supreme Court decisions such as DIRECTV, Inc. v. Imburgia; Perez v. Mortgage
Bankers Ass’n.; Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund;
Husky International Electronics, Inc., v. Ritz; Harris v. Viegelahn; Young v. United Parcel Service,
Inc.; OBB Personenverkehr Ag v. Sachs.; Republic of Argentina v. NML Capital, Ltd.; Shaw v. United
States; and Salmon v. United States.
Coverage of Recent U.S. Supreme Court Decisions

The Constitutional Law chapter (Chapter 4) discusses recent U.S. Supreme Court decisions in
cases challenging the constitutionality of (1) a federal statute restricting how much money an
individual donor may contribute in total to all candidates or committees during a political cycle
and (2) states’ refusal to license a marriage between two people of the same sex or to recognize
a marriage between two people of the same sex when their marriage was lawfully licensed and
performed out of state. The Administrative Law chapter (Chapter 5) discusses the Supreme Court
case making the Patient Protection and Affordable Care Act’s tax credits available in those states
that have a Federal Exchange. The Bankruptcy Law chapter (Chapter 38) discusses the Supreme
Court decision holding that in Chapter 11 cases, including structured dismissal cases, a bank-
ruptcy court cannot confirm a plan that contains distributions that violate the priority rules over
the objection of an impaired creditor class. The Intellectual Property chapter (Chapter 40) covers
Supreme Court cases involving the patent exhaustion doctrine and the disparagement clause of the
Lanham Act. The Employment Law chapter (Chapter 41) covers the Supreme Court case holding
that in disparate-treatment claims, an employer may not make an applicant’s religious practice,
confirmed or otherwise, a factor in employment decisions.
Key Features
Summarized Cases
Relevant, carefully selected, and interesting cases illustrate how key principles of business law are
applied in the United States. The facts, decisions, and opinions for all the cases are carefully sum-
marized for clarity. Each case is followed by an interpretation, which explains the significance of
the case and how it relates to the textual material. We have retained the landmark cases from the
prior edition. In addition, we have added more than thirty recent cases, including a number of U.S.
Supreme Court cases.
Case Critical Thinking Questions

Each case is also followed by a critical thinking question to encourage students to examine the
legal policy or reasoning behind the legal principle of the case or to apply it in a real-world context.
Ample Illustrations
We have incorporated more than 220 visually engaging, classroom-tested figures, tables, diagrams,
concept reviews, and chapter summaries. The figures, tables, and diagrams help students concep-
tualize the many abstract concepts in the law. The Concept Reviews not only summarize prior dis-
cussions but also indicate relationships between different legal rules. Moreover, each chapter ends
with a summary in the form of an annotated outline of the entire chapter, including key terms.
Applying the Law

The “Applying the Law” feature provides a systematic legal analysis of a realistic situation that
focuses on a single concept presented in the chapter. It begins with the facts of a hypothetical
case, followed by an identification of the broad legal issue presented by those facts. We then
state the rule—or applicable legal principles, including definitions, which aid in resolving the
Preface xxi
legal issue—and apply it to the facts. Finally, we state a legal conclusion or decision in the case.
The Applying the Law feature appears in fourteen chapters. We wish to acknowledge and thank
Professor Ann Olazábal, University of Miami, for her contribution in preparing this feature.
Business Law in Action

The “Business Law in Action” scenarios illustrate the application of legal concepts in the chap-
ter to business situations that commonly arise. This feature provides students meaningful insights
into how managers currently apply the law within common workplace situations. There are twen-
ty-seven scenarios in all. We wish to acknowledge and thank Professor Ann Olazábal, University
of Miami, for her contribution in preparing this feature.
Practical Advice
Each chapter has a number of statements that illustrate how legal concepts covered in the chapter
can be applied to common business situations.
Going Global
A “Going Global” feature appears in fifteen chapters (Chapters 1, 3, 6, 9, 15, 19, 20, 27, 30, 34, 38,
39, 40, 41, and 42), thus integrating international business law content throughout the text. This
feature enables students to consider the international aspects of legal issues as they are covered.
The International Business Law chapter (Chapter 46) has been retained in its entirety.
Chapter Outcomes
Each chapter begins with a list of learning objectives for students.
Enhanced Readability
To improve readability throughout the text, all unnecessary “legalese” has been eliminated, while
necessary legal terms have been printed in boldface and clearly defined, explained, and illustrated.
Definitions of essential legal terms and legal concepts also appear in the margins. Each chapter
is carefully organized with sufficient levels of subordination to enhance the accessibility of the
material. The text is enriched by numerous illustrative hypothetical and case examples that help
students relate material to real-life experiences.
Classroom-Proven End-of-Chapter Materials

Classroom-proven questions and case problems appear at the end of chapters to test students’
understanding of major concepts. We have used the questions (based on hypothetical situations)
and the case problems (taken from reported court decisions) in our own classrooms and consider
them excellent stimulants to classroom discussion. Students, in turn, have found the questions and
case problems helpful in enabling them to apply the basic rules of law to factual situations.
Taking Sides
Each chapter—except Chapters 1 and 2—has an end-of-chapter feature that requires students to
apply critical thinking skills to a case-based fact situation. Students are asked to identify the rel-
evant legal rules and develop arguments for both parties to the dispute. In addition, students are
asked to explain how they think a court would resolve the dispute.
Pedagogical Benefits
Classroom use and study of this book should provide students with the following benefits and
skills:
1. Perception and appreciation of the scope, extent, and importance of the law.
2. Basic knowledge of the fundamental concepts, principles, and rules of law that apply to busi-
ness transactions.
3. Knowledge of the function and operation of courts and government administrative agencies.
4. Ability to recognize the potential legal problems that may arise in a doubtful or complicated
situation and the necessity of consulting a lawyer and obtaining competent professional legal
advice.
5. Development of analytical skills and reasoning power.
xxii Preface
Additional Course Tools

MindTap
MindTap is a personalized teaching experience with relevant assignments that guide students to
analyze, apply, and improve thinking, allowing instructors to measure skills and outcomes with
ease. Teaching becomes personalized through a pre-built Learning Path designed with key student
objectives and the instructor syllabus in mind. Applicable reading, multimedia, and activities
within the learning path intuitively guide students up the levels of learning to (1) Prepare,
(2) Engage, (3) Apply, and (4) Analyze business law content. These activities are organized in a
logical progression to help elevate learning, promote critical-thinking skills, and produce better
outcomes.
This customizable online course gives instructors the ability to add their own content in the
Learning Path as well as modify authoritative Cengage content and learning tools using apps that
integrate seamlessly with Learning Management Systems (LMS). Analytics and reports provide a
snapshot of class progress, time in course, engagement, and completion rates.
Instructor’s Resources
Instructors can access these resources by going to login.cengage.com, logging in with a faculty
account username and password, and searching ISBN 9781337555180.
• The Instructor’s Manual prepared by Richard A. Mann, Barry S. Roberts, and Beth D. Woods
contains chapter outlines; teaching notes; answers to the Questions, Case Problems, and Tak-
ing Sides; and part openers that provide suggested research and outside activities for students.
• PowerPoint® Slides clarify course content and guide student note-taking during lectures.
• The Test Bank contains thousands of true/false, multiple-choice, and essay questions. The
questions vary in levels of difficulty and meet a full range of tagging requirements so that
instructors can tailor their testing to meet their specific needs.
• Cengage Testing Powered by Cognero is a flexible, online system that allows you to
• author, edit, and manage test bank content from multiple Cengage solutions
• create multiple test versions in an instant
• deliver tests from your Learning Management Systems (LMS), your classroom, or wherever
you want
Acknowledgments
We express our gratitude to the following professors for their helpful comments:
Michael E. Adighibe, Cheyney University; Martha Agee, Baylor University; Jessica Allen,
Suffolk Community College; Terence Baird, Antelope Valley College; Keith A. Beebe, SUNY-
Cobleskill; Dawn Bennett-Alexander, University of Northern Florida; Janie Blankenship, DelMar
College; George S. Bohler, Embry-Riddle University; Joyce Boland-DeVito, St. John’s University;
Steven W. Bostian, Caston College; Norman E. Bradshaw, Alvin Community College; Donald R.
Brenner, American University; Carroll Burrell, San Jacinto College; Jane Campbell, Jackson Com-
munity College; Stephanie Campbell, Mineral Area College; Vic Daniels, Tallahassee Commu-
nity College; Ed Dash, Pierce Junior College; Joseph P. Davey, Hartnell College; David L. Davis,
Tallahassee Community College; Sandra Defebaugh, Eastern Michigan University; Theodore M.
Dinges, Longview Community College; Vernon P. Dorweiler, Michigan Technological University;
Dora J. L. Dye, City College of San Francisco; Steve Easter, Mineral Area College; Robert Ek, Sem-
inole Community College; Tony Enerva, Lakeland Community College; Karla Harbin Fox, Uni-
versity of Connecticut; Edward J. Gac, University of Colorado; George P. Generas, Jr., University
of Hartford; Allan M. Gerson, Palm Beach Community College; J. P. Giovacchini, Western Nevada
College; Thomson Glover, Murray State University; Douglas C. Gordon, Arapahoe Community
College; Suzanne Gradisher, University of Akron; A. James Granito, Youngstown State Univer-
sity; Deborah C. Hanks, Cardinal Stritch University; E. Sharon Hayenga, Minneapolis Commu-
nity College; James E. Holloway, East Carolina University; H. Daniel Holt, Southeastern Illinois
College; Trevor Howell, Belmont College; Gregory M. Huckabee, University of South Dakota;
Dan Huss, Miami University; Robert Inama, Ricks College; Keith Kasper, University of Vermont;
Preface xxiii
Michael A. Katz, Delaware State University; Julia S. Kennedy, University of St. Francis; George
Kepner, Hartwick College; Edward M. Kissling, Ocean County College; Blake LeCrone, Baylor
University; Daniel A. Levin, University of Colorado–Boulder; David Ludwich, Belmont College;
Sarah H. Ludwig, Mary Baldwin College; Bradley Lutz, Hillsborough Community College; R ichard
Lynn, Belmont College; John F. Mastriani, El Paso Community College; Marian Matthews, Central
New Mexico Community College; Kyle McFatter, McNeese State University; James Miles, Anoka-
Ramsey C ommunity College; Scott E. Miller, CPA, J.D., Gannon University; David J. Moser,
Belmont University; Andre Nelson, Montgomery College; John H. Neu, Whittier College; Brennan
Neville, Bellevue University; L. K. O’Drudy, Jr., University of Virginia; Michael J. O’Hara, Univer-
sity of Nebraska; Dinah Payne, University of New Orleans; Mary Ellen Perri, SUNY-Farmingdale;
Todd B. Piller, SUNY-Cobleskill; Richard W. Post, College of the Desert; LeGene Quesenberry,
Clarion University; Roger E. Reinsch, Emporia State University; Darlington C. Richards, M organ
State University; M. Rose, Macomb County Community College; Herbert Rossman, Drexel Uni-
versity; Sylvia Samuels, Skyline College; Donald E. Sanders, Southwest Texas State University;
Susan Schoeffler, Central Piedmont Community College; John E. H. Sherry, Cornell University;
Caroline W. Smith, College of Central Florida; Owen T. Smith, Long Island University; Michael E.
Sommerville, St. Mary’s College; Dan Spielmann, University of Wisconsin-Green Bay; Art Stelly,
Baylor University; Larry Stephens, Gulf Coast College; Stanley H. Stone, Valencia Community
College-East Campus; Mary Torma, Lorain County Community College; Patricia S. Tulin, Central
Connecticut State University; Robert J. Votta, Pierce Junior College; Edward C. Wachter, Jr., Point
Park College; Pamela Poole Weber, Seminole Community College; Hugh Wilkoff, Cerritos Col-
lege; and Kim Wong, Central New Mexico Community College.
We express our thanks and appreciation to Debra Corvey for administrative assistance. For
their support, we extend our thanks to Karlene Fogelin Knebel and Joanne Erwick Roberts. And
we are grateful to Vicky True-Baker and Amanda White of Cengage for their invaluable assistance
and cooperation in connection with the preparation of this text.
This text is dedicated to our children Lilli-Marie Knebel Mann, Justin Erwick Roberts, and
Matthew Charles Roberts.
Richard A. Mann
Barry S. Roberts
Pa r t I
Introduction to Law
and Ethics
Chapter 1
Introduction to Law 2
Chapter 2
Business Ethics 13
Introduction to Law
C HAPTER 1
C h a p t e r O u t co m e s
The life of the law has not been logic; it After reading and studying this chapter, you should be able to:
has been experience.
1. Identify and describe the basic functions of law.
Oliver Wendell Holmes
The Common Law (1881) 2. Distinguish between (a) law and justice and (b) law and morals.
3. Distinguish between (a) substantive and procedural law, (b) public and private law, and (c) civil
and criminal law.
4. Identify and describe the sources of law.
5. Explain the principle of stare decisis.
L
aw concerns the relations between individuals as such relations affect the social and eco-
nomic order. It is both the product of civilization and the means by which civilization
is maintained. As such, law reflects the social, economic, political, religious, and moral
philosophy of society.
Law is an instrument of social control. Its function is to regulate, within certain limitations,
human conduct and human relations. Accordingly, the laws of the United States affect the life of
every U.S. citizen. At the same time, the laws of each state influence the life of each of its citizens
and the lives of many noncitizens as well. The rights and duties of all individuals, as well as the
safety and security of all people and their property, depend on the law.
The law is pervasive. It permits, forbids, or regulates practically every human activity and
affects all persons either directly or indirectly. Law is, in part, prohibitory: certain acts must not be
committed. For example, one must not steal; one must not murder. Law is also partly mandatory:
certain acts must be done or be done in a prescribed way. Thus, taxes must be paid; corporations
must make and file certain reports with state or federal authorities; traffic must keep to the right.
Finally, law is permissive: certain acts may be done. For instance, one may or may not enter into a
contract; one may or may not dispose of one’s estate by will.
Because the areas of law are so highly interrelated, you will find it helpful to begin the study of
the different areas of business law by first considering the nature, classification, and sources of law.
This will enable you not only to understand each specific area of law better but also to understand
its relationship to other areas of law.
Nature of Law [1-1]

The law has evolved slowly, and it will continue to change. It is not a pure science based on
unchanging and universal truths. Rather, it results from a continuous striving to develop a work-
able set of rules that balance the individual and group rights of a society.
CHAPTER 1 Introduction to Law 3
Definition of law Definition of Law [1-1a]

“a rule of civil conduct
Scholars and citizens in general often ask a fundamental but difficult question regarding law: what
prescribed by the supreme
is it? Numerous philosophers and jurists (legal scholars) have attempted to define it. American
power in a state, commanding
jurists and Supreme Court Justices Oliver Wendell Holmes and Benjamin Cardozo defined law
what is right, and prohibiting
as predictions of the way in which a court will decide specific legal questions. The English jurist
what is wrong” (William
William Blackstone, on the other hand, defined law as “a rule of civil conduct prescribed by the
Blackstone)
supreme power in a state, commanding what is right, and prohibiting what is wrong.”
Because of its great complexity, many legal scholars have attempted to explain the law by
outlining its essential characteristics. Roscoe Pound, a distinguished American jurist and former
dean of the Harvard Law School, described law as having multiple meanings:
First we may mean the legal order, that is, the régime of ordering human activities and relations
through systematic application of the force of politically organized society, or through social p
ressure
in such a society backed by such force. We use the term “law” in this sense when we speak of “respect
for law” or for the “end of law.”
Second we may mean the aggregate of laws or legal precepts; the body of authoritative grounds
of judicial and administrative action established in such a society. We may mean the body of received
and established materials on which judicial and administrative determinations proceed. We use the
term in this sense when we speak of “systems of law” or of “justice according to law.”
Third we may mean what Justice Cardozo has happily styled “the judicial process.” We may
mean the process of determining controversies, whether as it actually takes place, or as the public, the
jurists, and the practitioners in the courts hold it ought to take place.
Functions of Law [1-1b]

Functions of law At a general level, the primary function of law is to maintain stability in the social, political,
to maintain stability in the and economic system while simultaneously permitting change. The law accomplishes this basic
social, political, and economic function by performing a number of specific functions, among them dispute resolution, protection
system through dispute reso- of property, and preservation of the state.
lution, protection of property, Disputes, which arise inevitably in any modern society, may involve criminal matters, such
and the preservation of the as theft, or noncriminal matters, such as an automobile accident. Because disputes threaten social
state, while simultaneously stability, the law has established an elaborate and evolving set of rules to resolve them. In addition,
permitting ordered change the legal system has instituted societal remedies, usually administered by the courts, in place of
private remedies such as revenge.
A second crucial function of law is to protect the private ownership of property and to assist
in the making of voluntary agreements (called contracts) regarding exchanges of property and
services. Accordingly, a significant portion of law, as well as this text, involves property and its
disposition, including the law of property, contracts, sales, commercial paper, and business
associations.
A third essential function of the law is preservation of the state. In our system, law ensures
that changes in political structure and leadership are brought about by political action, such as
elections, legislation, and referenda, rather than by revolution, sedition, and rebellion.
Laws and morals Law and Morals [1-1c]

are different but overlapping: Although moral concepts greatly influence the law, morals and law are not the same. You might
law provides sanctions while think of them as two intersecting circles (see Figure 1-1). The area common to both circles includes
morals do not the vast body of ideas that are both moral and legal. For instance, “Thou shall not kill” and “Thou
shall not steal” are both moral precepts and legal constraints.
On the other hand, the part of the legal circle that does not intersect the morality c ircle
includes many rules of law that are completely unrelated to morals, such as the rules stating
that you must drive on the right side of the road and that you must register before you can vote.
Likewise, the part of the morality circle that does not intersect the legal circle includes moral
precepts not enforced by legal sanctions, such as the idea that you should not silently stand by and
watch a blind man walk off a cliff or that you should provide food to a starving child.
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Essentials of Business Law and the

Legal Environment Richard A. Mann

Business law and the regulation of business Twelfth

Business Law and the Legal Environment, Standard

The Legal and Ethical Environment of Business Fort

Anderson s Business Law and the Legal Environment

The Legal Environment of Business, a Managerial

Business Law in Canada Twelfth Canadian Edition Richard

Business Law Today the Essentials Text and Summarized

Essentials of business communication Guffey

Richard A. Mann Barry S. Roberts

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Content Developer: Amanda White

Project Manager: Reba Frederics Library of Congress Control Number: 2017955929

Cover Image: iStockPhoto.com/DNY59 ISBN: 978-1-337-55518-0

Cengage is a leading provider of customized learning solutions with

Cengage products are represented in Canada by Nelson E

To learn more about Cengage Solutions, visit www.cengage.com.

Purchase any of our products at your local college store or at our

Printed in the United States of America

RICHARD A. MANN received a B.S. in mathematics from the University of North

BARRY S. ROBERTS received a B.S. in business administration from Pennsylvania

1 Introduction to Law 2 19 Introduction to Sales and Leases 332

3 Civil Dispute Resolution 44 Part V

33 Nature and Formation of Corporations 634 45 Environmental Law 925

Chapter 7: Intentional Torts 121 Fraud 199

Chapter 19: Introduction to Sales and Leases 332

Warranties on Presentment 487 Forms of Business Associations 564

Bank Deposits and Collections 494 Nature of Partnership 567

Business Law in Action 540 Dissolution 603

Chapter 33: Nature and Formation Officers 691

Trade Names 834 Nuisance 925

F Kimbrell’s of Sanford, Inc. v. KPS, Inc. 734

Parker v. Twentieth Century-Fox Film Corp. 55 T

The Tradition Continues

Uniform Certified Public Accountant Examination

Business Ethics Emphasis

New to This Edition

Additional End-of-Chapter Questions and Case Problems

Coverage of Recent U.S. Supreme Court Decisions

Case Critical Thinking Questions

Applying the Law

Business Law in Action

Classroom-Proven End-of-Chapter Materials

Additional Course Tools

Nature of Law [1-1]

Definition of law Definition of Law [1-1a]

Functions of Law [1-1b]

Laws and morals Law and Morals [1-1c]

• You provide a full refund of any money paid by a user who

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