722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx

7/2/2019 Print
https://content.ashford.edu/print/AUBUS670.12.2?sections=fm,
ch05,sec5.1,sec5.2,sec5.3,ch05summary,unit02,ch09,sec9.1,sec9
.2,sec9.3,sec9.4,se… 1/49
7/2/2019 Print
.2,sec9.3,sec9.4,se… 2/49
Chapter 5
Administrative Law
Administrative law governs and de�ines the powers of
government agencies. A number of political and
technological factors have led to an explosion in the
growth of government since the turn of the 20th century,
at both the federal and state levels. Even though these
bureaucracies fall under the executive or
legislative branch, their rapid growth has given rise to
what is commonly referred to as the "fourth branch of
government": administrative agencies.
7/2/2019 Print

.2,sec9.3,sec9.4,se… 3/49
Comstock/Thinkstock
The Internal Revenue Service is one example of an
agency created by the federal government to
expand
its regulatorypower.
5.1 What Is the Purpose of an Administrative
Agency?
Beginning in the 1930s, the federal government has been
steadily expanding its regulatory powers over
business and individuals through the creation of agencies
such as the Federal Trade Commission,
Internal Revenue Service, and Food and Drug
Administration. Under the U.S. Supreme Court's broad
interpretation of the Commerce Clause, Congress has the
power to regulate nearly any matter that has
an impact on interstate commerce. However, the 535 men
and women that make up the 112th Congress
have neither the time nor the expertise to become
involved in the speci�ics of drafting regulatory rules
for each federal agency. What Congress has done instead
is to create administrative agencies to oversee
or carry out speci�ic governmental functions and then
empower those agencies to create the rules by
which they will operate. The same holds true for the
executive branch of government, where the
president uses administrative agencies to help carry out
the responsibilities of the of�ice.
When an agency is created, Congress gives the agency the
power to draft its own agency rules—the
guidelines under which the agency operates and that must

be followed by persons over whom the
agency is given regulatory powers. When federal agencies
enact rules, they must follow the guidelines
set forth in the Administrative Procedure Act (APA),
which speci�ies the procedures agencies must
follow in promulgating new rules. As long as an agency
creates rules in accordance to the
Administrative Procedure Act, such rules have the force of
law.
Agencies have two main purposes: assisting in carrying
out vital government functions and exerting
regulatory control. They are the instruments through which
Congress and the president institute
policies and implement government regulation. As both
government and government regulation have
steadily grown, starting in the �irst half of the 20th
century, agencies, as the instrumentality of that
growth, have likewise swelled in size and power. While
the titular seat of power may rest with
legislative and executive branches of government, it is
administrative agencies that carry out the day-to-
day operation of governmental regulatory and service
functions, and they often take on a life of their
own.
7/2/2019 Print
.2,sec9.3,sec9.4,se… 4/49
5.2 The Administrative Procedure Act
An independent federal agency is created through an act

of Congress that establishes the agency and empowers it
to perform whatever duties Congress
speci�ically delegates to the agency. The actual creation
of the agency and the scope of its authority are detailed
in the enabling legislation—the act of
Congress that creates the agency. The details of the
agency's operation are left to the agency, which creates its
own rules in accordance with the guidelines
set forth in the 1946 Administrative Procedure Act (APA).
The APA gives agencies broad rulemaking powers, as long
as they act within the guidelines that
the APA provides. Federal executive agencies are usually
created by presidential order. Like independent agencies,
executive agencies are also subject to the
guidelines of the APA.
What relevance does this have to you as a
businessperson? One effect could be that if an act by an
administrative agency exceeds the powers given to it by
its enabling legislation, and this impacts your business,
then the act by the administrative agency is unenforceable.
Rulemaking Requirements
Under the Administrative Procedure Act, agencies have the
power to create rules that have the force of law provided
that the guidelines of the APA are
observed. The basic requirements that all federal agencies
must observe in rulemaking are as follows:
Giving notice to the general public that a new rule or
rule change is being considered
by publication of the proposed rule in the Federal
Register
Providing an opportunity for all interested parties to

participate in the rulemaking
process by conducting public hearings and giving all
interested parties a reasonable
opportunity to voice their views on the proposed new rule
or rule change
Publishing in the Federal Register a draft containing the
essential factors relating to the
proposed rule and its purpose at least 30 days before the
rule is to take effect
Once the requirements of the APA have been met, the
proposed rule takes effect on its proposed effective date
and has the force of law.
Limits on Administrative Agencies
As previously noted, federal agencies have far-reaching
powers within the areas that they oversee. A congressional
grant of authority to an agency often
includes the ability to carry out investigations, create rules
that are the functional equivalent of statutes, hold hearings
to adjudicate alleged violation of
agency rules, and assess punishment (usually by way of
�ines) to those adjudicated to be in violation of the
agency's rules. Agencies with such powers, such
as the Internal Revenue Service, can act as legislator,
police, judge, and jury.
While this concentration of power leads to the swift
administration of justice, the average citizen facing an
administrative hearing may take comfort in the
knowledge that both agency rules and most agency
decisions are subject to judicial review on any of the
following grounds:

The agency acted beyond the scope of its authority under
the agency's enabling act;
The agency misinterpreted federal law (including its
enabling act) in its rulemaking
or in the adjudication of any matter before the agency;
Agency action violates the U.S. Constitution or any
federal law; or
Agency rules or the �indings of administrative law judges
are arbitrary or capricious.
Agency rules and procedures, as well as the adjudications
by administrative law judges of agency hearings conducted
as informal trials, are upheld by the
courts as long as they meet the noted requirements.
7/2/2019 Print
.2,sec9.3,sec9.4,se… 5/49
Pablo Martinez Monsivais/Associated Press
Members of the president's cabinet direct
executive agencies such as the
Departments of State, Justice, and Homeland
Security.
5.3 Types of Administrative Agencies
Federal agencies fall into two basic categories: independent
and executive. Independent agencies are created by
Congress to assist it in exerting regulatory
control or to carry out governmental administration. Once

created, these agencies are headed by a director who is
appointed by the president and
con�irmed by the Senate. In order to distance these
agencies from the political process, independent agency
directors serve for set terms that are staggered
so as to prevent any given administration from having too
great an impact on such agencies through presidential
appointments.
Independent Federal Agencies
Independent federal agencies can wield tremendous
power. Congress often imbues these agencies with quasi-
judicial, quasi-legislative, and quasi-executive
powers: they create their own rules (a legislative power),
enforce these rules and conduct investigations (executive
powers), and adjudicate disputes relating
to these rules or their applications in administrative
hearings similar to trials (a judicial power). Administrative
law judges (ALJs) preside over hearings,
rule on issues of evidence, decide the outcome of cases,
and write opinions. Independent agency directors are
appointed by the president and con�irmed by
the Senate.
Independent agencies perform a vital function in areas
where speci�ic expertise is a requirement in order to
perform a governmental function or regulate a
speci�ic business. They include the Central Intelligence
Agency, the Environmental Protection Agency, the Equal
Employment Opportunity Commission, the
Federal Communications Commission, the Interstate
Commerce Commission, the Federal Trade Commission, the
Nuclear Regulatory Commission (NRC), and
the Securities and Exchange Commission, among many
others. Although Congress may have the right to regulate

aviation (because of aviation's impact on
interstate and international commerce), the civilian and
military use of nuclear energy, and intelligence gathering,
few senators or representatives have the
highly specialized knowledge necessary to effectively
regulate any of these areas. Rather than regulating these
areas directly, Congress can set up agencies
staffed with experts who can promulgate rules by relying
on their superior knowledge of the �ields they regulate or
operate in, with appropriate
congressional oversight. Consider the following examples.
1. The Nuclear Regulatory Commission (NRC),
concerned about safety in the nation's nuclear
power generating stations, wishes to impose
new
safety regulations affecting such power-generating
plants. After issuing a notice to the
general public that it is considering safety
rule changes,
the agency conducts hearings from interested persons in
the industry as well as from the general public
for a period of 60 days. At the
conclusion of thesehearings, it decides that it
would be in the best interest of the
industry to ban the sale of alcoholic beverages in
counties
where nuclear generating plants are located. It
then publishes a copy of the proposed regulation as
well as a general statement of the need for
such regulation in the Federal Register 30 days before
the regulations are to take effect. After
the effective date of the regulations, it is
challenged in a federal district courtof appeals
by liquor store owners in affected counties.
What is the result?

2. In the last example, assume that the NRC
followed the same procedure and promulgated a
rule that forbade nuclear generating plant
workers
from working with a blood alcohol level of .05%,
subjectingviolators to a �ine of $5,000. Is
such a regulation likely to be upheld if it
is
challenged in court? Explain.
3. The Federal Communications Commission,
concerned with the increasingviolence and hatred
depicted in the popular media, decides to
consider
new rules affecting the broadcasting of material of a
violent, sexual, or hateful nature. After
following the established procedures for
rulemaking
under the APA, it promulgates the following
new rules:
A. Material of a violent or sexual nature
can be broadcast only between the hours of
12:00 a.m. and 6:00 a.m.;
B. Music that advocates physical violence, the
degradation of women, or racial bigotry
cannot be broadcast at any time.
Will thesetwo regulations withstand courtchallenges?
Explain.
Executive Agencies
Federal agencies have also been created to assist the

executive branch in carrying out
its responsibilities. Notable executive branch agencies
include the Federal Bureau of
Investigation (Justice Department), the U.S. Customs
Service (Treasury Department),
the Food and Drug Administration (Health and Human
Services Department), the
Bureau of Indian Affairs (Interior Department), the
Immigration and Naturalization
Service (Justice Department), the Secret Service (Treasury
Department), the Federal
Aviation Administration (Transportation Department), and
the Social Security
Administration (Health and Human Services Department),
to name only a few.
Consider the following example.
The Federal Aviation Administration wants to
institute new safety
regulations relating to the use of drugs and
alcohol by pilots in civil
aviation. After conducting a study, the agency
decides that it would be in
the best interest of the general public to begin
weekly random drug testing
of all airline pilots effective immediately. At
the direction of the agency
7/2/2019 Print
.2,sec9.3,sec9.4,se… 6/49

director, the FAA sends out notices to all airlines
that a new drug testing program is now in
effect. Is this regulation validunder the
facts given? Explain.
Unlike independent agencies, executive agencies are under
the control of the president, who can appoint and remove
their directors at will. Executive
agency directors, including members of the president's
cabinet, serve at the pleasure of the president. These
agencies are, therefore, much more responsive
to political issues and subject to the winds of political
change, at least at the top levels. Nonetheless, most
agency workers are civil servants, not political
appointees, and enjoy the relative job security that status
conveys. Thus, while the heads of executive agencies may
come and go with changing
administrations, the bureaucracy itself is well entrenched
and grows yearly as new agencies are created and existing
agencies expanded to help implement
government goals and programs.
StateAgencies
Agencies are used not only by the federal government but
also by state governments. State administrative agencies
are set up to assist the executive and
legislative branches to carry out their responsibilities.
States use agencies to assist with such matters as the
administration of workers' compensation, social
services, tax collection, and the regulation of business. For
example, each state has a tax division that not only
oversees the collection of state taxes but also
has a component with hearing boards that hold "trials" or
hearings presided over by government ALJs. There is also
an appeals component wherein the

loser can take the tax issue to another level in the same
agency. The decisions of the hearings are published and
become stare decisis for further hearings.
Businesses can easily consult these matters to see the
current state of the law.
Workers' Compensation Boards
Because workers' compensation is such an important
business-related topic, this section will focus on a
"typical" workers' compensation board and how it
makes law, but keep in mind that each state creates its
own workers' compensation law, so the rules discussed
next vary throughout the United States. If
you want to view your own state's workers' compensation
rules and procedures, search the words "workers'
compensation State C." The Colorado workers'
compensation can be found here
(http://www.colorado.gov/cs/Satellite/CDLE-
WorkComp/CDLE/1240336932511) ; Utah at
laborcommission.utah.gov; and so on.
Each state's website is detailed and provides information
unique to its systems and rules. For an overview, the U.S.
Small Business Administration website
sets out links for business managers looking for workers'
compensation information throughout the states found here
(http://www.sba.gov/content/workers-
compensation) .
How Workers' Compensation Boards Make Law
In the early 1900s, when the United States had a large
industrial base, many employees who were injured or
killed at work, or their families, could not pay
their medical expenses and often lost their jobs if their
injuries were serious. Workers' compensation laws serve an

important social and political purpose in
that they force employers to pay into an insurance fund
to guarantee that employees will have medical and hospital
coverage for injuries or death on the
job. The trade-off is that the employee cannot sue the
employer for negligence, a proceeding that would most
likely result in much larger monetary
compensation for the employee than the awards available
through workers' compensation.
When an employee is injured at work, the employee
submits any medical bills to the employer and the bills
are then paid. On occasion, an employer may
refuse to pay an injured employee's claim. Suppose, for
example, that an employee suffers a heart attack at work.
The employer may argue that the injury is
not work related, and thus the employer is not liable. The
employee, on the other hand, may disagree, contending
that the job caused his heart attack,
making him eligible for bene�its. Such a workers'
compensation claim is deemed controverted. When this
occurs, the employee may request a hearing
before a workers' compensation administrative judge. At
the hearing there will be doctors, the employer, the
employee, and the judge, who will listen to the
"testimony" and render a decision about whether or not
the employee is entitled to payment. Thus, the hearing
resembles a trial in which there are
witnesses and testimony and a decision by a judge.
Because the hearing is "like a trial" but does not have all
the formalities of a trial, it is called quasi-
judicial. The judge's decisions are written down and can
serve as precedent, thereby providing some predictability.
In this way, workers' compensation
hearings "make law." The following case excerpt (with
citations omitted) is an example of a controverted matter

before the New York Workers'
Compensation Board.
Cases to Consider: Richman v. Workers'
Compensation Board
Richman v. Workers' Compensation Board, 936 N.Y.S. 2d
722 (Jan. 2012)
Appeal from a decision of the Workers' Compensation
Board, �iled August 18, 2010, which ruled that claimant
sustained a compensable
injury and awarded workers' compensation bene�its.
On August 10, 2007, claimant, a court reporter, was found
unconscious at her workplace and rushed to a local
hospital, where she was
diagnosed with a subarachnoid hemorrhage caused by a
ruptured basilar artery aneurysm. Although claimant
survived, she apparently
remains unable to communicate. A workers' compensation
claim subsequently was �iled on her behalf, and the
employer and its workers'
compensation carrier (hereinafter collectively referred to as
the employer) controverted the claim, asserting that the
ruptured aneurism was
not related to claimant's employment. Following a hearing,
a Workers' Compensation Law Judge (hereinafter WCLJ)
found that the employer
did not overcome the presumption of compensability set
forth in Workers' Compensation Law § 21 (1). The
Workers' Compensation Board
af�irmed the WCLJ's decision, prompting this appeal by
the employer.
http://www.colorado.gov/cs/Satellite/CDLE-

WorkComp/CDLE/1240336932511
http://www.sba.gov/content/workers-compensation
7/2/2019 Print
.2,sec9.3,sec9.4,se… 7/49
We af�irm. Pursuant to Workers' Compensation Law § 21
(1) a presumption of compensability exists where, as here,
an unwitnessed or
unexplained injury occurs during the course of the affected
worker's employment. "The employer may overcome the
presumption by
presenting substantial evidence to the contrary."
Here, we �ind no basis upon which to disturb the Board's
conclusion that the employer did not present suf�icient
evidence to overcome the
presumption. The record establishes that, prior to
claimant's collapse, she was under considerable stress at
work and her workplace was
loud and overheated. While the employer's expert opined
that claimant's ruptured aneurysm was unrelated to her
employment, the Board
agreed with the WCLJ that the expert's report and
testimony were not credible—in large measure because he
was evasive when questioned
as to whether workinduced stress could raise a person's
blood pressure high enough to cause an aneurysm to
rupture. Notably, the expert
acknowledged that high blood pressure could be a factor
in the rupture of an aneurysm and conceded that he did
not know what claimant's

blood pressure was at the time the rupture occurred.
Contrary to the employer's argument, the Board, which "is
the sole arbiter of witness
credibility" was not required to wholly credit the expert's
opinion on this point simply because it was the only
expert proof presented. The
employer's remaining arguments on this point, to the
extent not speci�ically addressed, have been examined and
found to be lacking in
merit.
ORDERED that the decision is af�irmed, without costs.
Read the full text of the case here
(http://law.justia.com/cases/new-york/appellate-division-
third-department/2012/512356.html) .
Questions to Consider
1. What did the court mean by a "presumption of
compensability"? What does this mean?
2. How does the employer overcome this presumption? Did
the employer succeed in this case? Why or why not?
How Workers' Compensation Boards Determine
Payment
When an employee is injured on the job, the next step in
the process is for that employee to receive medical
attention. The doctor will make a determination
about the extent of the injury, deeming it either temporary
or permanent. For example, if the worker suffered a
broken arm, the injury is temporary; if the
worker suffered a spinal injury, the injury may be
permanent. In the case of permanent injuries, the doctor

(or doctors) will make an assignment of the
percentage of injury, for example, 32% permanent partial
disability. That number will then be converted using the
state's permanent partial disability
schedules to an actual dollar amount. For example, a right
index �inger under the schedule might be worth $2,500.
The complexities of determining a
workers' compensation award are illustrated in the excerpts
from the following case, which shows the ways in which
claimants are classi�ied and paid:
Cases to Consider: Schmidt v. Falls Dodge, Inc.
Schmidt v. Falls Dodge, Inc. New York State Court of
Appeals (2012)
Workers' Compensation Law §15(6) provides that
compensation for any disability, partial or total, shall not
exceed a �ixed maximum per
week. At issue in this case is the application of the cap
when an employee has received several awards for
different injuries, at least one of
which is a so-called "schedule loss of use" award being
paid periodically pursuant to the pre–2009 version of
Workers' Compensation Law
§25. We hold that in such cases an employee's total
weekly payment may not exceed the cap. The schedule
award is not nulli�ied by the
other awards, but must be deferred until the time comes
when the cap will not be exceeded.
I
Plaintiff worked as a collision shop technician, repairing
automobiles. He suffered several injuries on the job, of
which three, all occurring in

2005, are relevant to this appeal. On February 21, he
slipped on ice, injuring his hip and back. On March 18,
he suffered a lower back sprain.
He left his job on June 27, and later reported hearing
loss beginning on that date, attributable to loud noise at
his place of work. He applied
for and received workers' compensation bene�its for all
three injuries.
For the hip and back injuries, the workers' compensation
carrier for claimant's employer was directed, in separate
awards, to pay claimant a
total of $400 per week—the maximum allowed, at the
relevant time. . . . Though the disabilities caused by the
hip and back injuries were
designated as "temporary," nothing in the record indicates
that these $400 weekly payments have ever been
discontinued.
On September 21, 2007, a Workers' Compensation Law
Judge made an award for the hearing loss claim. Claimant
was found to have a
permanent partial disability, entitling him to a schedule
loss of use award under Workers' Compensation Law §15.
. . .
The Judge in this case found that claimant's hearing loss
entitled him to 32.145 weeks of bene�its at the rate of
$400 per week; the award
speci�ied a period from September 27, 2005 (the "date of
disablement" found by the Judge) to May 10, 2006. After
considering the carrier's
objections, the Judge concluded on November 23, 2007
that the schedule award was "currently payable in full,"
notwithstanding the fact that
claimant had received during the period in question, and

was still receiving, $400 per week for his other claims.
The Judge found the issue
to be controlled by Matter of Miller v. North
Syracuse Cent. School Dist. in which the
Appellate Division held that because a schedule award
"is not allocable to any particular period," it "cannot be
deemed to overlap with" a temporary total disability
award.
http://law.justia.com/cases/new-york/appellate-division-third-
department/2012/512356.html
7/2/2019 Print
.2,sec9.3,sec9.4,se… 8/49
II
Workers' Compensation Law § 15(6)(a) says, in relevant
part:
Compensation for permanent or temporary partial disability,
or for permanent or temporary total disability due to an
accident
or disablement resulting from an occupational disease that
occurs . . . on or after July �irst, nineteen hundred
ninety two [and
before July one, two thousand seven], shall not exceed
four hundred dollars per week.
The Board and the Appellate Division have held in this
case that claimant was entitled to receive $800 per week
for a period of roughly 32

weeks. That result cannot be squared with the cap
imposed by section 15(6). The Appellate Division's
decision in Miller, which upheld a
similar award, is incorrect and should not be followed.
We therefore hold that periodic payments of a schedule
loss of use award must be deferred to the extent that
those payments, when
combined with payments of another disability award, would
exceed the cap imposed by Workers' Compensation Law §
15(6). We hold no
more than this, and do not decide what implications, if
any, our holding may or may not have for cases governed
by the 2009 amendment to
section 25(b): that section, as amended, now says that
schedule loss of use awards "shall be payable in one
lump sum, without commutation
to present value upon the request of the injured
employee."
Accordingly, the order of the Appellate Division should be
reversed, with costs, and the case remitted to the
Appellate Division with
directions to remand it to the Workers' Compensation
Board for further proceedings in accordance with this
opinion.
(http://www.nycourts.gov/ctapps/Decisions/2012/May12/7
6opn12.pdf) .
1. What different injuries did this employee suffer at
work, and what were his workers' compensation awards for
each?

2. This case is concerned with the cap that a worker may
receive for workers' compensation. Why does the state
impose a cap? And what
possible effect does this have on an employee?
Workers' Compensation as the Exclusive Remedy
As mentioned above, workers' compensation serves an
important social function by guaranteeing that workers hurt
on the job are taken care of medically
and that their bills are paid. There is a trade-off for this
guarantee, however. Employees are not allowed to sue
their employers for injuries on the job that
are a result of the employer's negligence. Thus, we say
that workers' compensation is the exclusive remedy, meaning
it is the only remedy available to an
injured worker against an employer. If an employer does
not put up an adequate guard around a machine and an
employee is seriously maimed, the
employee's monetary award is limited to workers'
compensation rather than a lawsuit in court. (However, the
employee in such a situation could sue the
manufacturer of the machine, who, of course, is not the
employer.) (See Chapter 8, Negligence, Strict
Liability, and Product Liability
(http://content.thuzelearning.com/books/AUBUS670.12.2/sectio
ns/sec8.1#sec8.1) .) This is the maximum amount that an
employee could recover under workers'
compensation, whereas in a tort lawsuit, the same injury
might be worth millions of dollars, �iguring in punitive
damages, compensation for emotional
distress, and so forth. There is usually no choice; workers'
compensation is the only remedy afforded to employees
against employers, except in rare
exceptions.

One of those exceptions is if the employer intentionally
injured the worker, as discussed in the Washington State
case Brame v. Western StateHospital,
excerpted here with citations omitted:
Cases to Consider: Brame v. Western StateHosp.
Brame v. Western StateHosp., 136 Wash. App. 740,
150 P.3d 637 (2007)
In 1911, the legislature passed the Industrial Insurance
Act, which provided injured workers a system of certain,
no-fault compensation for
injuries on the job while granting employers immunity
from civil suits by workers. The act generally bars
employee lawsuits against
employers for on-the-job injuries.
This bar is subject to a limited exception when an
employer intentionally injures an employee:
If injury results to a worker from the deliberate intention
of his or her employer to produce such injury, the worker
or
bene�iciary of the worker shall have the privilege to take
under this title and also have cause of action against the
employer as
if this title had not been enacted, for any damages in
excess of compensation and bene�its paid or payable
under this title.
This exception prevents employers who engage in
egregious conduct from burdening the industrial insurance
risk pool. We interpret the
deliberate intention exception narrowly. Neither gross

negligence nor failure to observe safety laws or procedures
rise to the level of
deliberate intention. Even an act that has a substantial
certainty of producing injury is insuf�icient to show a
deliberate intent to injure.
The Birklid Test
http://www.nycourts.gov/ctapps/Decisions/2012/May12/76opn1
2.pdf
https://content.ashford.edu/books/AUBUS670.12.2/sections/sec
8.1#sec8.1
7/2/2019 Print
.2,sec9.3,sec9.4,se… 9/49
Until 1995, courts found deliberate intention only in cases
where an employer or its agent physically assaulted an
employee. But in Birklid
our Supreme Court interpreted the exception to include
conduct other than physical assaults. In that case, the
plaintiffs alleged that a
supervisor reported to management that fumes from a new
product were making employees sick; management denied a
request for
improved ventilation before increasing use of the product;
workers became ill after the product went into full
production; and Boeing knew
that the symptoms were the result of exposure to the
product. The court, �inding that the employees had
alleged suf�icient facts to �ind
deliberate intent on the part of Boeing to injure them,

held that deliberate intention exists where the employer
(1) has actual knowledge
that an injury is certain to occur and (2) willfully
disregards that knowledge.
***
Since Birklid, the Supreme Court continues to emphasize
the need to show actual, not substantial, certainty. For
example, in Vallandigham
employees alleged that the school district deliberately
intended to injure them because it willfully disregarded its
knowledge that a severely
disabled special education student would injure them. The
employees alleged that over the course of a school year
the student had injured
staff and other students about 96 times, resulting in 7
workers' compensation claims. The school district had
taken numerous steps to try to
modify the student's behavior, including implementing a
behavior plan, hiring a one-on-one aide, and creating an
isolation space. The court
rejected the employees' claims, holding that they met
neither prong of the Birklid test.
The court emphasized that the �irst prong "can be met in
only very limited circumstances where continued injury is
not only substantially
certain [to occur] but certain to occur." Foreseeability is
not enough to establish deliberate intent to injure an
employee, nor is an admission
that injury would probably occur. And the plaintiffs' case
could not meet this test because "the behavior of a child
with special needs is far
from predictable"; no one knew that the violent behavior
would not stop as quickly as it began. This was unlike

Birklid where the employer
knew that continued exposure to the chemical would make
employees sick absent increased ventilation.
In addressing the second prong of the test, the court
disapproved of two Court of Appeals cases that considered
whether the steps the
employer took to prevent injury were reasonable and
whether they were effective. These tests, according to the
court, adopted, at least in
part, a negligence standard; the court again emphasized
that the deliberate intent exception does not apply in
cases of negligence, even gross
negligence.
The Employees contend that the trial court erred in
granting the Hospital summary judgment because issues of
material fact exist as to
whether the Hospital deliberately intended to injure them.
They argue that the Hospital knew with certainty that
patients would assault staff
and that it willfully disregarded this knowledge. They
point to the history of patient assaults on staff as proof
that the Hospital knew with
certainty that patients would assault staff in the future.
And they assert that the Hospital willfully disregarded this
knowledge because it did
not effectively train staff in defending themselves against
patient assaults and instead implemented a non-violence
initiative aimed at
eliminating the use of physical restraint of patients.
Even taking the facts in the light most favorable to the
Employees, they cannot meet the stringent requirements of
the Birklid test. The
Employees do not contend that the Hospital knew that any

speci�ic assault would occur. They rely instead on the
history of patient-to-staff
assaults. But past patient-to-staff assaults demonstrate, at
the most, that such assaults are foreseeable, not that they
are certain.
Foreseeability is not suf�icient to establish deliberate
intent to injure an employee. In Vallandigham, 96 prior
assaults by one student were
not suf�icient to predict with absolute certainty any
particular future assault. Similarly, here the past assaults
of hospital patients on hospital
staff are not suf�icient to create a certainty that any
individual patient will assault any individual staff member.
(http://caselaw.�indlaw.com/wa-court-of-
appeals/1432625.html) .
1. Under what circumstances may an employee sue his or
her employer for injuries sustained at work under this
court's theory?
2. Why does this court make an exception to the rule,
allowing employees to sue their employers? Do you agree
with this policy shift?
Employers' Duties Under Workers' Compensation
Law
Employers have many responsibilities under workers'
compensation too numerous to list here. Among the most
important requirements, however, are that
the employer must have in place insurance, either through
a private carrier or through the state fund. In New York,

for example, an employer's failure to
provide workers' compensation coverage is a crime,
punishable by �ines and/or criminal prosecution. If an
employer does not have coverage and an
employee �iles for workers' compensation, the employer
will be liable for the actual cost of medical care and
compensation payments, in addition to
penalties. If a corporation has failed to secure workers'
compensation coverage, the president, secretary, and
treasurer of the corporation are personally
liable for the medical care, compensation payments,
penalties, and possible criminal prosecution. This applies
to situations in which employers might hire
someone "under the table." If that person is injured and
is not listed on the books, there are numerous workers'
compensation violations associated with
such conduct, some of them criminal.
Workers' compensation rules are detailed, but each state
has a website devoted to the issue. On it, the
responsibilities of the employer are clearly spelled
out.
http://caselaw.findlaw.com/wa-court-of-appeals/1432625.html
7/2/2019 Print
.2,sec9.3,sec9.4,s… 10/49
Key Terms
Click on each key term to see the de�inition.

administrative agencies
ns/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.
2/sections/fm/books/AUBUS670.12.2/section
State and federal governmental entities set up to assist
with the smooth operating of areas of business and
industry and to provide special expertise.
administrative law judge
Government employee (state or federal) who presides over
agency hearings and writes opinions upon the conclusion
of the hearing that resemble a
judicial decision and are therefore quasi-judicial.
Administrative Procedure Act
Speci�ies the procedures that administrative agencies must
follow in promulgating new rules.
agency rules
Guidelines under which an agency operates and that must
be followed by persons over whom the agency is given
regulatory powers.

controverted
Refers to a workers' compensation case in which the
employer refuses to pay following a worker's injury or
death.
exclusive remedy
The concept that employees may not sue their employers
for injuries or death on the job but can seek a remedy
only through the workers'
compensation process.
executive agencies
Agencies that have been created to assist the executive
branch in carrying out its responsibilities.
independent federal agencies
Agencies created by Congress to assist it in exerting
regulatory control or to carry out governmental
administration.

permanent partial disability
A determination in workers' compensation that the
disability suffered by the employee covers part of the
body but will be permanent, thereby
converting it to a "schedule loss of use award." The
injury is given a �ixed number of lost weeks'
compensation according to the bodily member
injured.
private insurance carrier
An insurance carrier for an employer to cover matters like
workers' compensation claims.
state fund
A general statewide fund to which employers contribute
and which then pays out workers' compensation claims.
workers' compensation board
A state administrative agency that adjudicates cases
requesting compensation to workers for death or injury on

the job.
https://content.ashford.edu/books/AUBUS670.12.2/sections/fm/
books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sect
ions/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.
12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AU
BUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/b
ooks/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/secti
ons/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.1
2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#

2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#

2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#
2.2/sections/fm#
7/2/2019 Print
.2,sec9.3,sec9.4,s… 11/49
Chapter 5 Flashcards

Critical Thinking and Discussion Questions
1. What is the basic purpose of government agencies?
2. What is the purpose of state administrative agencies?
3. What are the basic Administrative Procedure Act
requirements that agencies must observe in rulemaking?
4. What are the quasi-judicial and quasi-legislative powers
that some agencies are given in their enabling legislation?
5. Where does one look to �ind the exact power that
Congress has given to an independent federal agency?
6. Although agency heads change from time to time as
part of the political process, most agency employees are
unaffected by changes in political
administrations. Why?
7. Julian works in a shoe manufacturing plant putting the
soles on leather shoes using a machine similar to a lathe,
a rotating metal pipe. On the day in
question, Julian was preparing to place the leather into
the machine when a piece of his clothing became caught
on the lathe, pulling on his arm and
causing severe injuries. His employer refuses to pay for
any of his injuries, claiming that the injury is completely
the fault of Julian's negligence. What
options for remedy would Julian have? Assume that
another employee pushed Julian into the machine, and that
is why he suffered the injuries. Now
what would Julian's options for remedy be? Now assume
the employer pushed him into the machine, and that is
the sole reason he suffered the
injuries. In this situation what would Julian's options for

remedy be?
State and federal governmental entities set up to assist with the
smooth operating of areas of
C l i c k c a rd t o s e e t e r m �
Choose a Study ModeView this study set
https://quizlet.com/
https://quizlet.com/14643625/business-law-for-managers-
chapter-5-flash-cards/
7/2/2019 Print
.2,sec9.3,sec9.4,s… 12/49
Unit II
Criminal Law and Torts
Comstock/Thinkstock
Chapter 6: Criminal Law
In this chapter you will:
Understand the elements and classi�ications of different
types of crime.
Identify defenses to criminal liability.
Chapter 7: Intentional Torts

Understand the elements and classi�ications of intentional
torts.
Chapter 8: Negligence, Strict Liability, and Product
Liability
Understand the elements of negligence and use of the
"reasonable person standard."
Identify defenses to negligence.
Distinguish between strict liability and product liability.
7/2/2019 Print
.2,sec9.3,sec9.4,s… 13/49
Chapter 9
Contracts, Part I: Introduction and Formation
As a manager, you may �ind yourself dealing with
contracts on a regular basis. For instance, contracts may
be presented to you for signature or you may be
asked to hire an employee. Perhaps you will enter into
contracts to purchase goods for the business or to arrange
insurance coverage. In any event,
understanding the mechanics of contract law is essential to
effectively carry out your obligations.

This chapter presents an overview of contract law. It is
not meant to take the place of legal advice, nor will it
make you an expert in contract law. What you
should derive from these materials is an appreciation of
the complexities of contract law and a mindset for acting
preventively and strategically in your
business dealings. Warding off the possibility of a contract
lawsuit is a cost-saving measure. Furthermore, you should
acquire an understanding of black
letter law, that is, the theories of law in the context
of business and employment contracts.
7/2/2019 Print
.2,sec9.3,sec9.4,s… 14/49
9.1 What Law Governs Your Contract?
Contract law is governed by either the common law or
the Uniform Commercial Code (UCC). As a student, the
�irst question you should ask yourself when
contemplating a contract problem is: What body of law is
this contract under? Fortunately, the answer is relatively
simple:
If the contract involves the sale of goods, it is governed
by the Uniform Commercial Code (whether the people
involved are merchants or
nonmerchants); and
If the contract deals with anything other than sales of
goods (e.g., real estate, insurance, or personal services),

then it is governed by the common law.
As a manager, you will need to know which body of law
applies to a particular contract. For example, warranties
apply to goods sold pursuant to the UCC
but do not apply to contracts under the common law.
When you hire an employee to join your staff, you enter
into a contract that is governed by principles
of common law. Selling food in your restaurant, however,
creates a contract governed by the UCC. What difference
does it make which set of rules applies?
In the restaurant example, the UCC covers a warranty
about the quality of goods, whereas the common law does
not. An employee could not sue for breach
of warranty for the quality of his or her of�ice, for
example, but could for the quality of the food in your
restaurant. Table 9.1 provides some examples of
types of contracts covered under each body of law. Many
other differences between the two regimes will be
examined throughout this chapter.
Table 9.1: Contracts governed by common law or
the Uniform Commercial Code
Examples of Common Law Contracts Examples of
Uniform Commercial CodeContracts
Real estate (e.g., selling a house) Sale of goods (e.g.,
purchasing an automobile or of�ice equipment) between
merchants or
nonmerchants
Insurance
Personal services (e.g., hiring an employee or
professional)

Sometimes a contract comprises both goods and services.
For example, if you hired people to build your house,
they would need to supply material goods,
such as the bricks, cement, wiring, and wood, as well as
services, that is, constructing the building. What law
governs such a contract? The answer lies in the
predominant test, which asks: Which is greater, the cost
of the goods (UCC) or the cost of the services (common
law)? If the cost of the goods is greater,
then the contract is governed by the UCC; if the cost of
the services is greater, then the contract is governed by
the common law. For example, suppose that
a buyer hires a contractor to construct a new factory. The
goods to build the new plant cost $450,000 and the cost
of the contractor's services total $1
million. Under the predominant test, the cost of the
services is greater, and therefore, the contract is governed
by the common law.
7/2/2019 Print
.2,sec9.3,sec9.4,s… 15/49
The Nature of Contract Law
9.2 Elements of a Contract
Although all contracts contain promises that are
enforceable, not all promises rise to the level of a
contract. Rather, only promises that meet certain criteria
are considered to be valid contracts. For a

valid contract to be formed that is enforceable by a court,
each of the following criteria must be
present:
1. Offer
2. Acceptance
3. Consideration (something of legal value given and
received by each party to the contract)
4. Capacity (mental capacity or legal ability)
5. Legality (of purpose)
We will discuss each one of these elements in the
following sections. The phrase enforceable by a
court is signi�icant because it means that a court can
assess monetary damages against a party who
does not comply with the terms of the agreement. Thus, it
is important to recognize these de�ining
elements, for example, when a seemingly innocent
statement becomes a binding statement leading
to contract formation.
Because an offer and acceptance are sent over
electronically by email, or in a Tweet or text
message, they are in a tangible form or in writing. As
such, the fact that it is an electronic form
does not affect contract formation. What matters is that it
is in writing—clearly an advantage over
contracts made by the parties that are oral; for a writing,
that means the terms are stated in the correspondence
itself.
What has changed with regard to electronic contract

formation is the signature. All states but three (New York,
Illinois, and Washington) have adopted the
Uniform Electronic Transactions Act. Although each state's
law as adopted has different components, the following is
an example of Montana's law:
30-18-104. Use of electronic records and electronic
signatures—variation by agreement.
(2) This part applies only to transactions between
parties[,] each of which has agreed to conduct transactions
by electronic means. Whether
the parties agree to conduct a transaction by electronic
means is determined from the context and surrounding
circumstances, including the
parties' conduct.
(3) A party that agrees to conduct a transaction by
electronic means may refuse to conduct other transactions
by electronic means. The right
granted by this subsection may not be waived by
agreement.
(4) Except as otherwise provided in this part, the effect
of any of its provisions may be varied by agreement. The
presence in certain
provisions of this part of the words "unless otherwise
agreed," or words of similar import, does not imply that
the effect of other provisions
may not be varied by agreement.
(5) Whether an electronic record or electronic signature
has legal consequences is determined by this part and
other applicable law.
30-18-106. Legal recognition of electronic

records, electronic signatures, and electronic
contracts.
(1) A record or signature may not be denied legal effect
or enforceability solely because it is in electronic form.
(2) A contract may not be denied legal effect or
enforceability solely because an electronic record was used
in its formation.
(3) If a law requires a record to be in writing, an
electronic record satis�ies the law.
(4) If a law requires a signature, an electronic signature
satis�ies the law.
Some states make the law expressly apply to commercial
as applied to personal transactions. Others also state that
an electronic signature is not applicable
to documents such as wills.
ESIGN is a federal version of the same law that was
enacted by Congress to facilitate the use of electronic
records and signatures in interstate or foreign
commerce. It holds that a contract relating to such a
transaction may not be denied legal effect, validity, or
enforceability solely because an electronic
signature or electronic record was used in its formation.
(See U.S. Government Printing Of�ice (GPO), Public
Law 106-229—Electronic Signatures in
Global and National Commerce Act
(http://www.gpo.gov/fdsys/pkg/PLAW-
106publ229/content-detail.html) .)
Offers

The two parties to a contract are the offeror (the person
making the offer) and the offeree (the person who has the
power to accept the offer). Suppose an
offeror says, "I will sell you a basset hound puppy." This
offer creates in the offeree the power of acceptance.
Therefore, one can say that the offeror is the
http://www.gpo.gov/fdsys/pkg/PLAW-106publ229/content-
detail.html
7/2/2019 Print
.2,sec9.3,sec9.4,s… 16/49
party who makes the offer, and the offeree is the party
who has the power of acceptance. Imagine that you wish
to purchase a new copier machine for your
business and that you have been instructed to contact a
particular supplier, which we will call Acme Business
Supply Company. You would most likely begin
by calling and inquiring about machine types and prices.
Information would be exchanged about your business needs
and what machines would meet those
needs. Although informal, these discussions are called
preliminary negotiations. Preliminary negotiations are the
conversations, e-mails, telephone
conversations, and other dialogue that occur before a
contract is created. Note that these talks are completely
unenforceable between the parties.
How, then, does one distinguish a preliminary negotiation

from a legally binding offer? An offer has three
characteristics that set it apart from a preliminary
negotiation. First, the language of an offer is de�inite
and certain. If you say to Acme Business Supply
Company, "I offer to buy the 123C Machine for $5,000,"
that language is considered de�inite and certain and
constitutes an offer because it clearly expresses the intent
to purchase the goods. Second, the
transaction between the parties must look like a contract
and not something else. This is called the objective test.
"Objective" means how it appears to a
hypothetical reasonable third party. Third, the offer must
be communicated to the offeree (see Table 9.2).
Table 9.2: Distinctions between a preliminary
negotiation and an offer
PRELIMINARY NEGOTIATION OFFER
Language "I am thinking about . . ." "I offer . . ."
"I might sell my goats . . ." "I agree to sell you my
goats"
"I am thinking about buying that car . . ." "I will buy
that car from you..."
Objective Test Does not look like the two parties are
entering
into a contract.
Appears to a reasonable third party that the two parties
are
entering into a contract.
Communication to the

Offeree
No offer is communicated. Offer is communicated.
Consider the following example: You opened your mail at
work today and received this offer letter.
Carl Beethoven Real Estate
Dear Customer:
As you are aware, I am the owner of a
substantial amount of real estate in the
Pocono Mountains. I am thinking about
retiring next
year and need to sell off a substantial portion of
my holdings. If you are interested, please
contact me.
Sincerely,
Carl
If you wrote back and said, "I accept," would you have a
contract with Carl? The answer is no. To have a contract,
you must �irst have an offer, and to have
an offer, the language must be de�inite and certain. The
language in Carl's letter "If you are interested" and "I am
thinking about" is instead vague and
noncommittal. Therefore, this dialogue opening is a
preliminary negotiation only.
Offers in Large Communicating Media
Sometimes, the language of an offer appears in a large
communicating medium. This is a site like a

newspaper, webpage, Tweet, or television
advertisement, which potentially has thousands of people
hearing or seeing the "offer." The problem is that when
thousands of people hear an offer
simultaneously, no one has the power of acceptance. And,
if no one has the power to accept, then it is not
considered an offer but rather a preliminary
negotiation, even if it is couched in language that is
de�inite and certain.
There is an exception to this rule, however. In these
situations, a message in a large communicating medium
does constitute an offer because the number of
potential offerees is limited. For example, if the offer
states, "First come, �irst served!" then only the �irst
person has the power of acceptance. Or, if the offer
limits the class of offerees to the �irst 100 callers, then
only 100 people have the power of acceptance. Another
example would be if it is a reward contract
offered by a local police department; then only the person
giving information leading to the arrest of the fugitive
would have the power of acceptance.
Once it has been established that an offer has been made,
four events may then take place, as illustrated in Figure
9.1.
Figure 9.1: Four events that can happen after an offer
In order for a contract to be made, an
offer must be accepted. If an offer is initially
rejected, a counteroffer can then be made
and, if accepted, lead to a contract.

7/2/2019 Print
.2,sec9.3,sec9.4,s… 17/49
Lapse
Lapse is the outcome that simply refers to the fact that an
offer does not last forever. After a certain amount of
time, the offer expires. How much time is
that? The answer is, it depends on the situation. In most
businesses, an offer is open for a reasonable amount of
time, say, two weeks. However, if the
business is a wildly �luctuating market, such as
stocks or commodities, the offer can lapse after only a
few seconds. An important exception to this rule is
the option contract, a frequently used and highly valuable
business tool. In an option contract, the offeree will pay
money to hold the offer open for a
certain amount of time.
Consider, for example, that the offeror agrees to sell the
offeree a $10 million printing press. The offeree is not
sure whether �inancing for the press is
available and needs to meet with bankers to determine if
he can obtain a loan. At the same time, the offeree does
not want the offeror to sell the press to
anyone else. In such a case, the offeree could pay a
certain sum, e.g., $1,000, to the offeror to hold the offer
open for 30 days contingent on getting a bank
loan. If the bank does make the loan, the offeree still has
the power of acceptance, but if the bank says no, then all
the offeree has lost is the $1,000.
Rejection and Counteroffer

In rejection, the offeror makes an offer to the offeree. The
offeree then either says "no," which is an express
rejection, or the offeree makes a counteroffer,
which is also a rejection of the original offer. In either
case, both responses negate the original offer and make
the offeree the offeror, as illustrated in Figure
9.2.
Figure 9.2: Rejection and counteroffer
This response by the offeree kills the original offer. Now
the original offeror becomes the offeree and has the
power to accept the offeree's offer of $75,000.
Revocation
In revocation, the offeror takes back the offer before the
offeree has time to accept. See Figure 9.3.
Figure 9.3: Offer revocation
7/2/2019 Print
.2,sec9.3,sec9.4,s… 18/49
Acceptance
Acceptance is one of the four events that can happen after
a valid offer, but it is the only one that leads to contract
formation (the second element). Suppose
the offeror said, "I will sell you a puppy for $200." If

the offeree says, "I'd love a puppy! I'll take it!" then he
or she has assented to the terms of the offer and
contract formation has begun.
The Mirror Image Rule
In the acceptance phase, it is signi�icant whether the
contract is governed by the UCC or by common law.
Under the common law, acceptance must mirror
the offer. For example, if you offer to sell me a house
for $450,000, I must use those exact terms in my
acceptance. Any deviation from the terms of the offer
in the terms of my acceptance constitutes a counteroffer,
not an acceptance. Under the common law, the rule for
acceptance is called the mirror image rule.
This means that all the terms in the offer must match
(mirror) all the terms in the acceptance. If the terms do
not match, the parties are still engaged in
preliminary negotiations. This is illustrated in Table 9.3
and in the examples that follow.
Table 9.3: Offer and acceptance
OFFER ACCEPTANCE
"I offer A and B and C." "I accept A and B and C." This is a
mirror image acceptance.
"I offer A and B and C." "I accept." (It is implied that A
and B and C
are included in the acceptance.)
This is a mirror image acceptance.
"I offer A and B and C." "I accept, but I want D, too." This
is not a mirror image acceptance but a

counteroffer; there is no contract formation.
"I offer you employment for six
months at a salary of $50,000."
"I accept, but I want health insurance, too." This is not a
mirror image acceptance but a
counteroffer; there is no contract formation.
Acceptance Under the UCC
Recall that the Uniform Commercial Code applies to
contracts involving the sale of goods. This is a law that
was adopted by all 50 states to make the sale of
goods from people in one state to another relatively
uniform.
Under the UCC, no mirror image acceptance is required.
If the offeree changes the terms of the offer, there may
still be a contract. If the parties are not both
merchants, the new terms in the acceptance become a
proposal that the offeror may accept or reject. If the
parties are both merchants, the new terms
automatically become part of the contract unless the
offeror objects or states that the offer can be accepted
only in mirror image fashion. We will look at
this rule in much more detail in Chapter 10
(chapter_10.htm;#ch10) , Contracts, Part II: The UCC.
After the Offer
SLIDE 1 OF 7
https://content.ashford.edu/print/chapter_10.htm;#ch10

7/2/2019 Print
.2,sec9.3,sec9.4,s… 19/49
Click here
(https://media.thuze.com/MediaService/MediaService.svc/conste
llation/book/AUBUS670.12.2/{pdfs}ch09.pdf)
for a pdf of this slideshow.
Consideration
Consideration is the third element required of all contracts.
Despite its importance to contract law and its long and
deep history, it has really become quite
archaic. As a result, we will discuss it only brie�ly. The
concept of consideration is what makes a gift different
from a contract.
To have consideration means that the promise by the
promisor gets the promisee to do something he or she
was not previously legally bound to do. For
example, if Glenda says to Bill, "I will give you $1,000
if you �ind my lost dog," the offer of $1,000 is causing
Bill to do something he has no legal obligation
to do. When Bill �inds the dog, his action is what
causes Glenda to promise the $1,000. We say that the
promise of the $1,000 caused Bill to �ind the dog,
and conversely, Bill �inding the dog is what caused
Glenda to promise the $1,000. A shorthand way to say
this is, the promise (of $1,000) induced the
detriment (�inding the dog), and the detriment (�inding
the dog) induced the promise (of $1,000).

Compare this scenario with the following: Suppose Glenda
said to Bill, a police of�icer, that she would give him
$1,000 to �ind her dog. Did the promise of
the $1,000 cause Bill to do anything he was not already
previously, legally bound to do? No. As a police of�icer,
he is already obligated to do many things,
including �inding lost dogs, so her promise did not cause
him to do something he wasn't already obligated to do;
thus, there is no consideration. Her
promise to give him the $1,000 is completely
unenforceable.
In a gift, the bestower might announce, "I am getting you
a new car for your birthday!" That statement is another
example of a completely unenforceable
promise. While the promise to get you a new car for
your birthday might cause you to do something that you
were not previously legally bound to do, such
as sell your current car (the promise caused the
detriment), selling your car is not why the promisor said
he would get you a new car, and so the detriment
did not cause the promise. Therefore, there is no
consideration, so if you sued your would-be benefactor
when your birthday came and went and no car
arrived in your driveway, you would lose in court because
a gift is not a contract. If that same person, however,
had promised, "I am getting you a new car
for your birthday if you get an A in your law class,"
then you would have a contract. What is the difference?
The promise to get you a car induced or caused
you to do something you were not previously, legally
bound to do (work for an A). And your getting the A is
what caused the gift giver to promise the car:
The car caused the A, and the A caused the car. Or
stated another way, the promise (of the gift of a car)
induced the detriment (earning an A), and the

detriment (earning an A) induced the promise (of the gift
of a car).
Capacity
The fourth element of a valid contract is capacity. This
relates to the mental state of the parties to the contract.
A party who lacks capacity does not have
the ability to understand the consequences of entering into
a contract.
Mental Competence
With regard to lack of mental capacity, people generally
fall into two different categories. First, some people are
deemed mentally incompetent by a court
because they may have a disease such as Alzheimer's, or
they may be acting in such a way that their family
members ask the court to appoint a guardian. In
either scenario, the fact that someone has gone to court
and been adjudicated insane is a �inding that a person is
non compos mentis, or lacking mental
capacity. As a general rule, a person lacks capacity if he
or she is judged by the courts to be so mentally ill that
he or she can no longer handle personal
business, and thus is assigned a legal guardian. Other
categories of persons who may be assigned a guardian by
a court are "habitual drunkards," another
special type of category lacking mental capacity, and
minors (those under the age of 18).
Persons who have been adjudicated insane can enter into a
contract only through their guardians; if the insane person
enters into a contract on his or her
own, it is void. As a result, the insane person would
have no liability for any damages to the goods and would

be entitled to his or her money back.
Minors
Businesses more often deal with minors since they may
constitute a large segment of their consumers, in retail
sales, for example. Contracts with minors are
not void, but rather voidable.
The law confers special protection on minors when it
comes to disaf�irming contracts. This attitude stems from
the common law notion that children need
special protection because, compared with adults, they are
innocent, gullible, and easy to be taken advantage of.
Thus, a minor who enters into a contract
may choose to escape his or her contractual liability,
which is why contracts with minors are called voidable;
they may be avoided by the minor. Such
avoidance is called disaf�irmance. A person may exercise
this right only before reaching the age of 18 or for a
reasonable time thereafter. Suppose that a
16-year-old purchases a car on credit, pays for two
months, and then decides to return the car. The minor
may disaf�irm the contract but must return the
car. Then the seller must return to the minor his or her
payments to date. In short, the minor is completely
protected from liability when entering into a
contract. Needless to say, few merchants are willing to
enter into a contract with a minor.
Once a minor reaches 18, the minor reaches majority and
may want to continue, rather than disaf�irm, any contracts
entered into before the age of 18. In
this case, the person now of majority is said to ratify the
contract. Rati�ication can be implied (by retaining the
goods, for example) or express (e.g., by

agreeing orally or in writing to continue the contract).
Either way, the person is now liable for performance of
the contract (to ful�ill one's obligations
under its terms) he or she entered into as a minor, just
as any other adult would be.
https://media.thuze.com/MediaService/MediaService.svc/constel
lation/book/AUBUS670.12.2/%7Bpdfs%7Dch09.pdf
7/2/2019 Print
.2,sec9.3,sec9.4,s… 20/49
But are minors liable for anything? Yes, in some
instances, they are liable for their contracts. Speci�ically,
the courts have ruled that minors are liable for
necessaries, which comprise food, drink, clothing, shelter,
medical care, and education. In evaluating whether an item
is a necessary or a luxury (and
therefore not exempt from disaf�irmance), courts generally
look at the minor child's needs in relation to his or her
upbringing and the relative wealth of the
minor's parents. The minor is liable, however, only for the
fair market value of such services, which may be
considerably less than the price charged by the
provider.
Business contracts entered into by nonemancipated minors
(minors who are still dependent on their parents or
guardians) are also exempt from
disaf�irmance. The rationale here is clear: a minor who is
mature enough to run his or her own business is also
mature enough to be held responsible for

contracts entered into on behalf of that business. However,
that same minor is still free to disaf�irm personal
contracts he or she enters into that are
unrelated to the business.
If a minor lies about his or her age in order to induce
an adult to enter into a contract, legal opinion is split
among the states. Some states allow the adult to
recover damages from the minor for the tort of fraud,
while others allow the minor to disaf�irm the contract,
even when the minor offered fraudulent proof
of age to induce the adult to enter into the contract.
So how can a business protect itself from the impact of
minors' disaf�irmance? By either requiring minors to
obtain an adult cosigner for any contract they
enter into, or by refusing to deal with minors altogether.
The second option is seldom exercised, because minors
represent a very important market for most
vendors. And, with the exception of large-ticket items, the
�irst option is also often impractical. Why then do
merchants deal with minors? Because the
bene�it of courting this pro�itable consumer segment far
outweighs the potential cost of disaf�irmance. As a
businessperson, it is essential that you are aware
of those persons with whom you are contracting and their
potential for reneging on their contracts with you.
Legality
The �ifth and �inal element of a contract is the
requirement that the contract be legal. So even if it
ful�ills all other four elements, if it is for the transfer
of
goods or services that are illegal, it is invalid.

An illegal contract is one that is de�ined by the law of
its state as being illegal. Each state has different laws on
this topic, but all states agree, for example,
that hiring someone to commit murder is an illegal
contract, since the purpose of the contract is illegal.
Similarly, if Bob orders "100 grams of cocaine" from
Harriett, that too is an illegal contract and unenforceable
by the courts.
Sunday Contracts
In some states, entering into a contract on a Sunday
renders the contract void. These laws originated from the
religious belief that entering into business
transactions on Sunday (when one should be observing the
Sabbath and attending church) is immoral. These beliefs
were codi�ied into legislation known as
Blue Laws and are still in force to varying degrees in
some states.
Overly Broad Noncompetition Contracts
Suppose that the Fabulous Hotel hires you as head chef
under a two-year employment contract. After two years,
another hotel wants to hire you. However,
in the original employment contract you signed with the
Fabulous, the following paragraph appears:
22. The below-signed agrees not to work as a chef for
another hotel in the same metropolitan area for a period
of two years after leaving our
employ.
This is called a covenant not to compete, or a
noncompetition clause. As a general rule, these clauses
have been held valid in court. Does this mean that

you cannot work for another hotel? That depends on
certain factors that a court will consider to determine
whether the clause is enforceable. These
include:
Whether the agreement stood alone or was contained in an
employment contract. If alone, the agreement is void;
The length of time involved. If too great, the contract is
void; and
The location or distance involved. If the contract prohibits
you from working in the Western Hemisphere, that scope
is too great, but the same county
may be small enough to consider the agreement
enforceable.
If you agreed never to be a chef on the entire East Coast
for the rest of your life, a court would most likely �ind
that agreement illegal because it is in force
for too much time and over too great a distance. In
contract law, a clear dividing line between reasonable and
unreasonable terms does not exist but is a
matter of judicial discretion, so a court will study each
case individually. As an employee, you should be aware
of the implications of signing such an
agreement, and as a manager, you should make sure the
language of your employment contracts is carefully drafted.
You may see this type of clause not only as an employee
or manager but also when you sell a business. Part of the
selling contract of your restaurant may
include the requirement that you not open another
restaurant in the same city. Here, too, the courts will
look at the same factors mentioned above to
determine whether the clause is enforceable.

Exculpatory Agreements
7/2/2019 Print
.2,sec9.3,sec9.4,s… 21/49
Suppose that you have been injured while skiing. On the
back of the lift ticket, the resort printed a clause stating,
"In the event of injury, the resort assumes
no responsibility." Such an exculpatory clause, or waiver
of liability, states in writing that the owner is not
liable for injury or harm to users of the facilities.
Can you sue for your injuries nevertheless?
The good news is that, in many states, an exculpatory
clause or waiver of liability is void. In New York State
(and many others), these clauses are illegal in
speci�ic settings. For example, an exculpatory clause
given to attendees at a place of amusement is void. Thus,
the owner can be sued even if the customer
signed an agreement saying the owner would not be
liable.
Failure to Follow Licensing Requirements
At law, there exist two types of licenses: One type is for
the purpose of ensuring competency, and the other type is
a government device for collecting
revenues.
Doctors, lawyers, and other professionals must pass a test

before the state will award them a license to practice. If
these professionals do not obtain a
license but nevertheless enter into a contract, that contract
is voidable by the other party. For example, Dr. Jones
never passed his medical examinations, but
set up his own practice anyway. He sees a patient and
sends the patient a bill for his services. That patient may
avoid the contract. This means that the
patient may choose not to pay because Dr. Jones is
unlicensed. Economically, this is a powerful incentive to
obtain a license.
The second type of license is one established for the
purpose of raising revenue for the state. Suppose you
want to start a business, such as a bar. As part of
the process of setting it up, you would need to obtain, in
this case, a liquor license. A liquor license is an example
of the type of license the state uses to
collect money rather than to establish competency. If a
person subject to this type of licensing requirement fails
to obtain a license, his or her contracts are
still enforceable. Thus, a patron of your restaurant could
not argue that your failure to obtain a liquor license
excuses him or her from paying for a pitcher
of beer.
7/2/2019 Print
.2,sec9.3,sec9.4,s… 22/49
9.3 Defenses to Contracts
Sometimes one party to a contract has a legal reason for

being excused from contractual liability. This reason is
called a defense to contracts. While we
cannot study all the various defenses, we will examine the
four most common ones: fraud, undue in�luence, duress,
and impossibility.
Fraud in the Inducement and Fraud in the
Execution
Fraud in the inducement occurs when one party enters
into a contract because the other party knowingly lied.
Suppose I come to look at your house,
which is listed for sale. I ask you whether the creek in
the back ever �loods. You say no. In reliance on your
statement, I buy the house. The next spring, the
creek �loods, causing extensive damage. Can I get out of
the contract? Yes.
A case of fraud requires one to prove the following:
One party intended to deceive the other, that is,
knowingly lied;
The innocent party relied on the lie; and
Reliance was justi�ied.
If all those elements are proven, the innocent party can
withdraw from the contract in an act called recission.
Fraud in the inducement makes the resulting
contract voidable at the option of the defrauded party. In
our example, I (the innocent party) would normally get
back my money, and you (the guilty party)
would get back your house. In other words, the parties
would be restored to their precontract positions. However,
if the defrauded party wishes to go

through with the agreement even after learning about the
fraud, he or she has the right to fully enforce the
contract.
When fraud in the execution of a contract is involved,
the defrauded party has been intentionally encouraged to
execute a legal instrument by
misrepresenting the nature of the instrument being signed.
This is a different situation than fraud in the inducement,
where one party is induced to enter
into an otherwise valid agreement through the intentional
misrepresentation of a material fact. Whenever fraud in
the execution is involved, the victim does
not intend to enter into an agreement at all. Thus, the
agreement that appears to result from the fraud is
completely void and unenforceable by either party,
not only the victim.
Undue Influence
Parties to a contract sometimes have a special relationship
to one another because of a state statute that de�ines
their relationship as �iduciary. A �iduciary
relationship is a relationship of special trust. Examples
include the relationship between attorney and client or
doctor and patient. In these relationships,
the law recognizes that there is one party in a position of
special trust and another party who is more vulnerable. As
a result, the courts have held the
�iduciary to a higher standard of care than an ordinary
person.
For example, a trustee who manages the monies of a
young bene�iciary is a �iduciary and will be held liable
if he or she does anything unethical or illegal
with the bene�iciary's money. If the trustee uses his or

her in�luence to overcome the will of the other party,
that is undue in�luence. Suppose a trustee talks
a bene�iciary into investing in one of the trustee's
enterprises, which is in fact a high-risk investment, and
the bene�iciary agrees to the arrangement only
because she trusts his judgment. This agreement could be
voided if the court found that the trustee overcame the
"will" of the bene�iciary. A party seeking
to avoid a contract based on undue in�luence needs to
show that the assent given to enter into the contract was
not genuine, but rather was clouded by the
other party's taking unfair advantage of the �iduciary
relationship in inducing her to enter into the contract. As
with contracts where there was fraud in the
inducement, contracts involving undue in�luence by one of
the parties are voidable only by the victim.
Duress
Duress consists of forcing a party to enter into a
contractual relationship under threats. Generally, being
threatened with physical or mental harm or with
criminal prosecution constitutes a valid defense to the
contract. Courts generally apply an objective test in
determining whether a threat constitutes duress.
Under an objective standard, a threat constitutes duress
only if a reasonable person under the same circumstances
would have deemed the threat believable
and would have been motivated to act in order to avoid
the consequences of the threat.
Some types of threats are not considered duress, however.
For example, being threatened with a civil lawsuit or with
economic need is not a valid defense. A
contract entered into under those types of threats would
still be enforceable.

Impossibility
Suppose a family made reservations at the Fabulous Hotel
and then, because of illness, canceled. Or suppose a
famous rock group did not show up for a
concert you were managing because their bus broke down.
Are these excuses for reneging on a contract recognized
by the courts? The answer is—
sometimes. Impossibility means, as a general rule, that the
contract could be performed only at an "excessive or
unreasonable cost," that is, that it would be
impractical. For example, an earthquake, �lood, or
emergency that interrupted electrical power at the hotel
might make the performance of the innkeeper's
contract with a guest impractical and, therefore, serve as
an excuse for nonperformance.
7/2/2019 Print
.2,sec9.3,sec9.4,s… 23/49
9.4 Contracts That MustBe in Writing to Be
Enforceable
Many students are surprised to learn that most oral
contracts are enforceable. Of course, the problem with
enforcing an oral contract is proving its
existence. Even so, if this burden can be overcome in
court (that is, if the court �inds that a contract existed),
then an oral contract may be enforced.
With that said, there are six contracts that must be in

writing to be enforceable, of which we will
discuss three. Collectively, laws requiring certain contracts
to be in writing fall under the category of the Statute of
Frauds, a common law concept dating back to 1677.
Before we address the three contracts that must be in
writing to be enforceable, it is useful to �irst study what
it means to "be in writing." The phrase in
writing does not necessarily mean written on a piece of
paper. For contracts under the common law, it simply
means that the contract has all of the
following characteristics:
Identi�ies the parties;
Describes the subject matter;
Sets forth terms and conditions;
Sets forth the consideration; and
Contains the signature of the party to be charged
("charged" in this context means the party "to be sued, or
the defendant." Thus, a breach of contract
lawsuit will not be "winnable" unless the defendant has
signed the contract—that is, if it is one of the types of
contracts that must be in writing to be
enforceable).
For contracts under the Uniform Commercial Code, "in
writing" means that the contract has the parties, quantity,
and enough information for a reasonable
person to conclude it is a contract. Note that if a
contract is missing any of these requirements, it will be
considered oral, even if it is written on a piece of
paper. For example, under the common law, a contract to

sell real estate that is printed on a form but is not
signed by the party to be charged is oral, and
therefore unenforceable.
What contracts must be in writing to be enforceable? We
will look at the three most important and common ones in
the sections that follow.
Contracts for the Sale of Real Property
Real property is land and all things attached to the land
(�ixtures). Personal property is all other property. If you
enter into a contract to sell land, a
building, or a house, that contract must be in writing to
be enforceable. Are there any exceptions? Yes.
Suppose that the buyer and seller enter into an oral
contract for the sale of a building. The buyer moves in
and makes substantial improvements to the
property. Although the agreement is oral, the courts will
usually �ind that a contract exists, because people do not
usually make improvements unless they
own real property. Likewise, a seller would not normally
allow such improvements unless the alleged buyer owned
the property. This situation is called part
performance, and it may be suf�icient proof of the
contract's existence to make the oral contract enforceable.
Contracts for the Sale of Goods Greater Than $500
Under the Uniform Commercial Code, Article 2 (discussed
further in Chapter 10
ns/sec10.1#sec10.1) ), a contract to sell goods valued at
$500 or more must be in writing to be
enforceable. Exceptions include those with part

performance. Suppose I agree over the telephone to sell
you widgets worth $4,000. I deliver $2,000 worth of
the devices, which you accept. You then become liable for
the payment of $2,000, even though the contract should
have been in writing.
Another important exception that is used frequently in
businesses is the con�irming memorandum. Suppose the
Fabulous Hotel calls a supplier and orders
1,000 luxury terry-cloth robes at $50 each. The contract is
for more than $500 and therefore should be in writing.
But the telephone call is, of course, oral.
Such a contract may be enforceable if one of the parties
sends a con�irming memorandum and the receiving party
does not object to it within 10 days. The
parties then have a contract even though it is not "in
writing." (Remember that "in writing" under the UCC
means, in part, that the quantity is stated.) If the
seller sends a fax reading, "Order received. Will ship
robes as per your order," even though the contract is not
in writing by UCC standards (because the
order to purchase the robes was oral and the
con�irmation does not contain quantity), under the
con�irming memorandum exception, it is enforceable. Note
that, for this exception to apply, both parties to the
contract must be merchants. That is, they cannot be
private individuals, but must be businesspersons
who "regularly deal in goods of this kind."
Contracts That Cannot Be Performed in a Year
The third contract that must be in writing is one that
cannot be performed within a year. Suppose the Fabulous
hires you on March 1, 2012, for one year.
You will graduate in May 2012, but you want a little
time off to see Europe before you start working. So you

agree to begin your employment on August 1,
2012. Does this contract have to be in writing?
If you agreed to work for the Fabulous on March 1, the
rule is that the time from which you start to count is the
day after contract formation, or beginning
on March 2. You agreed to work for a year from August
1, 2012, until August 1, 2013. However, March 2, 2012,
through August 1, 2013, is almost 17 months
—a period that exceeds one year. Therefore, this contract
would have to be in writing to be enforceable.
https://content.ashford.edu/books/AUBUS670.12.2/sections/sec
10.1#sec10.1
7/2/2019 Print
.2,sec9.3,sec9.4,s… 24/49
Contractual Remedies
9.5 Damages for Breach of Contract
If the parties to the contract perform all their obligations
under the agreement and have no obligations remaining,
they are said to be discharged.
Unfortunately, not all parties perform. Failure of a party
to perform is a breach. The nonbreaching party may
institute a lawsuit and, if so, can choose what
to sue for. Damages come in two forms: monetary
damages and nonmonetary damages.
Monetary Damages

The nonbreaching party may sue for compensatory
damages. These damages will replace the loss
to the injured party. For example, suppose a seller fails
to deliver a shipment of tomatoes to a hotel
client, and purchasing replacement tomatoes would cost the
hotel an additional $1,000. This
amount is suf�icient for compensatory damages, as $1,000
would compensate the buyer for the
seller's breach.
Nominal damages are awarded when the court �inds for
the nonbreaching party in theory but does
not �ind that the nonbreaching party suffered any actual
money loss. Usually, token damages of $1
are awarded in these cases.
Some types of monetary damages generally are not
allowable for breach of contract. These include
punitive damages, that is, damages whose purpose is
punishment (also known as exemplary
damages). Punitive damages are most often awarded in tort
claims where there was malicious or
willful misconduct, such as negligence actions, not for
breach of contract cases.
Speculative damages are usually not allowed in breach
of contract cases. These are damages remote
from the actual agreement. Suppose that the tomatoes
mentioned above were a special order and
the chef now claims that because they did not arrive on
time, the number of customers dining that
evening fell by 10%. Damages for such a speculative
claim are unlikely to be awarded unless the
hotel had conveyed this possibility to the seller at the
time the order was placed. However, it is
highly unlikely that such a conversation ever took place.

The point is, such damages would be
considered too remote, that is, unless the buyer and the
seller agreed otherwise about their
liability at the time of contracting.
Nonmonetary Damages: Duty to Mitigate
Sometimes monetary damages are not suf�icient
compensation for a party's breach of contract. In those
instances, the nonbreaching party wants to enforce
performance of the contract and sues for the remedy called
speci�ic performance. Bear in mind that speci�ic
performance is not available when monetary
damages would compensate the nonbreaching party; nor is
it available to force a party to perform. You cannot sue
in order to make someone do his or her
part under the contract. That would be slavery, which of
course is illegal. Let's say that you hire a famous band
for the New Year's Eve party at the hotel you
are managing. If the band cancels, you can sue for
monetary damages, e.g., lost customers and loss of
provable income. But you cannot sue the band to make
them give a command performance at the hotel.
So when is speci�ic performance available as a remedy?
When the goods are unique, such as land, antiques, or
paintings, you could sue to recover these
speci�ic goods rather than monetary damages.
7/2/2019 Print

.2,sec9.3,sec9.4,s… 25/49
Key Terms
Click on each key term to see the de�inition.
acceptance
When the offeree agrees to the offeror's offer.
avoidance
In contract law, to annul, cancel, or make void. Also
called disaf�irmance.
black letter law
Theories of law in the context of business and
employment contracts.
Blue Laws
Laws in some states, based on traditions of religious

morality, that ban certain commercial activities on Sundays
and render contracts entered into
then invalid.
breach
Failure of a party to perform part of a contractual
agreement.
capacity
The mental ability to understand that one is entering into
a contract. Also, the ability of a person of average mental
abilities who is above the age of
18 to enter into contracts.
compensatory damages
Money awarded to the nonbreaching party to restore that
person's position as though there had not been a breach
of contract. The same as
restitution.
consideration

When the offeree does something that he or she was not
previously legally bound to do because of the offeror's
promise. Distinct from a gift.
counteroffer
An offer by the offeree that kills the original offer and
creates the power of acceptance in the offeror.
damages
Monetary loss that results from the breaching parties'
actions.
defenses to contracts
Legally valid excuses for not performing a contract.
detriment
Doing something that one is not previously, legally
obligated to do.

722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx

722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a 722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx

Semelhante a 722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx (20)

Mais de sleeperharwell

Mais de sleeperharwell (20)

Último

Último (20)

722019 Printhttpscontent.ashford.eduprintAUBUS670.1.docx