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FIFTH EDITION

ESSENTIALS of BUSINESS LAW

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston UniversityPet

er P ea

rs o n /S to ck b yt e/ G et ty

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Essentials of Business Law, Fifth Edition Jeffrey F. Beatty, Susan S. Samuelson

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Printed in the United States of America 1 2 3 4 5 6 7 17 16 15 14 13

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

WCN: 02-200-206

CONTENTS: OVERV IEW

Preface xix

UNIT 1 The Legal Environment 1 1 Introduction to Law 2 2 Ethics and Corporate Social Responsibility 23 3 Dispute Resolution 51 4 Common Law, Statutory Law, and

Administrative Law 83 5 Constitutional Law 109 6 Torts and Product Liability 134 7 Crime 164 8 International Law 190

UNIT 2 Contracts 213 9 Introduction to Contracts 214 10 Agreement 234 11 Consideration 256 12 Legality 276 13 Capacity and Consent 295 14 Written Contracts 316 15 Third Parties 337 16 Performance and Discharge 356 17 Remedies 377 18 Practical Contracts 400

UNIT 3 Commercial Transactions 423 19 Introduction to Sales 424 20 Ownership, Risk, and Warranties 450

21 Performance and Remedies 477 22 Negotiable Instruments 501 23 Secured Transactions 528 24 Bankruptcy 562 25 Agency Law 587

UNIT 4 Employment, Business Organizations and Property 615 26 Employment and Labor Law 616 27 Employment Discrimination 644 28 Starting a Business: LLCs and

Other Options 673 29 Corporations 699 30 Government Regulation: Securities and

Antitrust 732 31 Consumer Protection 754 32 Cyberlaw 782 33 Intellectual Property 805 34 Real and Personal Property 832

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1

iii

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CONTENTS

Preface xix

UNIT 1 The Legal Environment 1

Chapter 1 Introduction to Law 2 1-1 The Role of Law in Society 3

1-1a Power 3 1-1b Importance 3 1-1c Fascination 3

1-2 Origins of Our Law 4 1-2a English Roots 4 Case Summary: The Oculist’s Case (1329) 5 1-2b Law in the United States 6

1-3 Sources of Contemporary Law 6 1-3a United States Constitution 7 1-3b Statutes 9 1-3c Common Law 9 1-3d Court Orders 10 1-3e Administrative Law 10 1-3f Treaties 10

1-4 Classifications 10 1-4a Criminal and Civil Law 10 1-4b Law and Morality 11

1-5 Jurisprudence 11 1-5a Legal Positivism 11 1-5b Natural Law 12 1-5c Legal Realism 12

1-6 Working with the Book’s Features 13 1-6a Analyzing a Case 13 Case Summary: Kuehn v. Pub Zone 13 1-6b Devil’s Advocate 15 1-6c Exam Strategy 16 1-6d You Be the Judge 16 You Be the Judge: Soldano v. O’Daniels 17

Chapter Conclusion 17 Exam Review 18 Multiple-Choice Questions 19 Essay Questions 20 Discussion Questions 21

Chapter 2 Ethics and Corporate Social Responsibility 23

2-1 Introduction 24 2-2 The Role of Business in Society 26

2-3 Why Be Ethical? 27 2-3a Society as a Whole Benefits from Ethical Behavior 27

2-3b People Feel Better When They Behave Ethically 27

2-3c Unethical Behavior Can Be Very Costly 28 2-4 Theories of Ethics 28

2-4a Utilitarian Ethics 29 2-4b Deontological Ethics 29 2-4c Rawlsian Justice 30 2-4d Front Page Test 30

2-5 Ethics Traps 31 2-5a Money 31 2-5b Rationalization 32 2-5c Conformity 33 2-5d Following Orders 33 2-5e Euphemisms 34 2-5f Lost in a Crowd 34 2-5g Blind Spots 35 2-5h Avoiding Ethics Traps 35

2-6 Lying: A Special Case 36 2-7 Applying the Principles 37

2-7a Personal Ethics in the Workplace 37 2-7b The Organization’s Responsibility to Society 38

2-7c The Organization’s Responsibility to Its Employees 39

2-7d An Organization’s Responsibility to Its Customers 40

2-7e Organization’s Responsibility to Overseas Contract Workers 41

2-8 When the Going Gets Tough 42 2-8a Loyalty 42 2-8b Exit 43 2-8c Voice 43

2-9 Corporate Social Responsibility (CSR) 43

Chapter Conclusion 44 Exam Review 44 Multiple-Choice Questions 46 Essay Questions 47 Discussion Questions 48

Chapter 3 Dispute Resolution 51 3-1 Three Fundamental Areas of Law 52

3-1a Litigation versus Alternative Dispute Resolution 52

v

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3-2 Court Systems 52 3-2a State Courts 52 Landmark Case: International Shoe Co. v. State of Washington 55

3-2b Federal Courts 56 3-3 Litigation 60

3-3a Pleadings 60 Case Summary: Stinton v. Robin’s Wood, Inc. 65 Case Summary: Jones v. Clinton 67

3-4 Trial 69 3-4a Adversary System 69 3-4b Right to Jury Trial 69 3-4c Voir Dire 69 Case Summary: Pereda v. Parajon 70 3-4d Opening Statements 71 3-4e Burden of Proof 71 3-4f Plaintiff ’s Case 71 3-4g Rules of Evidence 72 3-4h Motion for Directed Verdict 72 3-4i Defendant’s Case 73 3-4j Closing Arguments 73 3-4k Jury Instructions 73 3-4l Verdict 73 3-4m Motions after the Verdict 74

3-5 Appeals 74 3-5a Appeals Court Options 74

3-6 Alternative Dispute Resolution 75 3-6a Negotiation 75 3-6b Mediation 76 3-6c Arbitration 76

Chapter Conclusion 77 Exam Review 78 Multiple-Choice Questions 80 Essay Questions 81 Discussion Questions 82

Chapter 4 Common Law, Statutory Law, and Administrative Law 83

4-1 Common Law 84 4-1a Stare Decisis 84 4-1b Bystander Cases 84 Case Summary: Tarasoff v. Regents of the University of California 85

4-2 Statutory Law 87 4-2a Bills 87 4-2b Discrimination: Congress and the Courts 88 4-2c Debate 89 4-2d Statutory Interpretation 91 Landmark Case: Griggs v. Duke Power Co. 92

4-2e Changing Times 93 4-2f Voters’ Role 93 4-2g Congressional Override 93

4-3 Administrative Law 95 4-3a Background 95 4-3b Classification of Agencies 96

4-4 Power of Agencies 96 4-4a Rulemaking 96 4-4b Investigation 98 Landmark Case: United States v. Biswell 99 4-4c Adjudication 99

4-5 Limits on Agency Power 100 4-5a Statutory Control 100 4-5b Political Control 100 4-5c Judicial Review 100 Case Summary: Federal Communications Commission v. Fox Television Stations, Inc. 101

4-5d Informational Control and the Public 102

Chapter Conclusion 103 Exam Review 104 Multiple-Choice Questions 106 Essay Questions 107 Discussion Questions 108

Chapter 5 Constitutional Law 109 5-1 Government Power 110

5-1a One in a Million 110 5-2 Overview 110

5-2a Separation of Powers 111 5-2b Individual Rights 111

5-3 Power Granted 111 5-3a Congressional Power 111 5-3b Executive Power 115 5-3c Judicial Power 115 Case Summary: Kennedy v. Louisiana 116

5-4 Protected Rights 117 5-4a Incorporation 118 5-4b First Amendment: Free Speech 118 Case Summary: Texas v. Johnson 119 Case Summary: Citizens United v. Federal Election Commission 120

Case Summary: Salib v. City of Mesa 121 5-4c Fifth Amendment: Due Process and the Takings Clause 122

Case Summary: Kelo v. City of New London, Connecticut 125

5-4d Fourteenth Amendment: Equal Protection Clause 126

vi CONTENTS

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Chapter Conclusion 129 Exam Review 129 Multiple-Choice Questions 131 Essay Questions 132 Discussion Questions 133

Chapter 6 Torts and Product Liability 134 6-1 Intentional Torts 136

6-1a Defamation 136 6-1b False Imprisonment 139 6-1c Intentional Infliction of Emotional Distress 139

Case Summary: Jane Doe and Nancy Roe v. Lynn Mills 140

6-1d Additional Intentional Torts 140 6-2 Damages 140

6-2a Compensatory Damages 140 6-2b Punitive Damages 142 Landmark Case: State Farm v. Campbell 143

6-3 Business Torts 144 6-3a Tortious Interference with Business Relations 144

6-3b Privacy and Publicity 145 6-4 Negligence 146

6-4a Duty of Due Care 146 Case Summary: Hernandez v. Arizona Board of Regents 147

6-4b Breach of Duty 149 6-4c Causation 149 6-4d Damages 151

6-5 Defenses 152 6-5a Contributory and Comparative Negligence 152

6-5b Assumption of the Risk 153 Case Summary: Truong v. Nguyen 154

6-6 Strict Liability 154 6-6a Ultrahazardous Activity 155 6-6b Product Liability 155

Chapter Conclusion 157 Exam Review 157 Multiple-Choice Questions 160 Essay Questions 161 Discussion Questions 162

Chapter 7 Crime 164 7-1 The Differences between a Civil and Criminal

Case 165 7-1a Prosecution 165

7-1b Burden of Proof 166 7-1c Right to a Jury 166 7-1d Felony/Misdemeanor 166

7-2 Criminal Procedure 166 7-2a Conduct Outlawed 166 7-2b State of Mind 167 7-2c Gathering Evidence: The Fourth Amendment 167

You Be the Judge: Ohio v. Smith 169 7-2d The Case Begins 171 Landmark Case: Miranda v. Arizona 172 7-2e Right to a Lawyer 173 7-2f After Arrest 173 Case Summary: Ewing v. California 174

7-3 Crimes that Harm Business 176 7-3a Larceny 176 7-3b Fraud 176 Case Summary: Skilling v. United States 177 7-3c Arson 179 7-3d Embezzlement 179

7-4 Crimes Committed by Business 179 Case Summary: Commonwealth v. Angelo Todesca Corp. 179

7-4a Selected Crimes Committed by Business 180

7-4b Punishing a Corporation 183

Chapter Conclusion 184 Exam Review 184 Multiple-Choice Questions 186 Essay Questions 187 Discussion Questions 188

Chapter 8 International Law 190 8-1 Trade Regulation: The Big Picture 191

8-1a Export Controls 191 8-1b Import Controls 192 You Be the Judge: Totes-Isotoner Co. v. United States 192

8-1c Treaties 193 Case Summary: United States—Import Prohibition of Certain Shrimp and Shrimp Products 194

8-2 International Sales Agreements 197 8-2a The Sales Contract 197 Case Summary: Centrifugal Casting Machine Co., Inc. v. American Bank & Trust Co. 200

8-3 International Trade Issues 201 8-3a Repatriation of Profits 201

CONTENTS vii

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8-3b Expropriation 201 8-3c Foreign Corrupt Practices Act 202 Case Summary: United States v. King 203 8-3d Extraterritoriality 205 You Be the Judge: Carnero v. Boston Scientific Corporation 205

Chapter Conclusion 206 Exam Review 207 Multiple-Choice Questions 209 Essay Questions 210 Discussion Questions 211

UNIT 2 Contracts 213

Chapter 9 Introduction to Contracts 214 9-1 Contracts 215

9-1a Elements of a Contract 215 9-1b Other Important Issues 215 9-1c All Shapes and Sizes 216 9-1d Contracts Defined 216 9-1e Development of Contract Law 217 Case Summary: Davis v. Mason 217

9-2 Types of Contracts 218 9-2a Bilateral and Unilateral Contracts 218 9-2b Executory and Executed Contracts 219 9-2c Valid, Unenforceable, Voidable, and Void Agreements 219

Case Summary: Mr. W Fireworks, Inc. v. Ozuna 220

9-2d Express and Implied Contracts 220 You Be the Judge: DeMasse v. ITT Corporation 221

9-2e Promissory Estoppel and Quasi- Contracts 222

Case Summary: Norton v. Hoyt 223 9-3 Sources of Contract Law 225

9-3a Common Law 225 9-3b Uniform Commercial Code 225 Case Summary: Fallsview Glatt Kosher Caterers, Inc. v. Rosenfeld 226

Chapter Conclusion 227 Exam Review 227 Multiple-Choice Questions 230 Essay Questions 231 Discussion Questions 233

Chapter 10 Agreement 234 10-1 Meeting of the Minds 235 10-2 Offer 236

10-2a Statements That Usually Do Not Amount to Offers 236

Landmark Case: Carlill v. Carbolic Smoke Ball Company 238

10-2b Problems with Definiteness 239 Case Summary: Baer v. Chase 240 10-2c The UCC and Open Terms 241 10-2d Termination of Offers 242 Case Summary: Nadel v. Tom Cat Bakery 242

10-3 Acceptance 244 10-3a Mirror Image Rule 244 10-3b UCC and the Battle of Forms 245 10-3c Clickwraps and Shrinkwraps 247 Case Summary: Specht v. Netscape Communications Corporation 247

10-3d Communication of Acceptance 249 Case Summary: Soldau v. Organon, Inc. 250

Chapter Conclusion 250 Exam Review 250 Multiple-Choice Questions 253 Essay Questions 254 Discussion Questions 255

Chapter 11 Consideration 256 11-1 What Is Consideration? 257

11-1a What Is Value? 257 Landmark Case: Hamer v. Sidway 258 You Be the Judge: Kim v. Son 259 11-1b Adequacy of Consideration 259 11-1c Illusory Promises 260

11-2 Applications of Consideration 261 11-2a The UCC: Consideration in Requirements and Output Contracts 261

11-2b Preexisting Duty 262 YouBe the Judge:CitizensTrustBankv.White 263

11-3 Settlement of Debts 265 11-3a Liquidated Debt 265 11-3b Unliquidated Debt: Accord and Satisfaction 265

Case Summary: Henches v. Taylor 266 11-4 Consideration: Trends 267

11-4a Employment Agreements 267 Case Summary: Snider Bolt & Screw v. Quality Screw & Nut 268

11-4b Promissory Estoppel and “Moral Consideration” 268

viii CONTENTS

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Chapter Conclusion 269 Exam Review 269 Multiple-Choice Questions 272 Essay Questions 273 Discussion Questions 274

Chapter 12 Legality 276 12-1 Contracts That Violate a Statute 277

12-1a Wagers 277 12-1b Insurance 278 12-1c Licensing Statutes 278 Case Summary: Authentic Home Improvements v. Mayo 279

12-1d Usury 279 Case Summary: American Express Travel Related Services Company, Inc. v. Assih 280

12-2 Contracts That Violate Public Policy 281 12-2a Restraint of Trade: Noncompete Agreements 281

Case Summary: King v. Head Start Family Hair Salons, Inc. 281

12-2b The Legality of Noncompetition Clauses (Noncompetes) 283

12-2c Exculpatory Clauses 284 You Be the Judge: Ransburg v. Richards 285 12-2d Unconscionable Contracts 287 Case Summary: Worldwide Insurance v. Klopp 288

Chapter Conclusion 289 Exam Review 289 Multiple-Choice Questions 291 Essay Questions 292 Discussion Questions 294

Chapter 13 Capacity and Consent 295 13-1 Capacity 296

13-1a Minors 296 13-1b Mentally Impaired Persons 298 Landmark Case: Babcock v. Engel 299

13-2 Reality of Consent 300 13-2a Fraud 300 Case Summary: Hess v. Chase Manhattan Bank, USA, N.A. 304

13-2b Mistake 305 Case Summary: Donovan v. RRL Corporation 306

13-2c Duress 307 You Be the Judge: In Re RLS Legal Solutions, LLC 308

13-2d Undue Influence 309 Case Summary: Sepulveda v. Aviles 310

Chapter Conclusion 310 Exam Review 311 Multiple-Choice Questions 313 Essay Questions 314 Discussion Questions 315

Chapter 14 Written Contracts 316 Landmark Case: The Lessee of Richardson v. Campbell 317

14-1 Common Law Statute of Frauds: Contracts That Must Be in Writing 319

14-1a Agreements for an Interest in Land 319 14-1b Agreements That Cannot Be Performed within One Year 321

You Be the Judge: Sawyer v. Mills 321 14-1c Promise to Pay the Debt of Another 322 14-1d Promise Made by an Executor of an Estate 323

14-1e Promise Made in Consideration of Marriage 323

14-2 The Common Law Statute of Frauds: What the Writing Must Contain 323

14-2a Signature 324 14-2b Reasonable Certainty 324 14-2c Electronic Contracts and Signatures 326

14-3 The UCC’s Statute of Frauds 326 14-3a UCC §2-201(1)—The Basic Rule 326 14-3b UCC §2-201(2)—The Merchants’ Exception 327

Case Summary: Seton Co. v. Lear Corp. 328 14-3c UCC §2-201(3)—Special Circumstances 328

14-4 Parol Evidence 329 Case Summary: Mayo v. North Carolina State University 330

14-4a Exception: An Incomplete orAmbiguous Contract 331

14-4b Fraud, Misrepresentation, or Duress 331

Chapter Conclusion 331 Exam Review 332 Multiple-Choice Questions 334 Essay Questions 335 Discussion Questions 336

CONTENTS ix

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Chapter 15 Third Parties 337 15-1 Third Party Beneficiary 338

15-1a Intended Beneficiaries 338 Case Summary: Schauer v. Mandarin Gems of California, Inc. 339

15-1b Incidental Beneficiaries 340 Case Summary: Unite Here Local 30 v. California Department of Parks and Recreation 340

15-2 Assignment and Delegation 341 15-2a Assignment 341 Case Summary: Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hospital Service District No. 1 343

You Be the Judge: Wells Fargo Bank Minnesota v. BrooksAmerica Mortgage Corporation 346

15-2b Delegation of Duties 347 Case Summary: Rosenberg v. Son, Inc. 349

Chapter Conclusion 350 Exam Review 350 Multiple-Choice Questions 352 Essay Questions 353 Discussion Questions 355

Chapter 16 Performance and Discharge 356 16-1 Conditions 358

16-1a How Conditions Are Created 358 16-1b Types of Conditions 359 Case Summary: American Electronic Components, Inc. v. Agere Systems, Inc. 359

You Be The Judge: Anderson v. Country Life Insurance Co. 361

16-2 Performance 362 16-2a Strict Performance and Substantial Performance 363

16-2b Personal Satisfaction Contracts 364 16-2c Good Faith 365 Case Summary: Brunswick Hills Racquet Club Inc. v. Route 18 Shopping Center Associates 365

16-2d Time of the Essence Clauses 367 16-3 Breach 367

16-3a Material Breach 367 Case Summary: O’Brien v. Ohio State University 368

16-3b Anticipatory Breach 368 16-3c Statute of Limitations 369

16-4 Impossibility 369 16-4a True Impossibility 369 16-4b Commercial Impracticability and Frustration of Purpose 370

Chapter Conclusion 371 Exam Review 371 Multiple-Choice Questions 373 Essay Questions 374 Discussion Questions 376

Chapter 17 Remedies 377 17-1 Breaching a Contract 378

17-1a Identifying the “Interest” to Be Protected 378

17-2 Expectation Interest 379 Landmark Case: Hawkins v. McGee 379 17-2a Direct Damages 381 17-2b Consequential Damages 381 Case Summary: Hadley v. Baxendale 381 You Be the Judge: Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York 382

17-2c Incidental Damages 383 17-2d The UCC and Damages 383

17-3 Reliance Interest 385 17-3a Promissory Estoppel 386 Case Summary: Toscano v. Greene Music 386

17-4 Restitution Interest 387 17-4a Restitution in Cases of a Voidable Contract 388

Case Summary: Putnam Construction & Realty Co. v. Byrd 388

17-4b Restitution in Cases of a Quasi-Contract 389

17-5 Other Remedies 389 17-5a Specific Performance 389 17-5b Injunction 390 Case Summary: Milicic v. Basketball Marketing Company, Inc. 391

17-5c Reformation 392 17-6 Special Issues 392

17-6a Mitigation of Damages 392 17-6b Nominal Damages 392 17-6c Liquidated Damages 392

Chapter Conclusion 394 Exam Review 394 Multiple-Choice Questions 396 Essay Questions 397 Discussion Questions 399

x CONTENTS

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Chapter 18 Practical Contracts 400 18-1 The Lawyer 401

18-1a Lawyers and Clients 402 18-1b Hiring a Lawyer 402

18-2 The Contract 403 18-2a Who Drafts It? 403 18-2b How to Read a Contract 403 18-2c Mistakes 403 You Be the Judge: Quake Construction, Inc. v. American Airlines, Inc. 404

Case Summary: Cipriano v. Patrons Mutual Insurance Company of Connecticut 406

You Be the Judge: Heritage Technologies v. Phibro-Tech 408

18-2d The Structure of a Contract 409 Case Summary: Lemond Cycling, Inc. v. PTI Holding, Inc. 413

Chapter Conclusion 418 Exam Review 419 Multiple-Choice Questions 421 Essay Questions 421 Discussion Questions 422

UNIT 3 Commercial Transactions 423

Chapter 19 Introduction to Sales 424 19-1 Development of Commercial Law 425

19-1a Harold and Maude, Revisited 427 19-1b This Unit and This Chapter 427

19-2 UCC Basics 428 19-2a Code’s Purpose 428 19-2b Scope of Article 2 428 19-2c Mixed Contracts 429 19-2d Merchants 429 19-2e Good Faith and Unconscionability 429

19-3 Contract Formation 430 19-3a Formation Basics: §2-204 430 Case Summary: Jannusch v. Naffziger 431 19-3b Statute of Frauds 431 Case Summary: Delta Star, Inc. v. Michael’s Carpet World 433

19-3c Added Terms: §2-207 433 Case Summary: Superior Boiler Works, Inc. v. R. J. Sanders, Inc. 436

19-3d Open Terms: §§2-305 and 2-306 437

Case Summary: Mathis v. Exxon Corporation 438

You Be the Judge: Lohman v. Wagner 440 19-3e Modification 441

Chapter Conclusion 444 Exam Review 444 Multiple-Choice Questions 447 Essay Questions 448 Discussion Questions 449

Chapter 20 Ownership, Risk, and Warranties 450

20-1 Legal Interest 451 20-2 Identification, Title, and Insurable Interest 452

20-2a Existence and Identification 452 20-2b Passing of Title 453 20-2c Insurable Interest 454 Case Summary: Valley Forge Insurance Co. v. Great American Insurance Co. 455

20-3 Imperfect Title 455 20-3a Bona Fide Purchaser 455 Case Summary: Bakalar v. Vavra 457 20-3b Entrustment 457

20-4 Risk of Loss 458 20-4a Shipping Terms 459 20-4b When the Parties Fail to Allocate the Risk 459

Case Summary: Harmon v. Dunn 463 20-5 Warranties 463 20-6 Express Warranties 464

20-6a Affirmation of Fact or Promise 464 20-6b Description of Goods 464 20-6c Sample or Model 465 20-6d Basis of Bargain 465