Strict Law in the Law of the United States
ROBERT A. W E N I N G E R
PROFESSOR or
Liw,
T E X A S T E C H U N I V E B S I T Y SCHOOI. OF L A W
Contracts
Formation of a Contract. A contract is a promise or set of
promises for the breach of which the law will give a remedy or
performance of which the law recognizes as a duty. To be a
contract, there must be mutual assent of two or more competent
persons founded on a sufficient consideration, to perform or to
omit to do some act, the performance or omission of which is
not contrary to law or public policy, nor obviously impossible.
There must be mutual assent or a meeting of the minds of the
parties on all essential elements or terms. I t is a basic prerequisite that all parties intended to enter into a contract, but
an objective test is applied to determine the question of assent.
Thus, the outward manifestation of a party's intention is
controlling — his words and overt acts — not his subjective or
secret intention or understanding. Different meaning attached
by the parties to ambiguous language used by either of them
may preclude the formation of a contract. Where an offeror,
using ambiguous language, reasonably means one thing and the
offeree reasonably understands t h a t he meant another thing,
there is no contract.
The formation of a contract requires an offer and an acceptance
thereof. An offer must be definite and certain, and it must be
published or communicated. A mere statement of intention to
do an act is not an offer, nor is an invitation to enter into
negotiations. An offer need not be addressed to a particular
individual and may even originate in advertisements addressed
to the general public, such as offers of reward, Absent a specification of its duration, an offer continues for a reasonable time.
But the offeror may revoke an offer, not supported by consideration, at any time before acceptance; an offer supported by good
consideration cannot be withdrawn before the time agreed upon.
An offer is terminated by the rejection and carmot thereafter
be accepted so as to create a contract.
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EOBEBT A. WENTNGBE
Following acceptance the offer cannot be withdrawn or varied,
nor can the acceptance be revoked. An offer may be accepted
only by the person or persons to whom it is made. Unless the offer
itseff contemplates t h a t acceptance may be by the performance
of an act, the acceptance of an offer must be communicated to
the offeror. Acceptance need not be in any particular form and
may be oral or inferred from the circumstances, although the
conditions of the offer, such as those as to time, place, or manner
of acceptance, must be complied with. If an offer is made not
to a particular person, but to anyone generally, such as an offer
of reward, the offeror is bound to perform his promise where
a person acts upon it and fulfills its conditions before it is
withdrawn. Silence or mere failure to reject an offer does not
ordinarily constitute an acceptance : only in exceptional circumstances may an inference of acceptance be warranted by
silence or inaction.
An offer may be accepted by mail, telephone, or telegraph.
Where an acceptance by mail is authorized, the acceptance
becomes effective, and a contract arises, when the acceptance,
duly addressed and stamped, is deposited in the post office. The
offer cannot be withdrawn unless the withdrawal reaches the
party to whom it is addressed before his letter of acceptance has
been mailed. The party accepting must be alive when the letter
of acceptance is mailed, but a contract completed by the mailing
of an acceptance is not affected by the subsequent death of the
offeree.An acceptance must comply with the terms of the offer
without any substantial variance. The acceptance must be
unconditional and may not introduce additional terms or conditions. By making a conditional acceptance, the offeree rejects
the offer, which cannot thereafter be revived by the tendering
of an unconditional acceptance. But the offeror may, by words
or conduct, accept and be bound by the qualifications or conditions tendered by the offeree in his acceptance.
A contract must be definite and certain as to its terms and
conditions. Absolute certainty is not required, only such reasonable certainty as will enable a court to determine the intention
of the parties through the process of judicial construction. There
must be reasonable certainty as to the subject matter of a
contract and as to the consideration. But a contract will not be
invalidated for indefiniteness or uncertainty if its meaning can
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be ascertained with reasonable certainty by the consideration
of admissible extrinsic evidence. The subsequent conduct or
declarations of the parties may eliminate doubt or uncertainty.
A contract should be reasonably definite as to the time of its
operation and performance; but a provision for performance in
a reasonable time is sufficiently definite, and a promise to perform
in a reasonable time may be implied where the agreement
contains no provision as to the time of performance. A reservation
to either party of an unlimited right to determine the nature
and extent of his performance renders his obligation too indefinite
for legal enforcement.
Consideration is an essential element of a valid contract. The
motive which leads one to enter into a contract is a different
thing from consideration for a contract. Consideration is some
right, interest, profit, or benefit accruing to one party, or some
forbearance, detriment, loss, or responsibility suffered by the
other. Consideration for a promise is any benefit to the promisor
1
or any detriment to the promisee. A promise by one party is a
sufficient consideration for a promise by the other party, provided
the promises are binding. Equality of value is not essential.
A conditional promise, and even a voidable promise, have been
held to be sufficient consideration; the waiver of a legal right
or privilege is also sufficient. The extension of time for the
performance of a contract or the payment of a debt, if for a
definite time, constitutes a sufficient consideration. Forbearance
from exercising a right or doing an act which one has a right
to do, or a promise to forbear or delay, is sufficient consideration,
where the forbearance is requested and treated as consideration.
Nothing is consideration that is not accepted or regarded as such
by both parties.
A promise to do t h a t which the promisor is already legally
bound to do is no consideration. The payment of a debt which
is due and undisputed will not constitute consideration for a
promise, and a promise to pay a debt for which the promisor
is already bound is not sufficient to support a new contract. I t
also is a general rule t h a t past consideration is insufficient to
support a promise. This is because something given or done
before a promise is made, and therefore without reference to it,
does not constitute legal consideration. I t is generally held,
however, t h a t an express promise, made to a person entitled to
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the performance of an existing legal obligation, will be enforced.
Although a promise to do a thing w^hich the promisor is legally
bound to do cannot support a reciprocal undertaking h j the
promisee, such promise may be enforced against the promisor.
Also, love and affection or family relationships, although sufficient to support a deed or contract completely executed, caimot
support an executory contract.
Formal requirements. Whether the parties to an oral or informal
agreement become bound prior to the execution of a contemplated formal wTiting is a question which depends upon their
intention as to whether the wTiting is regarded merely as a
convenient memorial of their previous contract or is a condition
precedent to the final creation of a contract. The intention of
the parties in this regard is to be determined by the facts and
circumstances of each particular case.
Generally, the form in which a written contract is drawn is
immaterial, so long as it is intelligible. A valid contract may
consist of a series of letters, wTitings, and telegrams between
the parties. Unless a statute provides otherwise, parties may be
bound by the terms of a contract even though they do not sign
it, where their assent may be ascertained by other means; and
the form, maimer, and place of a signature on a contract is
unimportant.
A contract may be oral or -wTitten or both, and it need not
be in writing unless a statute requires it. The principal statute
making such a requirement is the statute of frauds, requiring
a writing for such contracts as those not to be performed within
a year, promises to answer for the debt or default of another,
contracts involving estates or interests in land, and contracts
for the sale of goods, wares, and merchandise exceeding a certain
value. Most American statutes of frauds contain a provision that
no action shall be brought to charge a person upon, or by reason
of, any representation as to the character, credit, or dealings
of another, unless it is made in writing, The effect of these
statutes is not to render entirely void a contract failing to
comply with its requirements, but merely to render such contracts voidable and unenforceable at the option of the party
sought to be charged. In some states, however, the statutes
expressly provide t h a t specified contracts shall be void if not
in writing.
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The most important provisions of the statute of frauds are
those invalidating the transfer of real property by parol or
livery of seisin only. The terms «interest » or « estate » in land,
as used in these statutes, mean some portion of the title or right
of possession, and does not include agreements which may affect
land but which do not contemplate the transfer of any title,
ownership, or possession. Generally, growing crops which are the
product of annual cultivation are regarded as personal property'
and not an interest in land. On the other hand, a contract for
the sale of standing timber or of mining or mineral rights is
regarded as one concerning an interest in land. An easement is
clearly an interest in land, but a mere license in real property
is not. A mortgage of real estate is a conveyance of an estate
or interest within the meaning of the statute. So is a transfer
under a land contract. With respect to sales of various kinds
of personal property, the adoption of the Uniform Commercial
Code has effected many changes in the statute of frauds.
Third -party beneficiaries. The rule prevails under American
law t h a t a third person may, in his own right and name, enforce
a promise made for his benefit, even though he is not a partj'
to the transaction, the promise was not made to him, he did
not furnish the consideration, and there is no mutual assent
between him and the promisor. The rule, however, applies only
to third persons who are donee or creditor beneficiaries of the
promisee. The intent of the promisee is controlling. If in buying
the promise the promisee intends the promised performance as
a gift to the third party, the latter is a donee beneficiary. Good
reason exists for permitting enforcement of the promise by the
donee beneficiary, since if he carmot enforce it no one can. If in
buying the promise the promisee intends the third party to
receive the performance in satisfaction of a real or supposed duty
or obligation owed by the promisee, the third party is a creditor
beneficiary. The promisee's purpose is to secure from the promisor
a performance to the third party which 'will discharge his debt.
The beneficiary's financial interest in the bargained-for performance makes him the logical one to compel it, and multiple
litigation is thus reduced. Third parties other than donees or
creditors of the promisee, though they might also be benefitted
by performance, are incidental beneficiaries, not entitled to
enforce the promise.
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The third partj' beneficiary need not be named in the contract,
if he is so described as to be ascertainable. Nor is it essential, in
order for a third person to recover on a contract made and
intended for his benefit, that he knew of the contract at the time
it was made. Thus if B promises A to pay A's future creditors, the
promise may be enforced by the individual creditors when they
become such at maturity of their claims. The most common
creditor beneficiary situation is t h a t in which mortgaged land is
conveyed to a purchaser who promises the mortgagor that he
will pay the mortgage debt to the mortgagee. At the maturity
of the debt the mortgagee may obtain judgment against the
assuming grantee. Another important area in which the third
party doctrine is applied comprises contractors' bonds. The prevailing view is that persons furnishing materials or labor may
recover on a bond given by a public or private contractor to
the owner or governmental agency where the bond contains a
condition for the benefit of laborers, materialmen, or subcontractors, and is intended for their protection, even though they
are not named as obligees in the bond and there is no express
provision that the bond shall inure to their benefit.
A third party beneficiary^ has the same remedies available to
him, for enforcement of the promise made for his benefit, as
would be available if he were the contractual promisee of the
performance promised. The beneficiary's rights depend upon,
and are measured bj-, the terms of the contract between the
promisor and promisee. If the contract is void for lack of mutual
consent or consideration, or for failure to comply with the statute
of frauds, these defenses are available in an action by the third
party; if the contract is voidable, as for fraud, mistake, duress,
or infancy^ of the promisor, these defenses may be asserted. But
after the right created by a third party contract has vested in
the beneficiary, subsequent rescission and release of the promisor
by the promisee is inoperativ^e.
Torts
Fault. Although the principle of social insurance is gaining
impetus in the United States, fault continues to play a dominant
role as a basis for civil liability. Under this scheme a man is
generally held liable only where he has been guilty of some kind
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of social or personal fault. The two general types of conduct
which involve fault are (1) conduct intended to harm another
and (2) conduct which creates a foreseeable and unreasonable
risk to others. Intentional wrongdoing is to be condemned on
ethical grounds since the actor engages in conduct for the very
purpose of causing harm. The second t j ^ e of activity', negligence,
is socially immoral. If the actor recognized the um-easonableness
of his negligent conduct, it may be unethical as well; such
conduct is characterized as « willful» or « wanton » or « reckless
indifference ».
Outside the field of workmen's compensation, negligence remains the normal predicate of liability in accident cases. The
plaintiff must show that his injury was caused by the fault of
the one from whom recovery is sought and must establish
(1) t h a t he was injured; (2) t h a t the person from whom he is
seeking recovery was negligent; (3) t h a t the defendant's negligence was a proximate cause of his injury. Moreover, the
plaintiff's recovery will be defeated if his own fault contributed
proximately to cause the injury. The fault principle does not
seek to punish wrongdoers (except in extraordinary cases where
the wrong is grievous) b u t to compensate victims. I t is based
on the notion t h a t it is fair to make the actor compensate his
victim where the actor is at fault, but not where he is innocent
of wrongdoing (or where the victim has also been at fault). I t
is assumed t h a t the actor had a choice and that he chose a
blameworthy course of conduct of his own free wiU. In addition
to its moral and compensatory objectives, the fault principle is
sought to be justified on the ground t h a t it provides an incentive
for safety and deters conduct which causes accidents. Liability
in tort often rests upon considerations of public policy which
have little to do with personal immorality, and fault has come
to mean a departure from the conduct required of a man for
the protection of others.
There are activities which create risks of danger which, because
of the general social utility of the activities, are not regarded
as unreasonable risks. If the actor carries on these activities,
taking all reasonable precautions to avoid harm to others, he is
altogether iimocent of any fault even if foreseeable harm actually
resulted from the activity. But the dangers created by some of
these socially desirable activities are abnormally great and often
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many innocent persons are injured when they result in harm.
In other of these activities the actor is greatly benefitted in
carrying them on and may be in a peculiarly advantageous
position to distribute the risk among large groups. In still other
cases the actor has introduced an uncommon danger into the
community. For these reasons the law sometimes imposes the
risk of such losses upon the persons conducting such activities,
regardless of fault on their part. The fact situations which are
included under this branch of tort law fall into the following
categories : (1) liability for the collection in dangerous quantities
of substances not naturally on land; (2) liability for blasting
operations; (3) liability for trespassing animals; (4) liability
incident to the keeping of dangerous animals; (5) liability for
the operation of aircraft; (6) liability for some tj^pes of nuisance;
(7) liability for some tjrpes of misrepresentations; (8) liability for
the escape of fire originating on defendant's premises; (9) poison
sprays, insecticides, herbicides, defoliants. The Restatement of
Torts declares that there is liability without fault for « ultrahazardous activities ». According to the Restatement, an activity
is « ultrahazardous » if it (1) necessarily involves a risk of serious
harm to the person, land or chattels of others which cannot be
eliminated by the exercise of the utmost care, and (2) is not a
matter of common usage.
Emotional distress. Emotional distress passes under various
names, such as mental suffering, mental anguish, nervous shock,
and includes all highly unpleasant mental reactions, such as
fright, horror, grief, shame, humiliation, embarrassment, anger,
worry, and the like. I t is only recently t h a t the intentional or
reckless inffiction of emotional distress has been recognized as
an independent basis of tort liability, and the law in this field
is still in a stage of development. Even where emotional distress
is caused intentionally or recklessly, liability has been found
only if the defendant's conduct has been so extreme and outrageous in character as to go beyond all possible bounds of decency.
The extreme and outrageous character of the conduct may arise
from an abuse by the actor of his power to affect the interests
of the plaintiff. Police officers, school authorities, landlords, and
creditors, in particular, have been held liable for extreme abuse
of their position. The extreme and outrageous character of the
conduct may also arise from the actor's knowledge t h a t the
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plaintiff is peculiarly susceptible to emotional distress because
of some physical or mental condition and the actor proceeds
despite this knowledge.
Liability in these situations, however, extends only to mental
distress which is so severe t h a t no reasonable person could be
expected to endure it. The law recognizes t h a t some emotional
distress is part of the price of living in a society; it does not
compensate for mere insults, indignities, or annoyances which
are not extreme or outrageous. Normally, severe emotional
distress is accompanied by bodily harm which in itself provides
e%'^idence that the distress is genuine. Recovery, however, is not
limited to such cases; an award is made if there is emotional
distress alone, wdthout bodily harm.
The law distinguishes between emotional distress which is
inflicted negligently. I t also distinguishes between neghgent
conduct which results in mental distress alone and that which
results in mental distress accompanied by bodily harm. Generally,
an actor is not liable if his negligent conduct results in emotional
disturbance alone. The courts have usually stated three reasons
to justify nonliability in these circumstances : (1) emotional
distress which is not so severe as to have physical consequences
is normally in the realm of the trivial; (2) emotional distress
unaccompanied by bodily harm is too easily feigned, and the door
to recovery would be opened to false claimants; (3) where a
defendant is guilty not of intent to do harm, b u t only of negligence, his fault is not so great t h a t he should provide compensation for a purely mental disturbance.
On the other hand, if the actor's negligence inflicts immediate
bodily harm, such as a broken arm, courts generally allow
compensation for purely mental elements of damage accompanying it, such as fright. The physical harm establishes a cause
of action, and « parasitic » damages are awarded for the emotional distress. The bodily injury is considered to provide sufficient assurance t h a t the emotional disturbance is not feigned.
But if the physical harm is not immediate, there is a conflict
among the authorities. Some courts allow recovery only if there
is <( impact», apparently on the theory that this affords the
guarantee t h a t the mental disturbance is genuine. An increasing
majority of courts, however, reject the requirement of «impact »
and regard the physical consequences as a sufficient guarantee.
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Causation: An essential element of a cause of action for tort
is that there be some reasonable connection between the damage
suffered by the plaintiff and the act or omission of the defendant.
Courts deal with this connection in terms of what is called
« proximate cause » — a term t h a t merely signifies the limitation
which courts have placed upon the actor's responsibility for the
consequences of his wTongful conduct. Obviously the defendant's
conduct must be a cause in fact of the harm. This calls for an
ordinarj', matter-of-fact inquiry into the existence of a causal
relation. Courts have derived a «.but for» or sine qua non test
which is applied to determine whether the result was in fact
caused by the defendant's act or omission, which may be stated
as follows : the defendant's conduct is a cause in fact of the
harm if the harm would not have occurred but for the defendant's
negligence. The failure to install a proper fire escape, for example,
is not a cause in fact of the death of a man who suffocated in
his hotel bed by smoke. But there is one type of situation in
which this test fails because it would reheve against liability
where liability should be imposed — where two causes concur
to bring about an event, and either one of them, operating alone,
would have been sufficient to cause the identical result. To meet
this type of case, the Minnesota court applied a formula which
has found general acceptance : the defendant's conduct is a
cause of the event if it was a material element and a substantial
factor in bringing it about. Insofar as cause in fact is concerned,,
no better test has been devised.
But if cause in fact were the only limitation upon the actor's
responsibility for the consequences of his conduct, liability would
be infinite for all wrongful acts. As a practical matter, legal
responsibility must be restricted to those causes which are of
such significance or importance that the law is justified in
imposing liability for the harm they produce. Thus « proximate
cause » has come to be important, not only for limitations related
to the fact of causation, which are relatively simple, b u t much
more often for limitations based upon ideas of justice or policy,
which have nothing to do with questions of causation. Quite often
these considerations are stated as issues of whether the defendant
is under any duty to the plaintiff, or whether his duty includes
protection against such consequences.
Illustrative of this facet of the « proximate cause » problem
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is the question whether a negligent defendant should be liable
for results which he could not reasonably have been expected
to foresee. Suppose, for example, t h a t the defendant's negligent
driving threatens the plaintiff with a broken limb, but instead
causes him to be shot? As to this problem, there are two basic,
opposing views, which have long been in conflict. One position,
first expressed by Baron Pollock in 1850, is that no defendant
should ever be held liable for consequences which no reasonable
man would expect to follow from his conduct. Liability, in other
words, should be restricted to foreseeable consequences and the
scope of the original risk created. This is the view which has
enjoyed the greater support in the United States. The foreseeability limitation upon « proximate cause » has been stated in
various ways by^ courts, which have held, for example, that the
defendant is liable only if the harm suffered is a « natural and
probable » consequence of his act, if the consequence is not too
far removed in «time or space », or if the harm resulted to a
«foreseeable plaintiff». The opposing view, less favored by
American courts, is t h a t a defendant who is negligent must take
existing circumstances as he finds them, and may be liable for
the unforeseeable consequences of his acts. This is especially so
if these consequences foUow an «impact» upon the person of
the plaintiff, or if the t o r t is intentional.
Corporations
Because of the dual nature of government in the United States,
a caveat is necessary in even a brief discussion of the law affecting
corporations : The laws governing the creation and operation of
corporations are state laws and are especially subject to variation.
Although at least 20 states have adopted some version of the
Model Business Corporation Act of the American Bar Association, no Uniform Act has been proposed or adopted, and an
attempt to formulate a Restatement in this field was abandoned
in 1932, perhaps because of the diversity of law among the
various states.
Corporations are deemed to be citizens of the state in which
they are incorporated, and the corporation laws of the state of
incorporation are binding on the corporate entity even though
it acts or conducts business elsewhere. This is true of both the
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statutes and judicial decisions of t h a t state. The Congress of the
United States has not enacted legislation dealing with the
formation of corporations, but a substantial body of federal
corporation law has arisen as a result of the enactment of such
regulatory legislation as the Federal Securities Act of 1933 and
the Securities Exchange Act of 1934, and of the administrative
and judicial interpretations of these acts. The general purpose
of these statutes is to require full disclosures concerning all stock
or other securities offered for sale, and to protect the public
against imposition and fraud in connection with the sale thereof.
Corporate structure is pyramidal in form. At the base are
shareholders who elect directors and pass upon fundamental
corporate matters, such as amendment of the articles of incorporation, sale or encumbrance of corporate assets, consolidation
or merger, and ratification of past acts of the directors and
officers. The next level is represented by the board of directors.
Almost all states' laws provide t h a t the business of the corporation shall be managed by this body. The dii-ectors elect the officers
and perform the function of niaking policy for the corporation.
The board of directors is generally vested with all of the powers
of corporate management. At the top of the pyTamid are the
officers who have some discretion in managing the corporation,
but whose principal functions are to execute policy formulated
by the board of directors. The term management often includes
senior officers chosen by the directors.
Because shareholders can act only at shareholders' meetings,
and then only within narrow limits, responsibility for management falls upon the directors. The powers, qualifications, and
procedures to be followed by management are prescribed not
only by a hierarchy of comstitutions, statutes, administrative
rules and regulations, but also by a variety of intracorporate
provisions such as articles of incorporation, by-laws, resolutions
of shareholders or directors, voting trusts, shareholder agreements, and the like. Directors are generally responsible for both
the formulation and execution of policy with respect to products,
services, labor relations, executive compensation, retirement
plans, declaration of dividends, and the selection and supervision
of executive persoimel. They exercise final authority over all
business activities of the corporation, having the power to make
contracts, borrow monej^, acquire real estate, institute litigation.
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issue negotiable instruments, and delegate power. How much
power is delegated to executive committees, officers, or outside
management firms varies among corporations. Some boards of
directors retain a large portion of management responsibility,
but others retain only? basic policy-making functions.
Directors can act on behalf of the corporation only in concert
and only at meetings which are properly convened. Individual
directors are not agents for the corporation; if, for example,
they act separately- in approving a proposal or signing a deed,
their action is usually ineffective. The Model Corporation Act
and a growing number of statutes, however, provide that
directors may act by unanimous consent without meeting. But
such statutes have been strictly construed because the very
purpose of a board of directors is to discuss and debate alternative courses of action that might be taken and this of course
is not possible without a meeting. On the other hand, the reality
is t h a t directors often ratifv without debate acts which have
already been taken by officers or executive committees; eliminating the requirement of a meeting is simply a recognition that
in many cases the board meeting is a mere formality.
Although the board of directors is the supreme authority in
matters pertaining to the management of corporate business and
activities, a large portion of this authority is customarily
delegated to the officers and employees of the corporation.
Frequently, too, directors delegate much of their authority to
executive committees. These committees are constituted by
directors and act in areas where the whole board would otherwise have to act. But a board of directors cannot abdicate its
ultimate responsibility for management. I t cannot, for example,
delegate complete control to a group of creditors, management
consultants, shareholders or officers; the power to select officers
is not delegable; nor is the power to declare or pay dividends.
Directors are in a peculiarly- advantageous position to exploit
the corporation or the shareholders, or both. A director is a
fiduciary of the corporation, but the practicalities of this relationship are not entirely clear. Obviously, he may not deal lightly
with the corporation, b u t courts and legislatures do not agree
on how strictly his duty of loyalty to t h e principal must be
observed. Questions concerning this d u t y often arise in connection with corporate transactions in which the director has a
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financial interest (apart from his interest as a shareholder).
A director has such an interest when he contracts with the
corporation or when the corporation contracts with a partnership or other corporation in which he is a partner, director,
officer, or controlling shareholder. But a contract with an
interested director will be upheld if the director has fully disclosed his interest to the board, if the transaction is approved
by a majority of disinterested directors attending the meeting
at which a quorum was present, and if the transaction is fair.
Some statutes provide t h a t directors and officers shall exercise
their powers in good faith and with a view to the interests of
the corporation. These statutes are difficult to apply to specific
fact situations, but the essence of a fiduciary duty is t h a t the
fiduciary will resolve all doubts in favor of the principal in cases
where their interests possibly conflict. If a director makes any
secret profits from his activities as a director, he must account
for them to the corporation. Directors may not compete with
the corporation, or usurp corporate opportunities for themselves;
but these prohibitions usually do not prevent an individual from
being a director of two competing corporations if no bad faith
or fraud is present.
Important provisions in federal regulatory statutes relate to
the directors' duty of loyalty. Section 16 of the Sectudties
Exchange Act of 1934 deals exclusively with the subject of
«insiders » trading in securities of the corporation with which
they are associated. An insider is a director, officer, or shareholder owning more than 10 % of the stock. The statute requires
the insider to disgorge to the corporation, without proof of
scienter, any profits realized by him on stock purchased and
sold within a six month period.
Directors are liable for losses suffered by- the corporation as
a result of their having mismanaged its affairs, intentionaUy^ or
neghgently. They may be held liable, for example, for the negligent selection of employees or — since they are expected to
maintain a reasonable degree of continuing supervision over
employees — for defalcations of which they knew or reasonably
should have known. Directors are not expected to perform
routine supervisory functions; in most cases they are entitled
to rely on reports of the condition of the corporation which are
submitted to them by executive officers.
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Directors and officers are restricted by charter provisions
defining the scope of corporate power and are liable to the
corporation for any losses it suffers as a result of their having
exceeded this authority. Directors also are liable for dividends
paid from improper sources or paid when the corporation is
insolvent, and for the withdrawal or distribution of assets among
shareholders except upon dissolution or adequate provision
having been made for creditors. I t is a common practice for
shareholders to consent to limitations upon the liability^ of
officers and directors. A director may also escape liability for
an improper transaction by recording his dissent to it at the
board meeting where it approved; otherwise he will be deemed
to have assented to it.
Holders of a majority of shares have the power to control the
corporation by their votes in fundamental corporate matters and
by the election of directors of their choice; minority shareholders
must submit to their decisions. Majority shareholders, however,
have a duty to protect the interests of minority shareholders
and to exercise diligence and good faith in the control of
corporate affairs. This is true whether the shareholders are individuals or other corporations. Majority shareholders, for example,
may not dissipate corporate funds to the detriment of the
minority. At the same time, minority shareholders may not
arbitrarily veto a decision, and charter provisions requiring
imanimity among shareholders are usually void. A minority
shareholder dissenting to a merger or consolidation may usually
have his shares appraised and purchased by the corporation at
a reasonable price.
A major reason for incorporating a business is t h a t shareholders
are not individually liable for obligations of the corporation.
Absent a provision in a statute or the charter, this applies to
liabilities for torts, contracts, or debts. Creditors, however, may
have recourse against shareholders whose subscriptions remain
unpaid, and against shareholders who purchased « watered » or
bonus stock, or who purchased stock at a discount. For the
redress of wrongs against them as individuals, shareholders may
sue the corporation, its directors, officers, or other shareholders.
They may also bring an action on behalf of the corporation,
called a derivitive action, for wrongs against the corporation.
This kind of suit is often brought where the directors are the
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alleged wrongdoers and refuse to commence the action. A derivative action is equitable in nature, but is governed by statute
in most jurisdictions. The corporation is the real party in
interest.
\^Tiile the courts protect minority^ shareholders from fraud and
breach of trust, management persoimel and majority shareholders have the right to manage corporate affairs. Courts, therefore, w-ill refrain from interfering in the internal affairs of the
corporation. Errors of judgment on the part of management or
majority shareholders are not sufficient grounds for the granting
of relief at the behest of minority shareholders.
Shareholders exercise power through their votes at shareholders' meetings, which are usually required to be held aimually.
The power to call these meetings is vested in the board of
directors, unless a provision in the charter, the by-laws, or an
applicable statute provide otherwise. Meetings may sometimes
be called by- an officer of the corporation, by a certain percentage
of shareholders, and — if a meeting has not been held for over
a year — by a single shareholder. Notice of the time, place, and
purpose of the meeting must be given in the prescribed manner
to all shareholders of record who are eligible to vote. Custom
governs the conduct of these meetings, but the fundamental
rule is that all participants shall be treated with fairness and
good faith. Questions may be decided by^ a vote of a majority
of the shares owned by^ shareholders represented at a legally
constituted meeting; a majority of all outstanding shares is not
required.
The right to vote stock at a meeting of shareholders is an
incident of stock ownership, but the right must be exercised in
the manner prescribed by the provisions of the charter, the
by-laws, or an applicable statute. Usually the right to vote stock
is limited to persons appearing as owners of stock on the records
of the corporation as of a certain date; purchasers of shares after
t h a t date are well advised to obtain an irrevocable proxy from
the record owner. Cumulative voting in the election of directors
is sometimes provided for by a charter, statute, or state constitution, b u t does not exist in the absence of such authorization.
Under this method of voting each shareholder is entitled to cast
a number of votes equal to the number of his shares multiplied
by the number of directors to be elected, with the option of
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305
giving all his votes to a single candidate or of distributing them
among two or more. The purpose of cumulative voting is to
enable minority shareholders to obtain representation on the
board of directors. Shareholders also enjoy- the right to vote
shares by proxy — an authority given by' the ow-ner to another
to exercise his voting rights. The duration of a proxy may be
limited by^ its terms, by statute, or by the charter; a proxy is
revocable by the shareholder unless it is coupled with an interest,
or has been given as security.
Agenricy
Apparent authority. The power of an agent to create relations
between the principal and a third person may result from what
is termed apparent authority : conduct by the principal which
causes the third person to reasonably believe t h a t a particular
person has authority to enter into negotiations or to make
representations as his agent — his manager, collector, or partner,
for example. Such conduct may be a direct statement to the
third person, a direction to the agent to tell something to the
third person, or permission given to the agent to do something
under circumstances which create in him an appearance of
authority. B u t it is not sufficient to show only t h a t the third
person reasonably' believed the agent is authorized; it must also
be shown t h a t the principal, by his conduct, was responsible for
the appearance of authority. Either the principal must intend
t h a t the third person believe the agent is authorized to act for
him, or the principal must realize t h a t his conduct is likely to
create such a belief. If this is proved, the principal and the
third person are bound by the ordinary^ rules of contract, provided t h a t the latter is without notice t h a t the agent was
unauthorized. Apparent authority however, does not ordinarily
operate to make the principal liable for physical harm caused
by negligence, assault, or trespass on the part of the agent.
Liability of disclosed or partially disclosed principals for the
unauthorized acts of a general agent. A disclosed or partially
disclosed principal is liable for the acts of his general agent
which usually^ accompany or are incidental to transactions t h a t
the agent is authorized to conduct; but it must be shown t h a t
the third party reasonably believed t h a t the agent is authorized
Unity of Strict Law. — 20
306
ROBERT A. WENINGER
to perform such acts and he must be without notice that the
agent was unauthorized to perform them. This liability is based
on the inherent powers of an agent and may exist in the absence
of authority or apparent authority; it is based on the theory
that the principal should bear losses which are incurred when
an agent does something, though unauthorized, in connection
with transactions he is authorized to perform, even if he acts
disobediently. Commercial convenience demands t h a t third persons not be required to scrutinize too closely the authority of
agents who do no more than what is usually done by other
agents in similar positions. But this rationale does not apply
to special agents, who are employed only to conduct certain
limited transactions and business organization. I t is held t h a t
the principal is bound b y the unauthorized acts of a special
agent in only a few- situations, such as where, for example, the
agent is authorized to deal with a chattel and does something
with it which is similar to what he is authorized to do, or where
the agent performs an act which would be authorized if done
carefully and with a proper motive. A principal is not liable to
a third person who has notice of limitations upon an agent's
authority and who knows or should know that the agent is
acting improperly.
A principal who entrusts an agent with possession of a chattel,
but who does not authorize him to sell it or display^ it for sale,
is not bound by an unauthorized disposition of the chattel by^
the agent. I t is considered that possession is not a sufficient
indication of authority to warrant subjecting the principal to
loss for an unauthorized transfer of the chattel. Where the
agent is authorized to deal with a chattel in a particular manner,
however, the principal's interest in the chattel may be affected
by an unauthorized transaction of the same kind as t h a t
authorized, provided the third person pays value and reasonably
believes the agent to be authorized.
Undisclosed principal. If, at the time of a transaction conducted by an agent, the other party has no notice t h a t the
agent is acting for a principal, the latter is an undisclosed
principal. Simple contracts and conveyances may be enforced
by or against an undisclosed principal if they were made on his
behalf by an agent acting within the scope of his authority.
This rule appears to violate the basic theory of contracts t h a t
STRICT LAW IN THE LAW OF U.S.A.
307
there be privity between contracting parties. Although there has
been no manifestation of consent by the principal to the third
party, or vice versa, the law finds it expedient to create rights
and liabilities as if they were contracting parties.
An undisclosed principal is responsible, in actions brought for
breach of contract or for rescission, for the authorized representations of the agent. The representations may be statements
concerning the existence of an extrinsic fact connected with the
contract or its subject matter, statements concerning the existence or extent of the agent's authority, or statements concerning
events upon which the authority depends. Although the contract
purports to be the contract of an agent acting wholly on his
own account, an undisclosed principal, upon his discovery, may
be held liable upon the agreement. This is true even if the agent
denies t h a t he was acting for another. If the contract is rescinded
or not performed, the third party is entitled to restitution from
the undisclosed principal on the theory t h a t he benefitted from
the transaction. Where a statute requires a contract or transaction to be signed by the party to be charged, a memorandum
signed by an authorized agent is sufficient to charge the principal. But an undisclosed principal does not become liable upon
a contract which excludes the principal as a party to the transaction or which specifically provides t h a t the agent alone shall
be liable. Nor, in the absence of statute, is an undisclosed
principal liable upon a sealed or negotiable instrument.
An undisclosed principal is liable for the unauthorized acts
of a general agent — acts which the principal has forbidden him
to do — if those acts usually accompany or are incidental to
transactions which the agent is authorized to conduct. Liability
is based on a theory of inherent agency power. I t does not result
from an exercise of real authority- since, if the acts are unauthorized, there can be no real authority. Nor, if the third
person does not know of the existence of the principal, can
liability be derived from apparent authority, which exists only
where the acts of an agent appear to the third person to be
authorized by a principal. Instead, liability is grounded on the
theory t h a t if one appoints an agent to conduct a series of transactions over a period of time it is fair t h a t he bear the losses
incurred when the agent acts in connection with such trans-
308
ROBERT A. WENINGER
actions, even though he does something which he has been
forbidden to do.
Death of principal. Except as to the payment or collection of
negotiable instruments, the death of the principal terminates
the authority of the agent without notice to him. Legal relations
with the deceased principal are impossible because an agent
caimot act on behalf of a non-existent person; to the extent t h a t
agency is a consensual relation, it cannot exist without the
continuing assent of both parties. Because the rule of termination
applies whether the death of the principal is known or unknown,
its application may produce harm to an innocent agent or third
party-. The agent who is employed to act is in an especially^
precarious position : if the principal is alive, the agent may be
held liable for his inaction; if the principal is dead, he may be
held liable for his action. Recognizing t h a t the agent ought to
be protected if he is justifiably ignorant of the principal's death,
courts have made inroads on the generality of the rule, but the
exceptions apply only to negotiable instruments. Until notice
of a depositor's death, a bank has authority to pay checks drawn
by him or by^ agents authorized by him before death. Protecting
the bank is sensible because it ordinarily is unaware of the death
of any one of its many depositors and checks are subject to
rapid negotiation. A bank escapes liability not only if it pays
the check of a drawer not know-ing of his death, but also if it
collects a check for its deceased depositor. This exception is
required by commercial convenience and is in the best interest
of the principal's estate. Checks in the process of collection
should be collected w-ith the least possible delay, and collection
can result in no harm to the estate of the depositor.
Workmen's compensation. This term refers to legislation placing
upon employers part of the costs of injury, disablement, or death
of workmen through industrial accident, casualty, or disease.
The statutes are based upon the idea of strict liability-, or liability
without fault, which departs from the tort principles t h a t tort
liability may be based only upon negligence and t h a t an
employer's liability is subject to the defenses of contributory
negligence, fellow servant's negligence, and assumption of risk.
The rationale of the legislation is that the costs of industrial
accidents are legitimate costs of business, t h a t employers are in
STRICT LAW IN THE LAW OF U.S.A
309
the best position to prevent accidents, and that their liabilitygives them an incentive to reduce accidents.
By 1948 — despite early constitutional decisions — all states
had enacted compensation laws based on liability without fault.
Nevertheless, the legislation has not completely supplanted
common law remedies for occupational injuries. Almost one-fifth
of the United States workers are not covered by existing laws.
Noncoverage is attributable to exclusions for certain types of
employment (e.g., small firms, agricultural work, domestic
employ^ment) and to «elective» provisions that give both
employer and employee the right to choose between the compensation system and common law remedies.
In addition, some types of injuries, especially- occupational
diseases (as distinguished from «accidents »), are excluded. The
statutes usually require that an injury' « arise out of» and «in
the course of» employment in order to be compensable. The
words «arise out of» involve the idea of causal relationship
between the employment and the injury, while the term «in the
course of » relates to the requirement t h a t a compensable injury
is one which takes place within the period of employ-ment, at
a place where the employee reasonably^ may- be in the performance of his duties, and while he is fulfilling his duties. An
« accident» is generally defined to mean an occurrence which is
neither to be expected nor intentionally caused by the workman.
Compensation benefits are financed by employers. The aggregate annual cost of the sy-stem has remained below 1 % of the
payToll in covered employment. Workmen's compensation systems are usually administered by administrative tribunals rather
than courts, b u t provisions are often made for appeal to the
judiciary- from administrative decisions. With the greater participation of lawyers in court cases, the costs of litigation have
steadily increased.