CFP Notes: Professional Conduct and Regulation - Business Law

Contract Requirements
In contract law, the person to whom an offer is made is called the offeree; the person who makes the offer is called the offeror. In order for a valid contract to exist, there must be five specific elements. The first is offer and acceptance, in which one part makes a definite, unqualified offer that the other accepts completely. There must then be what is known as genuineness of assent, meaning that there can be no misrepresentation, coercion, undue influence, ambiguities, or willfully incorrect information.
There must also be adequate consideration. The offeror and offeree must both be in a situation where they are capable of entering into such a contract.
Finally, the terms of the contract must not require that any laws be broken.

Types of Contracts
In a bilateral contract, both parties make legally enforceable promises to one another. In a unilateral contract, one party makes a promise in exchange for another party either doing something or not doing something. Insurance contracts are considered unilateral, since the insured doesn’t have any specific obligations. In an enforceable contract, all of the terms are present and clear. In a void contract, one or more of the elements required for a contract to be legal are missing. A voidable contract is one that is legally enforceable, but from which one of the parties could potentially escape because of some lack of genuineness of assent. A quasi-contract is not a legal contract itself, but may function as one if one party has unjustly received a benefit. An unenforceable contract is one that seems to have all the necessary elements for enforceability, but from which one party will be able to escape for some other reason.

The statute of frauds states that a contract need not be in writing to be enforceable, unless it is a promise to answer for the debts of another; a contract to transfer interest in real estate; a contract that cannot be fulfilled within one year; or a contract on goods of more than $500 in value.

The parole evidence rule states that when a written contract is the subject of a trial, there is a limit on the additional information that can be introduced to dispute it. Nonperformance of a contract may be excused when:  one party has committed a material breach or one party dies and is therefore released from obligations to perform services. If a breach of contract occurs, the party that did not breach the contract may be awarded compensatory damages, punitive damages, or liquidated damages.

Torts
A person can commit two types of misdeeds: public and private.

Public misdeeds are a violation of the individual’s compact with society and are called crimes, while private misdeeds are violations of the rights of another person and are known as torts. The person who commits such a wrong is known as a tortfeasor.

There are two kinds of torts: intentional and unintentional. Intentional torts are intentional infringements on the rights of others, such as assault, libel, trespass, or invasion of privacy. Unintentional torts are performed through negligence or carelessness. Liability insurance is unlikely to protect the insured from legal penalties resulting from intentional torts or criminal behavior.

Agency
When we discuss a two-party relationship in which one party (agent) has permission to act on behalf of the other (principal), we are referring to agency. When an agent acts on behalf of a principal, he or she has the fiduciary duty to act in the principal’s best interest, not his or her own.
When an agent is an independent contractor, the principal has no control over his or her actions. When an agent is an employee of the principal, however, the principal may direct the behavior of the agent.

There are a few kinds of agent authority that determine the degree to which an agent can bind a principal in a contract: express authority is granted for a specific purpose; implied authority is granted to carry out any acts that are relevant to accomplishing a particular goal; and apparent authority is granted to perform any act which the principal could reasonably want performed. Principals are liable for all torts committed by agents in their employ.

Negotiable Instruments
A negotiable instrument is a written contract that is used as a substitute for money. A negotiable instrument may be either a promissory note (a promise to pay) or a draft (a three-party promise to pay). The holder of a negotiable instrument is entitled to payment unless: the owing party is an infant; the instrument was created under extreme duress; the paying party goes bankrupt; or a fraud has been committed. A valid negotiable instrument is in writing and signed by the maker, includes an unconditional promise to pay, is payable at a definite time, and is payable to a certain party. Banks have a similar obligation to honor checks owed to customers, though banks may also be required to honor a customer’s request for them not to pay. Such a stop order is valid for 14 days if given orally and six months if submitted in writing.

Professional Liability
The Practice Standards were designed to protect financial planners from any liabilities created by the practitioner-client relationship.
Financial planners are potentially responsible for breach of contract, fraud, tort, or negligence. Financial professionals may take out both malpractice insurance and errors and omission insurance to protect themselves from liabilities.

Financial planners may be charged with a fiduciary liability because they have an obligation to their client that is similar to but also more intense than that of a trustee. In the event of a dispute between a client and a financial planner, arbitration and mediation may be a positive alternative to litigation.