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17 Cards in this Set

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1. Distinguish an operating lease from a purchase lease. (Pg. 321-22)
a. In both operating and purchase leases, the owner of a good (the lessor) permits the property to be possessed by another (the lessee). The lessor in return authorizes possession and use of the property by the lessee.
b. However, the lessor in an operating lease has no intention to transfer ownership but it is generally intended that the lessee will gain ownership through a purchase lease.
2. Discuss the importance of the distinction between operating and purchase leases. (Pg. 322)
a. Ownership of property generally entitles the owner to certain benefits and may impose obligations. A capital purchase lease will have to be recorded, for accounting purposes, in the lessee’s balance sheet. The item must be shown as an asset of the lessee and the outstanding payments as a liability.
b. For tax purposes, the two types of leases are treated differently. If ownership in the property is to be transferred to the lessee, as in a purchase lease, payments will not be tax deductible. However, in an operating lease, the lessee will be able to make a tax deduction for the rental payments. Furthermore, the owner of capital property may claim a tax deduction for its depreciation.
c. Finally, the type of lease will determine how security in the property must be obtained.
3. The owner of a leased chattel is not always the lessor. How and why might this occur? (Pg. 322-23)
a. A finance lease is an arrangement where a third party provides credit financing, becomes the owner of the property, and leases it to the lessee. In other words, it is an arrangement in which the vendor sells the chattel to a second party who arranges to lease the item to a third party, the lessee. The lessor, or financing party, is an intermediary who facilitates possession and use of the item by the lessee. The lessor owns the property until the lessee satisfies the terms of the lease.
4. Describe the remedy available to a lessee who suffers from a breach of the warranty of fitness. (Pg. 325-26)
a. Lessees will likely be able to avail themselves of the warrant of fitness. This warranty, like all warranties, entitles the offended party to damages. The implied term warrants that leased items are reasonably fit for the purpose for which it was leased. The lessee may be entitled to damages for losses resulting from the goods not being in compliance with the warranty.
5. Define the word “bailment.” (Pg. 327-28)
a. A bailment is a transfer of possession of personal property without a transfer of ownership. It is created when a bailor delivers some item of personal property to a bailee who accepts it agrees to return it at a later date.
6. Distinguish a bailment from a sale and a debt. (Pg. 328)
a. A bailment is a transfer of possession while a sale is a transfer of ownership. A deposit of money in a bank creates a creditor-debtor, rather than a bailor-bailee, relationship.
7. Describe the two general classes of bailments and the significance of distinguishing between them. (Pg. 327-29)
a. Bailments may be gratuitous or for reward. Gratuitous bailments may be for the benefit of the bailor, the bailee or both. Bailments for reward are of benefit to both.
b. The liability of the bailee for loss or damage to the bailed property varies depending on whether the bailment is gratuitous or for reward.
8. What is a “sub-bailment”? (Pg. 330)
a. Sub-bailment is the relationship between a bailor and sub-bailee. A sub-bailee is a person who receives a bailment of property from a bailee.
9. When bailed goods are damaged or lost, who has the burden of proof of explaining how the damage or loss occurred? (Pg. 330)
a. As the bailee is the person with possession of the goods, he/she normally is better able to establish the facts and, thus, has the burden of proof for showing that he/she was not negligent.
10. Describe the different standards of care that a bailee may owe to the bailor. (Pg. 332-32)
a. The bailee must use a reasonable degree of care to protect the bailed property during the time he/she has possession of it. If such care is not exercised, the bailee may be liable to the bailor if the property is lost or damaged. The degree of care due depends partly on the classification of the particular bailment. If it is a mutual benefit bailment, the bailee is held to a duty of ordinary care, that which a reasonable person would use to protect his/her own property. If the bailment is for the benefit of the bailor, a lower degree of care is required on the part of the bailee. On the other hand, if the bailment is for the bailee’s benefit, the bailee is held to a higher degree of care. Other factors relevant to the degree of care due include the nature and value of the property, how easily the property can be damaged or stolen, whether the bailment was for reward or for free, and the experience of the bailee.
11. A bailee may be compensated for his/her services by being paid the contract price, damages or quantum meruit. Describe the differences among these three remedies. (Pg. 332)
a. If the bailment is contractual, the bailee will have the usual contractual remedies. For complete performance, he/she is entitled to the contract price. Where performance is incomplete, the bailee may be entitled to the contract price. Where performance is incomplete, the bailee may be entitled to damages for payment for services rendered on a quantum meruit basis. Damages are normally less than the full contract price. Quantum meruit is based on what is reasonable, not what was the contract price.
12. What is a lien? Is a bailee entitled to one? (Pg. 332-33)
a. A lien is the right to retain possession of goods owned by another. The right arises when services have been performed with respect to the goods and payment is due by the owner.
b. Only some bailees are entitled to liens. Entitlement comes from the common law and from statures. At common law, for example, bailees who make repairs or improvements to goods may have a right of lien. Thus a garage which repairs your car may hold it until paid for its services.
13. How can a bailee realize on his/her lien? (Pg. 333)
a. Mere retention of a person’s goods (i.e., a lien) may lead to a bailee being paid for his/her services. If it doesn’t, the bailee may, by power of statute, sell the goods. Any surplus after payment of the bailee’s charges and costs must be given to the bailor.
14. What is a fungible good? Why is it relevant to bailment? (Pg. 334)
a. Fungible goods are goods that may be replaced with different but identical goods. Ordinarily, a bailee must return to the bailor the exact goods stored. When the goods stored are fungible, the bailee’s liability is discharged when he/she returns to the bailor goods of the exact description in the warehouse receipt.
15. Distinguish a private carrier from a common carrier. (Pg. 335-36)
a. A private carrier transports goods for reward but reserves the right to select his/her customers and restrict the type of goods he/she is willing to carry. A common carrier acts for reward and does not discriminate amongst customers. His/her services, however, may be limited to a particular geographical region or type of goods.
16. Why is it important to make the distinction between a private and a common carrier? (Pg. 335-36)
a. The liability of a common carrier is extremely high. In effect, a common carrier is an insurer of the goods as liability is imposed regardless of fault. The only defences to liability that a common carrier may have are that damage or loss occurred through an act of God, inherent vice in the goods or the fault of the shipper. A private carrier, however, owes only the normal standard of care.
17. What is meant by a “pledge”? (Pg. 338-39)
a. A pledge, also known as a pawn, is a bailment of personal property as security for repayment of a loan. The borrower is the bailor and the creditor the bailee.