Top exam answers, Fall 1998

Top Student Exam Answers, Fall 1998

Note: These were, in my judgment, the best answers received under examination conditions. They should not be taken as model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all take intelligent approaches to the questions, are well organized and reasoned, and make sensitive use of the facts.

Exam #3168, Question 1 (1495 words)

Dear Gerald and Lawrence:

We will first establish that your contract with LoCardi contained a relocation provision that would not be excluded as parol evidence. Your father’s meeting with Younger ended with a handshake, which signals the meeting of the minds that occurred during their preliminary negotiations. The handshake represents the customary way of doing business between two long-time business associates, and therefore would be binding if the parties desired a binding effect. The offeror is the master of his offer, and Younger showed no hesitation in acceding to the relocation condition on behalf of LoCardi; this shows Younger’s desire to be bound by Harold’s condition.

LoCardi will argue that the oral negotiations between Harold and Younger would be excluded as parol evidence, inadmissible to contradict a written integration. However, both Harold and Younger had decision-making authority, and Younger immediately accepted Harold’s conditional offer to sell Twin Cities. McCarty’s subsequent involvement in the deal was simply to clarify the executives’ already-existing bilateral contract, and he had no authority to modify this already-accepted offer. Alternately, the agreements’ lack of an integration clause, despite the presence of various other boilerplate provisions, indicates the written contract merely acted as a written addendum to the previous oral agreement and not an entirely new contract. The existence of some boilerplate provisions, but the exclusion of a standard boilerplate integration clause, implies that the exclusion of an integration clause was purposeful.

Due to Harold’s death, the lack of written evidence, and the passage of four years since the written contract, LoCardi might also argue than an agreement between Younger and Harold never occurred. However, we can assume that before his death, Harold told numerous people including the Shankmans of the relocation condition. In addition, we can find evidence of Younger’s assent to Harold’s condition in the subsequent involvement of McCarty and in the 1995 discussions regarding the Saskatoon market.

LoCardi might also raise the argument that Younger’s promise to Harold falls under the Statute of Frauds, because it cannot be fully performed within one year. We will have to argue that the essential agreement, which is the sale of a future distributorship, can be fulfilled within one year. Any subsequent liquor distributing agreements with LoCardi, formed after the Franks purchase a new distributorship, were not part of Younger’s original promise and therefore not subject to the Statute.

A pivotal argument regarding the inclusion of a relocation provision involves the question of consideration. Specifically, a court will likely ask whether Twin Cities was sold for fair market value, to determine the parties’ intent. If Twin Cities was sold to LoCardi for significantly less than the distributorship’s fair market value, a court will likely imply that Younger’s promise was intended to be added to the Twin Cities’ purchase price, as consideration for Twin Cities. This would be quite persuasive evidence that the parties intended Younger’s promise to outlive the written agreement. However, if Twin Cities was sold to LoCardi for its fair market value, then Younger’s promise would be a relied-upon donative promise, subject to different analysis.

After establishing the legitimate existence of the relocation provision, we will argue that Younger failed to satisfy his duty of good faith by not offering the Franks the next available distributorship similar to the one in Twin Cities. The relocation provision gives Younger a great deal of latitude with respect to location, price, and sales volume, but Younger failed to work within the good faith bounds of this latitude in only discussing a Saskatoon distributorship. The Saskatoon distributorship was quite inferior to Twin Cities in location, profit potential, and competitive considerations, and it was not even offered to the Franks. We will therefore argue that Younger has failed to offer even one contractually acceptable distributorship in the four years since the agreement.

Younger will counter our argument by saying that when he agreed to the condition, he intended to find a distributorship for Harold and his sons, because of Harold’s long-time relationship with LoCardi; after Harold’s death, he felt compelled to award new large distributorships to business teams with more longstanding ties to LoCardi. Furthermore, he would contend that he discussed the Saskatoon distributorship with the Franks, because he thought that without their father, Gerald and Lawrence should enter the liquor business on a relatively smaller scale. These arguments would point to his good faith response to the changed circumstances of Harold’s death.

Younger might have a strong argument on this point, were it not for the twelve years of apprenticeship that Gerald and Lawrence underwent at the direction of Harold, a very able mentor. Younger’s good faith argument might be plausible for a couple months or even years. But we will argue that Younger should have offered the next similar distributorship available, and it seems very unlikely that no acceptable distributorships became available for a entire four-year span.

Because of the possibility we will lose the above-stated arguments, we will also contend that were it not for our reliance on the substantial factor of Younger’s promise, we would not have sold Twin Cities. Because of this detrimental reliance, Younger should be estopped from denying the promise’s legal effect. Younger might reply that if the promise was truly that substantial, Harold should have insisted it be in writing. However, Harold had good reason to believe the customary handshake with a business associate of over twenty years was binding. Alternately, we will argue that whether the promise was oral or written is irrelevant, provided we relied upon it and Younger reasonably expected that reliance.

Remedies

Pursuing litigation might be an expensive and time-consuming option, and it may cause liquor suppliers to black-ball you from purchasing a distributorship in the future, so it is my duty as your attorney to inform you of non-legal solutions to your problem. Despite your feelings of Younger’s betrayal, it seems unlikely he harbors residual anger toward you, and might therefore be interested in seeking a modification to his agreement with Harold. LoCardi would probably prefer to avoid a discovery process which could provide hard evidence of Younger’s bad faith motivation in his business dealings with you or other potential distributors, and they would also likely wish to avoid excess legal fees. To this end, it might be efficient for LoCardi to furnish you with a smaller distributorship along with side payments to help offset the difference in profit between a large and a small distributorship.

While I advise you to allow me to initially pursue non-legal solutions, we must be prepared to commence litigation if such a solution cannot be reached.

Modern courts tend to aim for the expectation measure, which would compensate you as if Younger had fulfilled his bargain to the Franks. However, you are under a duty to mitigate damages. It seems unlikely a court would define this duty to include buying the Saskatoon distributorship, because owning a distributorship includes intensive labor, and courts are usually unwilling to include labor in the duty to mitigate damages. Furthermore, bond investments seem a reasonable, low-risk way to mitigate damages.

Courts are also reluctant to award expectation damages that are speculative, and we are basing estimates of a new distributorship on the established Twin Cities facility. LoCardi will likely succeed in arguing that this is not an accurate assessment, as the first ten years at a new distributorship would result in significantly lower profits than at Twin Cities, as the new distributorship builds up local business through word-of-mouth and paid advertising. The expectation measure would also subtract the cost of purchasing the new distributorship, in addition to start-up costs, from Winters’ estimate.

Because of the problems of finding the expectation measure in this case, it seems better to fulfill the purpose of expectation damages using a reliance measure to return you to your position before Younger’s breach. Were it not for this breach, your profits would likely mirror Winters’ estimate—Twin Cities pre-tax profits less your damage mitigation through bond investments. We will argue that were it not for Younger’s breach of Harold’s conditional offer, Harold would never have agreed to sell Twin Cities. Therefore, our reliance on Younger’s promise resulted in ten years of Twin Cities’ lost profits, assuming the Twin Cities contract had ten years remaining.

You cannot collect under contract law for the sentimental value that Twin Cities held or the betrayal you feel from Younger, and these would certainly be shaky tort claims.

You will also have an extremely difficult time regaining possession of Twin Cities or forcing specific performance of Younger’s promise. Specific performance, as an equitable remedy, is only available when legal remedies are inadequate. The reliance measure will provide adequate monetary damages, so a court will be hesitant to award specific performance. Similarly, because of the adequacy of the reliance measure, a court will not allow recession of the contract. Furthermore, even if Younger’s promise to Harold were void, a court would not void the entire sale of Twin Cities and return it to you.

Exam #3220, Question 1 (1500 words)

Dear Gerald and Lawrence:

I am writing to provide you with my assessment of the likelihood of success of your anticipated claim against LoCardi Brothers, the damages which you might receive if you win, and my recommendation as to the best course of action to resolve this dispute.

I. Merits of Claim

There are several aspects of your claim that LoCardi is likely to attack if sued. First, the agreement between your father and Mr. Younger was oral; it was never put in writing, and therefore could be unenforceable under the Statute of Frauds, a law which requires contracts not performed within one year to be in writing. However, courts usually hold that if the terms of the agreement could have been performed within one year, it is not subject to the Statute and therefore does not have to be in writing. Since it is possible that LoCardi could have awarded the new distributorship to you within one year, the oral agreement is most likely enforceable under the Statute of Frauds.

A second issue is that the oral agreement could have been too indefinite to be enforceable. Although your father believed that he had an understanding with Younger that the location would be subject to your approval and that the sales volume and price of the distributorship would be comparable to that of Twin Cities, these terms were not explicitly part of their agreement. Courts will generally not enforce contracts that are missing such essential terms. In order for the contract to be sufficiently definite to be enforceable, the court would have to imply some terms regarding the location, price and volume of the distributorship. The terms that your father understood are flexible, yet most likely definite enough to be enforceable. The court would almost certainly add them to the contract if Mr. Younger admits to them, which he might do on the basis of his long association with your father, but his offer of the Saskatoon distributorship in 1995 indicates that it is possible that he did not share this understanding with your father. The court could also imply these terms based on your father’s extensive experience and your twelve years of experience at Twin Cities; it would not be logical for you to want to have an inferior distributorship. Mr. Younger’s close relationship with your father makes it very likely that he also understood your motives to advance your careers in liquor distributing and understood the need for a similar distributorship. The court might be persuaded that these terms were part of the understanding between your father and Younger and imply them in interpreting the contract.

A third problem that you will face in a suit against LoCardi is that the court could refuse to admit any evidence of this agreement under the parol evidence rule, which excludes introduction of evidence of prior understandings and negotiations to supplement or vary a written agreement when parties express their agreement in a complete written integration. As you did not include a provision regarding the new distributorship in the written agreement signed in 1994, the court could refuse to admit evidence regarding the oral agreement unless we can show that it is an exception to the parol evidence rule. We could argue that this is really a separate agreement, which might be unpersuasive if the oral agreement is viewed as part of the consideration for the sale of Twin Cities. However, we could also argue that the two agreements would not be expected to be included in the same agreement, perhaps because no distributorship was available at the time of the sale of Twin Cities or because the written agreement was a form contract that could not be amended to include this unusual provision without undue burden. In addition, there was no clause in the written agreement providing that it constituted the entire agreement between the parties, so we have a good argument that the written agreement is only a partial integration and that the evidence of the oral agreement should be admitted.

Fourth, LoCardi could argue that the agreement regarding the new distributorship was merely a condition, not consideration, for the written agreement, and that this condition was waived when you and your father did not insist on including it in the written agreement. However, if it was only a condition, you can simply give notice that you want to enforce the condition of the new distributorship, and this revocation of the waiver is valid because LoCardi has suffered no material change in position in reliance on the waiver.

A fifth issue that could arise in a suit against LoCardi is that there has been a change in circumstances since the time that the oral agreement was made. LoCardi could argue that it was a crucial part of the agreement that your father be a part owner of the new distributorship because he was very experienced in the industry and you are less experienced. Therefore, LoCardi could argue, the agreement has become impossible to perform because your father is no longer alive and is therefore void. However, the fact that LoCardi offered you the Saskatoon distributorship after your father’s death indicates that it did believe itself to continue to be bound to you after his death. LoCardi does has a credible argument that without your father, it is not obligated to find you a distributorship with such a high sales volume because you are less experienced than your father was and are not likely to be able to sell as high of a volume of its products.

II. Damages Available

If all of the above issues are surmounted, and we win a suit against LoCardi, the damages available may be very limited. First, the damage calculation for lost profits may be too uncertain. Mr. Winters assumes that the market in the years after 1994 was not only stable but continued to rise. He also assumes that you would have made these profits without your father, uncle and cousin working with you on a daily basis. In addition, he assumes that you would make these profits in a different and unknown location and market volume, when it is likely that you would have suffered some, perhaps temporary, decrease in profits because of moving costs and the challenges of learning a new market. These assumptions, together with the projection that the distributorship would last at least ten years, are, despite the expert analysis, mere projections and it is unlikely that a court would award damages based on these lost profit projections. We could attempt to develop a more credible and realistic lost profit figure.

Second, if the court does award damages for lost profits, the defendants are likely to argue that you have failed to mitigate your damages because you did not accept the Saskatoon distributorship or find another comparable distributorship yourself. You can argue that you did not have to accept the Saskatoon offer because it was different and inferior to the Twin Cities distributorship. However, in the three year period since the sale of Twin Cities, you probably could have found another comparable distributorship on your own initiative, so the court might not award lost profits, or might reduce such an award, on this ground.

Third, the court would almost certainly not award specific performance by ordering LoCardi to offer you an acceptable distributorship. Courts rarely make such orders in contracts relating to personal services because of the likely tension in the business relationship, and even in a more distant relationship such as a distributorship, a court would not want to create an adversarial business relationship.

III. Recommendation

Any of the issues described above could result in dismissal of our suit, leaving us in a situation in which no legal remedies are available and LoCardi consequently has no incentive to negotiate with us. Even if the suit is successful, the damages available are likely to be minimal while litigation expenses are likely to be high. Therefore, I suggest that we try to negotiate with LoCardi before filing suit. Mr. Younger is likely to be willing to negotiate based on his relationship with your father and to avoid the costs of litigation. We should also try to negotiate before filing suit because we do not know yet whether Mr. Younger will deny the understanding regarding the location and volume of the distributorship, and that is an important issue in the case. My most important recommendation regarding these negotiations is to adopt a conciliatory tone, because your best alternative is to obtain a distributorship and if you want to work with Mr. Younger, you must be on good terms with him. I think that you should consider being willing to accept a distributorship that is somewhat inferior to the Twin Cities distributorship in price and location because it would save you the cost of litigation and is likely to work out to be more profitable than damages in a winning suit.

Exam #3226, Question 1 (1496 words)

The Franks have a very plausible action against LoCardi for breach of contract, but there are several weaknesses in their case which they must consider.

Status of the Oral Agreement: Preliminary Negotiation or Contract?

First, LoCardi will probably argue that the interaction between Harold Frank and Philip Younger was a non-binding preliminary negotiation for the sale of Twin Cities, rather than a contract, because it was too vague. It is true that the formal aspects of their interaction were similar to those of offer and acceptance, and consideration was contained in the exchange of a promise to buy for a promise to sell, but LoCardi will argue that the critical details were missing. Although courts will do some gap filling, LoCardi will say that there are too many open terms here, including the price of the sale itself, and so the court should probably find that no contract was made.

Even if the court agreed with LoCardi, this would not be devastating to our case because preliminary negotiations can still have some binding effect (TIAA, Red Owl). However, the court will probably reject LoCardi's argument because in addition to the promise to buy, Mr. Younger promised find a new distributorship for the Franks, and this provides a concrete basis for a remedy. To the extent that some of Twin Cities' assets were goods (such as trucks) UCC 2-305 could even fill in the open price terms. Furthermore, because the Franks relied on the promise it should be enforceable based on Restatement 2d §90. Mr. Younger made a promise to Mr. Frank to find a new distributorship, Mr. Frank sold Twin Cities in reliance on this promise just as Mr. Younger intended, and since failing to enforce it would result in injustice LoCardi should be estopped from retracting its promise.

Parol Evidence and the Written Contract

Unfortunately, the status of the agreement between Mr. Frank and Mr. Young is irrelevant if the contract written on September 30, 1994 was integrated, because then the court can only enforce the provisions within the "four corners" of the written contract. (To the extent the assets were material goods, UCC 2-202 would apply.) LoCardi will claim that the integrated, written contract made no reference to the promise to find a new distributorship for the Franks, and so it is not in breach of the contract.

In response, the Franks can argue that the written contract was not a complete integration as demonstrated by the absence of a merger clause. The agreement to find the Franks a new distributorship was collateral to the contract and does not contradict any written terms, so it should not be considered parol evidence precluded by the written contract. LoCardi might argue that the agreement is integrated because this additional term is the type of thing the parties would (or should) have put in the contract, and so its absence was intentional and can not be contradicted by the addition of new terms. LoCardi could further argue that the parties are sophisticated business people and should know that important terms should be included in the final writing.

However, the court is unlikely to accept that argument because of the long-term trusting and friendly relationship between Harold Frank and LoCardi. Parol evidence rules were intended in part to prevent the fraud that can result from using oral statements to contradict written agreements. In a situation where both parties trusted each other and had an ongoing relationship, there would be little reason to prevent parol evidence or insist on a completely integrated agreement. Even more importantly, LoCardi's offer of a Canadian distributorship suggests that it too thinks that the oral agreement was not precluded by the earlier contract.

Mistake and Reformation

Furthermore, the Franks may even be able to ask for reformation of the contract, so that the written deal reflects the earlier oral agreement. They could argue that leaving this detail out of the contract was a unilateral mistake on their part (similar to transposing numbers), but it was one which the other side should have known about, and to leave it out would be a windfall to LoCardi. Although reformation would place a heavy burden of proof on the Franks, it can be proven that Younger, a senior executive and Vice President of LoCardi, knew of and agreed to the new distributorship condition. Perhaps he simply failed to convey the information to his assistant, McCarty, who actually consummated the deal. More likely, the parties may have felt it was unnecessary to mention the term, since they trusted each other, or they never got around to inserting it in the predominately "boilerplate" contract.

Waiver and Interpretation: Could the Franks Reject the First Offer.?

Based on all the above arguments it is likely that the court will find that LoCardi had an obligation to find a new distributorship for the Franks. But there are two problems with the Franks' arguments that LoCardi is in breach of the contract. First, LoCardi might claim finding a new the distributorship for the Franks was a waivable condition, because the substance of the contract was sale of Twin Cities. LoCardi would argue that by not accepting the distributorship in Saskatchewan, the Franks waived their right to this condition. This ploy is unlikely to work because it was a substantive condition in the first agreement, and even if that were not true the Franks could retract their waiver and demand that they be given the new distributorship under UCC 2-209.

Second, LoCardi could argue that it fulfilled its contractual requirement by offering the Franks a new distributorship in Saskatchewan, and this was a "reasonable effort" so they are not in breach. This is a problem of contractual gaps and interpretation of the oral agreement, because the location, purchase price and sales volume of the new distributorship were never specified. Although Harold understood that the distributorship should cost the equivalent of their share of Twin Cities and be subject to their approval, this is only one possible interpretation based on the subjective standard of what the person speaking intended, If Mr. Younger claims this is not what he subjectively understood, the court may turn to a standard of reasonable expectation or reasonable understanding.

The court is likely to say that reasonable parties in these circumstances (trust and a long term relationship) would expect/understand that the new distributorship should be equivalent and subject to approval by the Franks, because if the Franks were forced to accept any undesirable distributorship they would be better off just keeping Twin Cities. Although this was never stated, if the court feels this is what both parties intended it can "imply-in-fact" these terms.

More importantly, since Mr. Frank originally bought the distributorship in part to help LoCardi, court should view him very sympathetically and may say that LoCardi breached its "good faith" duty to find a new dealership that is acceptable to the Gerald and Lawrence. To the extent the assets of Twin Cities included goods, "good faith" was also required under UCC 1-203). Thus, even if this wasn't what Mr. Younger intended, the terms should still be "implied-in-law" to prevent LoCardi's unjust enrichment.

Damages for Breach

The court will want to award expectation damages for LoCardi's breach (since the oral contract had consideration aside from §90). However, there is no way to calculate the expected profits resulting from the new, still unknown, distributorship. Therefore, Mr. Winters is probably correct in looking at the past profits of Twin Cities. This would be motivated by expectation (since the new distributorship was supposed to be roughly equivalent in price and hopefully profit) but measured by reliance (what they would have got if Twin Cities had not been sold, which is still speculative but more quantifiable). Nonetheless, Mr. Winter's calculation may still be too speculative because he bases his 14.6% profit on only one year (it should probably be based on a longer horizon, even with the upward trend) and his figure of 10 years of existence for the life of the new distributorship is completely arbitrary.

The court would probably prefer a less speculative, true reliance measure: the difference between one-half the actual profits of Twin Cities for each year between 1994 and the present and the profit of the bond investment for each of those years, added together for a four year total loss. Because this only puts the Franks in their original position for past losses and not future ones, they could combine this with a request for specific performance. Although it is difficult to get, in this case money alone will not make the Franks whole. There is no way to estimate the expected profits of a business for its entire existence, or to determine the risk of failure which would result in no profit at all. Furthermore, the supervising performance would not be a huge burden on the court; the Franks only need update them on whether LoCardi is making efforts to find an appropriate distributorship.

Exam #3128, Question 2 (1499 words)

The concerns Lucille Duffy has expressed with regards to her prospective contract with Pendant Publishing are of great merit. Duffy is in a delicate situation as she tries to balance her own interests and the interests of her client, Trina Lott, with the risk of contracting with a less well established publisher that has been known to act disreputably in contractual relations. In assessing this situation, it is important to first look to the legal positions of the parties before moving on to an analysis of what possible alternatives to the two contested clauses exist.

One’s legal position is important because "it makes a difference if one is demanding what both concede to be a right or begging for a favor." (Macauley p. 62) Even though both parties, as you will see, may wish to avoid any legal sanctions or consequences, the possibility of such sanctions strengthens one’s negotiating stance.

Duffy doesn’t have the strongest bargaining position. Hovering over any possible course of action is her desire to avoid litigation. The profitability of Lott’s manuscript depends largely on the legality of the audiotapes, the ability to withhold the more provocative elements of her story and the containment of unfavorable publicity. These are contingencies that any judicial or legislative proceeding could easily undermine, thus weakening any bargaining position the potential profitability of the book has secured Duffy. Duffy must also take care to negotiate terms that not only strengthen her client’s rights, but would also withstand judicial scrutiny. If Duffy inserts a term that lacks legal enforcement, Pendant would be more willing to threaten legal sanctions because of its knowledge of its opponent’s desire to stay out of court.

Diluting the weakness of Duffy’s bargaining position is the fact that Pendant will also want to avoid litigation. The submarket within which Pendant is operating is currently in financial turmoil. The market is extremely competitive and Pendant, like many of these companies, is in marginal financial condition. It can ill afford a costly legal battle that would set it back financially. The dangers both sides face in going to court are potentially offsetting, and therefore we must turn to other factors that contribute to the legal positioning of the parties.

Duffy has taken on a greater burden than Pendant for developing a more thorough and agreeable contract. Pendant lacks a strong reputation and is; thus, less likely to be influenced by the notion that if it withholds royalty payments it will substantially harm its own interests. Pendant’s prior breaches are evidence of this. Without the ability to rely on reputational harm, Duffy cannot rely solely on good faith compliance and must therefore attempt to minimize her risks through more favorable terms than those in Pendant’s form contract. With regards to this, it is important, for the purposes of staying out of court that both parties understand and agree to the proposed terms. Duffy does not want to get involved in a "battle of the forms" because that risks cancellation of terms and judicial gap filling that may run contrary to both parties’ interests. Duffy should also try and take advantage of its past relations with Pendant. Since Duffy has never had prior problems with Pendant, it may be safe to assume that their contractual relationships have worked well and therefore, Duffy should avoid upsetting this balance.

Duffy does possess some strength in her bargaining position with regards to the two clauses in question. Since these clauses are boilerplate clauses and since Pendant is the only option that Lott and Duffy have for publishing the manuscript, these clauses may be found by a court to be adhesive. It’s true that the Duffy would like to avoid court but the presence of a legal remedy may intimidate Pendant. It would be in Duffy’s best interest to focus this strength on altering the clause that deals with suspension of royalty payments, rather than the one that indemnifies Pendant. The reason for this is efficient risk allocation. Pendant is the best insurer against its own internal problems and Lott’s royalties should not suffer because of events not within her control. Likewise, Lott and Duffy are the best insurer of any third party claims at least those for defamation, invasion of privacy and the like. Duffy and Lott are better able to balance the chances of suit being brought against them with the potential profitability of the story and are therefore better able to bear the greater risk of their decision on whether or not to write the book. Pendant’s request for indemnification is not inappropriate to this highly volatile situation, especially in light of Lott’s growing unpopularity. Therefore, Duffy should concern herself with securing her client’s royalty payments.

The first clause is too discretionary and can lead to opportunistic behavior. It is especially bad for Lott because the profits of her manuscript will most likely come, due to the book’s shock value, in the first few months. Once her story becomes common many will not need to purchase the book. Thus the contract, as is, risks the potential loss or reduction of the highest months of profits. Although a court may imply a duty of good faith if such a clause was brought before them and there was a question as to the adequacy of the suspension of royalties, we know that Duffy wishes to avoid court. What she can propose instead is a clause governing modification that is based upon this implied duty of good faith. It would not be in Duffy’s best interest to drive too hard a bargain and freely negotiated modifications, if allowed by such a clause, could prove beneficial to both sides. This clause would be effective if adopting language similar to that of the UCC rather than the Restatement. The latter allows for modification if fair in light of unforeseen circumstances and this might leave Pendant with too much discretion. However, the latter relies on reasonable commercial standards. This standard would allow for greater availability of remedies outside of court and within the realm of arbitration.

Although the awarding of punitive damages by way of arbitration would most likely be deemed against public policy by the court’s in this jurisdiction, Duffy could attempt to establish a system of binding arbitration governed by the standards of traditional publishing houses. The remedies that may be sought in such arbitration would not be punitive, but would reflect more of a liquidated damages type clause. The contract can contain a measure that seeks to avoid withholding of royalties by allowing binding arbitration to allow the reasonable expectation interest of the injured party, but only if such a measure could be made with certainty. In this case, lost royalties would be the measure, and awarding them would not be a punishment, but just a way to force Pendant to pay what it owes or risk group pressure from other publishing houses by way of sanctions. Duffy fears that the large publishers would be harsh on her client’s interests, however, they are likely to look down upon submarket publishers like Pendant as well.

A final alternative is asking for an elimination of the royalty suspension clause in exchange for a term that promotes future agreements. Such future agreements would be dependent upon Pendant not withholding payments. Duffy can guarantee Pendant a certain percentage of her clientele over the next few years. Pendant may be willing to make this trade-off because Duffy’s writers have done extremely well. This may lead to greater profits for Pendant and legitimacy for their business in their highly competitive field. Duffy’s clientele could be what Pendant needs to establish a stronger reputation and thus rise above its competitors. The benefit for Duffy is that Pendant will be less likely to breach for fear of endangering these guaranteed future contracts and will be more likely to label Lott’s royalties as a top priority.

With regards to the indemnification clause, Duffy should be more conciliatory. If indemnification is not given, Pendant may be more susceptible to insolvency and the inability pay royalties. Not only will Duffy and Lott lose out on these royalties, but they are also likely to be held jointly liable for any claims brought against Pendant. One suggestion that may allay Duffy’s fears is to only indemnify Pendant of suits that involve such actions as defamation or invasion of privacy, but not suits for breach of contract or copyright infringement. However, such a clause may be difficult to incorporate.

In conclusion, Duffy must be careful to avoid any boilerplate terms of her own, for these will make her and her client more susceptible to unwanted litigation. Also acting in good faith during negotiations may ease relations with Pendant, making breach less likely. The bottom line is that these alternative approaches rely on Pendant’s cooperation and the outside threat of legal sanctions. It is important that Duffy keep her proposed terms within the realm of legal enforcement, making it less likely for Pendant to resort to court if necessary.

Exam #3154, Question 2 (1460 words)

Ms. Duffy seeks advice on three basic questions.

1. What contract changes would help ensure that Pendant Publishing pays all royalties owed in a timely fashion?

2. Should she challenge a boilerplate clause allowing Pendant to delay royalty payments or renegotiate royalty rates when faced with major business setbacks?

3. Should she challenge a boilerplate clause requiring Ms. Lott to hold Pendant harmless against any third party lawsuits arising out of the use of the manuscript?

While Ms. Duffy can take actions to protect her client’s interest in each of these areas, her bargaining power is limited by the reality that no other publishing company has expressed a willingness to publish Ms. Lott’s book. Therefore, all of the solutions below must be evaluated based upon their likely impact on the underlying transaction.

ENSURING PROPER ROYALTY PAYMENTS

The contractual changes Ms. Duff can adopt to help defend against Pendant wrongfully withholding royalty payments fall into three categories; structure the contract to ensure funds are available, draft the contract to avoid potential areas of conflict, and include a non-industry arbitration mechanism to allow quick dispute resolution without litigation.

Get the Money First

The best way to ensure that royalty payments are made on time is to get the money up front. A larger advance would minimize the amount of future royalty payments Pendant would have to make.

However, this book’s business prospects are highly dependent upon future events, and therefore difficult to predict. If too many of the more sensational, and thus more marketable, facts become public prior to publication (due to legal proceedings, leaks or other sources) or the public appetite for the story dissipates before publication, due to overexposure in the news media, sales may drop significantly below expectations. Pendant would therefore be understandably reluctant to increase the advance. Pendant’s marginal financial strength may exacerbate this concern.

Requiring Pendant to escrow all royalty payments as they are earned may resolve this dilemma. Ms. Duffy could include a clause requiring royalties to be deposited as they are earned into an escrow account, managed by an independent agent. The agent would then release the royalty funds when payable to Ms. Lott. This would ensure that once earned and deposited, Pendant could not redirect royalty moneys into another author’s advance or to cover other costs of its business. While this approach may increase the administrative costs of the deal, it may provide enough additional assurance to justify the increase.

Avoid Interpretive Disputes and Unplanned Contingencies

Ms. Duffy can also reduce the risk of royalty delays by anticipating and addressing potential future disputes directly in the contract. By addressing foreseeable contingencies, Ms. Duffy can reduce the likelihood that Pendant will use a real or imagined dispute to delay royalty payments. Several suggestions are discussed below.

Clear royalty formula. The formula under which the royalties are calculated should be clearly expressed in the contract. A simple formula would improve Ms. Lott’s likelihood of receiving payment, as the simpler the formula the more difficult it would be to misrepresent, either intentionally or accidentally. Using an clearly understood industry standard royalty formula may best prevent misrepresentation or misunderstanding over the amount and timing of payments.

Include Integration and No Oral Modification Clauses. The contract should include an integration clause, to make it more difficult for Pendant to claim that some prior agreement modifies their contractual obligation. For similar reasons, the contract should include a clause requiring all future modifications to be made in writing.

Expressly forbid royalty kiting. The contract should expressly forbid the use of earned royalties for any purpose other than payment to the author. This will prevent Pendant from arguing that diverting royalty funds for other uses is a common and allowable practice. If Pendant is contractually bound not to use the royalty money collected from sales for any other purpose, their incentive to withhold the funds is significantly reduced, and would require a willful "bad faith" violation of the contract.

Expressly forbid royalty withholding. The contract should expressly deny Pendant the right to withhold royalties already earned. This will prevent the publisher from interpreting a clause or unexpected event as implicitly creating a right to withhold royalties.

Accelerated Dispute Resolution

If Pendant simply refuses to make a royalty payment, Ms. Lott’s rights will be limited by her ability to quickly and economically resolve the dispute. For this reason, arbitration is an attractive option, and should be included in the contract in spite of the recent New York ruling on punitive damages.

Depending upon the size of the disputed royalty payments, enforcement through traditional litigation may be prohibitively expensive, time-consuming, and inflict further damage on Ms. Lott’s reputation. Arbitration enables any disputes to be resolved quickly and creates a clean legal case to bring to court should it become necessary. These advantages support the use of arbitration even without punitive damages.

The concerns over the industry bias against Ms. Lott and the more sensational segment of the publishing industry can be addressed by selecting a mutually agreeable arbitrator outside of the standard industry process. The costs of the arbitration can be funded by the loser of the dispute, allowing even small claims to be arbitrated, as the winner’s costs would not have to be funded out of the award (as in court proceedings).

Finally, the contract could include a non-punitive liquidated damages clause to cover such consequential damages as interest on past due royalty payments, and any other administrative costs. This clause would likely be of limited use in practice, however, because the missed royalty payments can likely be accurately calculated without or in spite of such a clause.

OPPOSE THE BUSINESS "SET-BACK" CLAUSE

Ms. Duffy should oppose the inclusion of boilerplate language allowing delays in royalty payments for two reasons.

First, it undermines any attempts to ensure royalty payments are made on time. Giving a publisher that operates in a financially marginal segment of a fiercely competitive business undergoing reorganization at an industry level such a loosely defined contractual right to delay payments would provide them an excuse to do so. Indeed, it is quite plausible and perhaps even likely that Pendant faces business setbacks that threaten its solvency on a frequent basis. While Pendant may have a right to reopen negotiations under the contract anyway under the change of circumstance doctrine, there is no reason to expand this potential in the text of the contract.

Second, such a clause effectively transfers the business risks of the publisher to the author. Ms. Lott is not in the publishing business, and is not in a position to predict, avoid or affect the business risks in any way. Including the provision would be tantamount to allocating the business risks away from the least cost avoider and insurer (Pendant) and placing them on the most cost avoider, a party with virtually no ability to avoid or insure against such losses. If Ms. Lott wished to bear the risks of the publishing business, she would open a publishing house.

OPPOSE "HOLD HARMLESS" CLAUSE OR SEEK MODIFICATION

While Ms. Duffy should strive to eliminate this clause because of the potential financial burden it could place upon Ms. Lott, the real concerns of Pendant will make this goal difficult, and Ms. Duffy may have to settle for a modified clause.

The circumstances of the books publication indicate that Pendant is in a better position to absorb the third party risks. The nature of the book, the fact that it may embarrass prominent public figures, and the fact that Ms. Lott collected the source material partially through surreptitiously taped conversations, all indicate that third party suits are distinctly possible. As an individual Congressional staffer, Ms. Lott’s financial capability is not sufficient to provide any real financial indemnity to Pendant. Further, since Ms. Lott is not actually writing the book, but merely providing the source material, she is not in control of how the information is presented and how that may affect possible third parties. Finally, Ms. Lott is not in the business of predicting and mitigating these risks, as is Pendant. Since it is the least cost avoider, and since it has final editorial control over the product, it would be more efficient for Pendant to assume this risk.

However, Pendant does have a real interest in ensuring that the information Ms. Lott provides for the book is accurate, and not simply fabricated by a staffer’s overactive imagination. Therefore, Pendant is unlikely to agree to publish the book without some protection. A mutually agreeable compromise may be that Ms. Lott warrants the information provided to be accurate to the best of her knowledge and belief, and that she will hold Pendant harmless for any third party claims that demonstrate the information violates this warranty.

Exam #3155, Question 2 (1494 words)

To protect herself and minimize her client's time in court, Duffy should include liquidated damage clauses in her contract with Pendant. While the courts in our state may consider that a private arbitrator awarding punitive damages is contrary to public policy, carefully written liquidated damage clauses that do not significantly exceed Duffy or Lott's actual damages will most likely be enforced. Instead of using the standard of the local publishers' trade association for arbitration, we should propose standards more reflective of the expectation measure used by the courts.

To start, liquidated damages should aim to make Lott or Duffy whole and nothing more if Pendant drops the project for no good reason, refuses to pay royalties or otherwise breaches. While a tempting incentive to make Pendant perform, punitive damages would exceed the profits Duffy and Lott expect from the book sales and should not be contemplated. In addition to leading to inefficient performance (for example, requiring Pendant to publish even though the courts decide Lott cannot use the juicy, marketable tidbits in the taped conversations), the courts, just like the one in New York, will not enforce penalties and, as such, any breach would be remedied using the default damage rules of the court.

There are several reasons to contract around these default rules. First, Pendant and Duffy, Lott's representative, understand the nature of publishing and selling controversial books and, therefore, are able to allocate the risks and incentives better than judges or trade association arbitrators who are unfamiliar with the esoteric submarket. Second, because more negative publicity about Lott and the taping of her former bosses on Capitol Hill could damage the story's marketability, all parties have an interest in resolving any disputes that might arise between them as quickly as possible. By minimizing their time in court and, therefore, the public eye, the clause could ostensibly increase profits for all parties. Furthermore, inefficient legal fees and lost time will be avoided, enhancing the wealth-producing benefit of the exchange between Lott, Duffy and Pendant.

A liquidated damage clause concerning royalties seems appropriate given that damages would arguably be difficult to estimate at the time of the contract between Pendant and Lott. The royalties Lott expects to earn, for example, will vary depending on: 1) whether she can legally use the content of secretly recorded audiotapes in her book; 2) how much more negative publicity she receives; 3) whether she will be required to reveal the more provocative aspects of her narrative in congressional hearings; and 4) the whims of an unstable market. Potential expectation damages in the case of a breach, nonetheless, could be reasonably measured using Duffy and Pendant's experience in the market. They might fix a percentage of sales using predetermined accounting methods, for example, to calculate royalties due. In setting the percentage, they may weigh how risky it is for Pendant to invest to publish a certain quantity of books versus the profit potential of a writer.

In order to efficiently allocate damages, account for uncertainties and reduce inefficient damages due to a lack of foreseeability, it is key that the parties exchange information. Duffy, for example, should be encouraged to inform Pendant in advance that Lott will not be able to go on the interview circuit and Pendant should make clear any foreseeable printing delays which might impede sales. Perhaps more importantly, information exchange will help avoid breaches in the first place. A combination of empirical (objective) standards, experience-based insight and information exchange, will allow Pendant and Duffy to reasonably approximate potential damages and maximize the wealth of all.

The presence of a predetermined, largely objective standard to measure damages will facilitate the enforcement of the clause in the courts. While the fact that Pendant and Duffy are sophisticated business people with years of experience in the business indicates they should know what the clause means, both should explicitly acknowledge and approve it to further legitimize the clause in the court's eyes.

To avoid manufactured disputes to delay or avoid making royalty payments, Duffy may have to rely on the Pendant's obligation of good faith. If good faith is defined by the reasonable commercial standards used in the submarket publishing trade, however, the standard may not be very high. Duffy could appeal to a broader standard of good faith in the larger publishing industry. She might also wish to contract for some form of arbitration whereby specific, bad faith tactics, if proven, would constitute a breach and result in expectation damages. Alternatively, Duffy could stipulate bonuses to reward Pendant for avoiding such behavior.

Given that Pendant is purportedly underfunded, Duffy could stipulate that a portion of Lott's royalities be put up as a bond. Such a bond would not be a penalty provided that it was accessed only to meet expectation damages in the event of a breach. The contract may also stipulate that all of the profits from Lott's book be deposited in a separate account--viewable by both parties--to avoid using her royalties to pay another author's advance. To adjust for the risk in dealing with a financially unstable publisher, the contract should also contemplate as a big of an advance as possible.

To protect herself and Lott, Duffy should contract for as many contingencies as are economically feasible, then outline specific rules to fill the inevitable gaps of the contract. Such measures will reduce the risks inherent in dealing with a potentially opportunistic party such as Pendant. To reduce confusion concerning Pendant's profits and Lott's royalties, for example, it might be wise to specify exact equations that will be used to divide the gains of selling the book. These equations might reward high sales by Lott and compliance with publishing deadlines by Pendant. To avoid miscommunication, Pendant and Lott should define key terms of the contract like "business setback" and "critical inputs" (first provision) and/or establish a mutual standard for interpreting the meaning of words. This standard may come from an industry source or be elaborated by the parties themselves. At the very least, a procedure for resolving interpretative disputes should be contemplated. In the event of a breach by Pendant, which according to industry hearsay does not seem all that unlikely, such measures will help resolve disputes by making the intentions and legal obligations of the parties more clear.

If not contracted around, the hold harmless clause may be unconscionable and, therefore, unenforceable anyway. Even though it is understandable that Pendant would want to protect itself from invasion of privacy suits, it seems excessive to exempt itself from any other common law or statutory charges that might arise out of the use of the manuscript. It seems unfair and one-sided for Pendant to allocate all of the risk of publishing and marketing the book to Duffy and Lott. Just as the gains must be equitably divided, so too must the risks. Furthermore, given that controversial writers and publicists cannot use the slower, costlier traditional publishers (who are more reliable), Duffy could argue she is being forced to accept the boilerplate terms of the only company that would sign Lott. Duffy arguably had no meaningful choice in accepting the no harm clause. Even if Duffy is not in a weak bargaining position (which she arguably is), the clause may make the contract as a whole oppressive and unfair.

The first provision in Pendant's contract also has problems. Duffy could assert that the right to suspend royalty payments and renegotiate royalty rates in the event of labor disputes, increase in cost of labor and other critical inputs is so broad that it renders Pendant's overall promise illusory. With so many free, and subjective, ways out of the original obligation to pay promised royalties, mutuality of obligation is lacking. Furthermore, lost profits or unexpected changes in the market do not necessarily relieve Pendent of its good faith obligations to complete the contract.

Duffy may wish to make explicit Pendant's duty to put forth its best efforts to print the book on schedule; similarly, she may contemplate a clause requiring Lott to put forth her best efforts as she travels to promote the book.

Ms. Duffy should not forget her nonlegal resources. First, even though many of the publishers in the submarket are not always "contractually reliable," they are in demand, and, therefore, reputation is still important. A leading publicist in the "inside" memoir field, Ms. Duffy could dissuade other writers and publicists from using Pendant. Given the fiercely competitive, volatile nature of the market, reputation can be decisive to the success of a small or midsize company. Furthermore, the promise of repeat business should not be underestimated. Some of Duffy's writers have sold extremely well, generating high profits for publishers. Duffy should make it clear that she will bring the Trina Lotts of the future to Pendant only if they act in good faith and meet their obligations. Such incentives may do more to facilitate cooperation than legal alternatives.