Georgetown University Law Center
Examination in Contracts
(24 Hours)
Professor Avery Katz
May 9-10, 1996
Instructions:
I will assume for purposes of administering the length limit that a double-spaced page with 1-inch margins contains about 300 standard English words when using 12-pitch fixed-width type (12 words per line × 25 lines per page), or about 250 words when using 10-pitch type. Alternatively, if you use a different type font, you may make a good faith estimate by counting the words in a sample paragraph and extrapolating to the length of the entire exam.
QUESTION 1: 50% of exam; limit of 1500 words.
Up until six weeks ago, Preston Poff was a special agent of the Dominion Life Insurance Company, a corporation engaged in the sale of life insurance and medical and disability coverage throughout the state of Virginia. Poff had represented Dominion since late 1984, when he entered into a special-agency agreement with Dominion's general agent, Albright. The agency agreement was memorialized in a standard form contract, complete with merger clause, drafted by Dominion's legal counsel. It was Dominion's practice at that time to use this form in almost all of its agency relationships, the exception being a few longtime agents who were able to negotiate special terms on the basis of their strong history of sales. By its terms, the agreement provided that Poff "agrees to devote his entire business time to the purpose of this Agreement and he will not, without the written consent of the Company, act as agent or broker for any other insurance company." It also provided that the relationship was terminable at will by either party on 10 days written notice, although Albright assured Poff orally that this term was "just a legal formality, of course; you know that we are reasonable people and would never terminate an agency without there being a good reason for it."
Under the agency agreement, Poff was to receive a base salary of $6000 annually, but the bulk of his compensation was to come in the form of commissions on the policies he sold. These commissions were to be paid on a quarterly basis, and varied according to the type of insurance and for the length of time the policies remained in force. Poff was also to receive various fringe benefits including group health and disability insurance. Dominion also agreed to pay premiums on a deferred whole-life insurance policy in Poff's name, in an amount proportional to the commissions Poff earned in each year. Because whole-life insurance policies accumulate value over time, and because it is possible to cash in or borrow against this accumulated value in later years, this policy provided many of the financial advantages of a pension plan, in addition to basic life insurance. Neither Poff nor his beneficiaries, however, were to have any rights under this policy for the first twelve years of Poff's agency with Dominion.
At the time Poff first began working as a special agent for Dominion, he was thirty-nine years old and was based in Richmond, Virginia. He had been selling insurance on a non-exclusive basis for a number of insurance companies, not including Dominion, for the previous ten years. It was morning in America, and Poff's business thrived. His sales were the highest of any Dominion agent in the Richmond metropolitan area in 1987 and 1988; and with Albright's encouragement Poff and his family relocated to the larger and more profitable Norfolk area in 1989. While it took Poff some months to become established in Norfolk (his total commissions in 1989 and 1990 combined were lower than they had been in 1988), he soon adjusted and by 1991 his insurance agency was selling more insurance and earning more commissions than he had in any of his previous years in business.
By 1994, however, tensions had developed between Poff and Dominion. Poff's sales (and Dominion's total sales in the Norfolk area as well) had leveled off as a number of North Carolina insurers established or purchased Virginia subsidiaries and began doing business in the state. In response to this increased competition, Poff considered it necessary to expand and diversify his business. Accordingly, he applied for and received in 1994 a license to represent the Blue Ridge Mutual Casualty Company and in 1995 to represent the Cherokee Insurance Company. Poff was advised by Albright that he should divest himself of these licenses, but Poff refused because other Dominion agents were allowed to carry dual licenses. The offerings of the three companies were not precisely comparable in any event. Blue Ridge and Cherokee had slightly different underwriting standards than Dominion, and their marketing was oriented toward a somewhat different customer base. In particular, both Blue Ridge and Cherokee offered a number of newer policies that bundled insurance together with other financial products, including some in which both premiums and policy amounts were tied to the performance of the stock market and other publicly traded securities. Dominion, in contrast, continued to emphasize the more traditional forms of whole-life and term insurance. In the view of its management, traditional insurance companies would never be able to compete with banks and brokerage houses in the market for investment services in the long run, and should stick to their basic products. Poff, for his part, regarded the new types of policies as the wave of the future, and wanted to gain experience in selling them. Despite Albright's periodic expressions of disapproval, Poff continued to sell policies of all three companies. Albright hoped that Poff would eventually discontinue his relationships with Blue Ridge and Cherokee, but because of the large number of sales that Poff was bringing in for Dominion, and the relatively small fraction of Poff's sales coming from the other two companies, he decided not to press the point.
Beginning in late 1994, Poff also had come into conflict with Dominion over the latter's adoption of an aggressive new anti-smoking policy. Like many other health and life insurers, Dominion had begun taking account of tobacco use in its actuarial assumptions in the late 1980's; this affected both its underwriting standards and the premiums it charged. In 1991, the company's central office sent memos to its agents reminding them that special nonsmokers' rates were available, and encouraging them to increase their efforts to bring in new non-smoking policyholders. When Dominion announced its 1992 schedule of commissions, furthermore. it reinforced this message by increasing the commission it paid agents on all life insurance and short-term health insurance policies qualifying for non-smokers' rates. Poff, a moderate smoker since high school, felt this was not a sensible decision for a company doing business throughout Virginia and the Carolinas, where smoking was both common and socially acceptable. In his view, the anti-smoking memos and the new rate schedule were a nuisance, imposed by a group of transplanted northerners who didn't know the customer base. Nonetheless, he did increase his sales to nonsmokers in the next year, as well as to smokers.
In 1994, however, Dominion adopted a company rule banning smoking in all company offices and at all company meetings. It sent out a memo recommending that a similar ban be imposed at the offices of all independent agents, and another, to all agents and employees, strongly encouraging them to quit smoking themselves. The memos observed that smoking by employees and agents both increased the expected costs of the group health life insurance that the company provided as a fringe benefit, and set a bad example for current and potential policyholders. Poff strongly objected to these new policies of the central office. In his view, the new rules were both ridiculous and an invasion of individual liberty. The discriminatory premium rates and commissions were one thing, but he was hardly going to tell his business customers to extinguish their cigarettes at his door. It was unmannerly, and bad business to boot, to put them ill at ease when trying to make a sale. It was a good thing that he was an independent agent working out of his own office, rather than an employee working out of the company office. He expressed these views to Albright both orally, and in a subsequent letter; the latter was provoked by an incident at the bi-monthly agents' luncheon in July 1995, held at the local Ramada Inn, at which agents were asked to leave the meeting and go outdoors if they wished to smoke. Poff was not one of those who left the meeting; as a moderate smoker he could easily get through the day without lighting up; rather, it was the principle of the thing. Albright, who himself was skeptical of the new anti-smoking campaign, responded with a sympathetic letter reiterating the company policy, and reminding Poff about the upcoming company picnic and chest x-ray drive.
Despite these tensions, Poff continued to sell insurance for Dominion through 1995 and early 1996. In early March 1996, however, without any notice, he received a letter from Albright stating that Dominion was terminating the agency relationship and that he should immediately cease his representation of Dominion and forward all customer lists and records. The letter made no mention of severance pay, or of the upcoming quarterly payment of commissions payable at the beginning of April. When he called Albright to ask what had happened; all Albright said was, "I'm sorry; that's just how it had to be." Poff was unable to get any explanation from Albright of why he had been fired. When he asked about severance pay and commissions, Albright responded that there would be no severance pay, but that of course Dominion would pay all earned commissions on the usual April timetable, so long as Poff cooperated with all the administrative details associated with terminating the agency. This included turning over all customer and contacts lists, including a list of recent applicants whose applications for insurance had not yet been approved and processed. The conversation was tense and Poff hung up in a state of agitation.
You are an attorney whom Poff has consulted to see what his options are and whether he has any claim against Dominion. According to Poff, he has several thousand dollars of commissions coming due in April for policies he sold from December through February. Not all of these policies have been approved and processed; those that have not will require further customer contact by the sales agent. Additionally, Poff is reluctant to turn over his customer lists. He does not want another agent to get credit for closing sales with customers that he developed, and if he is going to have to go into business on his own, he needs the lists for himself. None of his alternative job prospects are ideal. He could stay in his current office and continue to sell policies written by Blue Ridge and Cherokee, but this will entail a substantial drop in business, as these two companies currently represent only about 15-20% of his sales. He has been offered a job as a full-time Blue Ridge agent in Wilmington, N.C., but this would entail picking up his family (including a wife who is a full-time homemaker active in the local church, and two children in high school) and starting over where he has no contacts and no reputation. He could also go back to Richmond, where he and his family have many friends, and resume his independent agency, but it could be difficult to re-establish his position there. Currently he is working part-time as a bakers' assistant to make ends meet, while selling insurance for Blue Ridge and Cherokee while he can. The situation is causing substantial mental distress for both Poff and his family. He and his wife have been seeing a marital therapist; and the school counselor reports that his younger son has been alternatively acting withdrawn and inappropriately aggressive. What Poff would most prefer is to reinstate his relationship with Dominion, but Albright has rebuffed all suggestions in this direction. Poff is particularly concerned about the whole-life insurance policy that Dominion has been paying premiums on since October 1984. This policy currently has cash value of $83,000; and Poff and his wife had been counting on it as their main nest egg. It would be extremely helpful if he still had some rights in it; since the family may have to go into substantial debt in order to start over in a new area.
Write a letter to Poff advising him of his options and the likely consequences of each. Do not bother to comment on any specific doctrines of Virginia law in particular; and do not do any research into the case law. Instead, just base your advice on principles of law followed by courts in general. You are welcome, however, to consider in your advice how a Virginia-based factfinder might interpret the contract and its surrounding context.
QUESTION 2: 50% of exam; limit of 1500 words.
You are an attorney working in the office of Dr. Clarice Gill, who has just been named superintendent of the financially strained and scandal-ridden New Hope school district. Dr. Gill was one of eight candidates interviewed to run New Hope, the state's largest district with more than 78,000 students in 96 schools. She has a guaranteed mandate for one year, and her situation is delicate because the district is in receivership and she was named superintendent by the receivers over the objections of local politicians. Previous takeovers in other districts in 1989 and 1991 went sour in part because local interests resented the imposition of outsider leadership. In his just-completed two-year tenure, the previous superintendent, Joseph Sorvino, attempted to supersede the decisions of local boards more than a dozen times. Sorvino was painted as a meddlesome micro-manager, and local school officials unified in their political opposition to him, ultimately ousting him.
Much of Gill's attention will be devoted to rooting out corruption among the school board and local administrators. Several schools have a history of scandal dating back 20 years or more; in one case three principals had to be removed from a single school for corruption. An independent report conducted by the previous superintendent detailed excessive spending and kickbacks received by board members and administrators throughout the city. Many school jobs were put up for sale or went to relatives of the corrupt officials. In Palmer Point, one of the city's poorest neighborhoods, board members exploited the poverty of parents by offering jobs in exchange for help with the board members' re-election campaigns, and in some cases for personal favors such as tending their yards. The report estimated that $2.3 million was lost or misspent in most recent school year, and concluded that the district's most disadvantaged pupils, many of them from racial and ethnic minorities, bore the brunt of the waste.
You have been assigned the task of re-evaluating the school district's practices for soliciting commercial bids from suppliers of goods and services. While the district's bidding practices have suffered from some corruption and kickbacks, the problem of graft has historically not been as great in purchasing as in job patronage and campaign contributions. The main problem, rather, has been incompetence and waste in bidding and contracting. Winning bidders have routinely been allowed to negotiate subsequent increases in the contract price. Others have withdrawn winning bids after the fact, leaving the district vulnerable to price gouging by substitute suppliers. In a few cases, most notoriously the school lunch scandal of 1994, this happened midway through the contract term. When contracts were broken in this way, the press of time and administration made it difficult to hold new competitive auctions, with the result that the only substitute suppliers who could be found had personal ties to district officials. Yet a third problem was that some suppliers used their position as winning bidder to shop subcontractors' bids after the fact, so that subcontractors listed in the original bid turned out not to be the ones actually used to provide goods and services. In some cases, this meant that inexperienced and fly-by-night companies were used to do the contract work, to the detriment of quality and safety. In others, the winning bidder simply managed to drive down subcontractors' prices to its own advantage, skimming larger profits off the general contract than had been indicated in its original bid.
The first two problems, and to a lesser extent the third, were aggravated under the Sorvino administration, which in its attempts to stamp out corruption adopted a variety of policies designed to open up the school district's bidding process to a wider group of suppliers. Many of these newer suppliers, however, turned out to be inexperienced at calculating their bids and following through with them. In all fairness, however, not all of the difficulties in this regard were the suppliers' fault. The district's arcane and decentralized administrative practices left suppliers prey to the demands and machinations of numerous school administrators and board members with political and administrative agendas of their own. Many of the delays, mistakes, and cost increases that necessitated contract rescissions and price increases were occasioned by just such roadblocks put up by subordinate officials. While Gill's administration is going to try to take control of the situation as a part of its general program of reorganization, it is unrealistic to expect all such practices to be stamped out in the immediate term. As a result, suppliers without a previous relationship with the city will expect some flexibility in their contractual arrangements to deal with such problems as they arise.
Dr. Gill has asked you to prepare a memo outlining your recommendations for reforming the district's bidding and contracting process. In your memo, you should consider both the legal and practical constraints within which the district must operate. What rights and duties are provided the district by the background legal regime, which of these is it practical to pursue in current circumstances, and what leeway exists for altering either legal or practical arrangements? In preparing your recommendations, you should know that the main contracts coming up in the next year cover food services, school supplies, and maintenance supplies and services. In the next few years, furthermore, the district hopes to embark on a major program of renovation, since many school buildings were constructed in the early decades of this century and are in substantial disrepair. While the bulk of the funds needed for this renovation program are not yet available -- they have to be appropriated by the state legislature, and the legislature's willingness to provide the funds will depend in large part on the success of the new administration's reform efforts -- some renovations cannot be put off. It is likely that the contracting procedures and practices set up to deal with routine operations such as maintenance, accordingly, will influence those adopted for the more costly renovations anticipated in later years.
What do you recommend?
(Warning to students: just in case it occurs to anyone that it might be worthwhile in answering this question to look up my recent article on preliminary negotiations, which touches in part on construction bidding, please be advised that I do not think that article is particularly relevant to the problem you have been assigned here. Thus, I do not recommend your spending time or space pursuing such a tangent.)