EXAM TICKET NO._________________
Contracts
Avery Katz
Final Examination
May 10, 11, or 12, 1989
DIRECTIONS
Question 1: 50% of exam; limit of 1500 words.
You are the attorney for the House of Dumont, an internationally renowned dealer in vintage wines and spirits based in New York City, who has presented you with a legal problem laden with glamour and intrigue. Recently, Dumont tried to acquire one of three remaining bottles of Chateau Orleans burgundy wine originally bottled in 1789 at the private vineyard of King Louis XVI of France. This wine is both famous and rare. Only ninety-six bottles of it are believed to have survived the sacking of the royal cellars by sans-culotte extremists during the French Revolution; of these, sixty-four were consumed by Napoleon Bonaparte, eighteen were smashed by rioting workers of the Paris Commune, one was used to christen the Eiffel Tower at its opening in 1889, four were consumed in the same year on the occasion of the hundredth anniversary of the Revolution, and six were opened and drunk during the Nazi occupation in World War II.
One of the three remaining bottles was already owned by Dumont, who had purchased it in 1987 for $212,000 at a public auction. A second bottle is owned by Triumphe, a French industrialist renowned for her singular business acumen and flamboyant public gestures, who purchased it at an undisclosed price at a private sale in 1988. It was reported in the European press, however, that the price paid by Triumphe was over $350,000.
In recent months this wine has been the subject of substantial attention in international wine circles. It has been rumored that Triumphe wants to obtain all three surviving bottles of Chateau Orleans in order to present them to the French republic on the occasion of the bicentennial of the French Revolution, in anticipation of reaping the favorable commercial publicity such a gift would undoubtedly engender. Others with a less benevolent view of Triumphe's motives have speculated that she is trying to corner the market on Chateau Orleans in anticipation of the substantial appreciation in its value that is likely to accompany the bicentennial celebrations.
Given this background, it was with great excitement that Dumont learned that Count Von Braun, a reclusive Belgian expatriate currently residing in Newport, Rhode Island, wished to sell his bottle of Chateau Orleans in order to defray the cost of legal fees he owed to a professor of criminal law in Boston who had defended him in regard to some rather unsavory family matters. Better still for Dumont, because of his desire to avoid disclosing assets to certain of his relatives, Von Braun was willing to sell to Dumont at a private sale, instead of insisting on a public auction, which, if held, would likely bring a substantially higher price for the wine.
On February 20, 1989, Dumont and Von Braun signed an agreement that provided for the sale of Von Braun's bottle of Chateau Orleans to Dumont at a price of $450,000. Dumont was highly pleased with the agreement, since its appraisers had estimated that the bottle would likely have sold at between $500,000 to $525,000 at public auction. The agreement provided that Dumont would have the opportunity to inspect the bottle's condition before the sale became final, and that Dumont was to take delivery of the bottle at Von Braun's cellar on March 15.
As soon as the agreement with Von Braun was signed, Dumont secretly opened negotiations with Triumphe, revealing the fact that it now controlled two bottles of Chateau Orleans instead of just one. After a few days of bargaining, Dumont and Triumphe had not yet reached an agreement to sell both bottles of wine to Triumphe; Triumphe's most recent offer was $1.2 million for the two bottles, while Dumont was insisting on receiving $1.3 million. At this point Triumphe, attempting to break the deadlock, offered to buy one bottle for $550,000 and to put off a final agreement on the other bottle until later. Dumont accepted this offer, reasoning that Triumphe would be still be willing to pay at least $650,000 and perhaps as much as $750,000 for the final remaining bottle. Dumont also reasoned it would be in a stronger bargaining position with Von Braun's bottle actually in hand. Triumphe, for her part, felt she would be in a stronger bargaining position with two bottles in hand and would not have to pay any more than $650,000 for the last bottle. On March 1, Dumont and Triumphe agreed to sign two separate documents. In the first, Dumont promised to sell and Triumphe promised to buy the bottle of Chateau Orleans currently in Von Braun's cellar for $550,000. In the other, Dumont and Triumphe promised to resume negotiations in good faith on March 21 for the sale of the bottle of Chateau Orleans in Dumont's vault. This second document also summarized the course of the parties' prior negotiations, and included a statement of the two final offers left on the table at the time the documents were signed.
On March 8, Dumont sent its chief wine buyer, Butterfield, to Von Braun's residence in Newport to inspect the bottle of Chateau Orleans, as well as to look into the possibility of buying a number of other valuable but less rare wines from Von Braun's cellars. The occasion was a convivial one. Butterfield, Von Braun, and a few of Von Braun's remaining trusted friends sampled a number of Von Braun's favorite wines that he hoped to sell. Butterfield was favorably impressed and orally promised that Dumont would purchase several dozen cases of the sampled wines. Though the atmosphere was jovial, one could sense a note of trepidation in the air as Von Braun went to open the cellar containing the prized Chateau Orleans.
The bottle was produced and, with dramatic emphasis, set on the table in front of Butterfield. With excruciating care, Butterfield lifted the bottle and turned it as he inspected the label, the color of the glass, the residue on the neck, and the humidity of the cork. Finally, he set the bottle down gently, but quickly and with flair, and signalled his approval. Butterfield and Von Braun shook hands as glasses clinked around the room. Von Braun then picked up the wine to return it to its vault, stopping at two tables to display the bottle to his friends. As he opened the cellar door, however, Von Braun noticed with surprise a large and spreading purple stain on his suit coat. The room became an uproar when it was realized that the bottle was cracked and its precious contents were leaking onto the floor. Slightly less than a cup was all that could be saved.
Neither Dumont nor Von Braun were able to keep this disaster a secret. In the wake of the publicity, experts in New York and Paris expressed their opinions that the value of the two remaining bottles of Chateau Orleans would now sell for as much as $800,000 each. It also emerged that Von Braun had insured his bottle of Chateau Orleans in early 1988 for $250,000; however, the insurer, Floyd's of Flanders, announced its intention to suspend any payment on the policy until the circumstances of the accident could be investigated. In addition to expressing its concern about the handling of the bottle on the day of the accident, Floyd's raised questions regarding whether the wine had been kept at the proper temperature and humidity in Von Braun's cellar, and whether this could have contributed to the bottle's cracking. But by far the most sensational report about the incident is traced to two of Von Braun's guests, who have claimed that they managed to taste the wine as it leaked out of the bottle, and who have suggested that its acidity and flavor was that of a wine at most eighty years old. Thus far, Von Braun has refused to allow anyone to submit the remaining wine to chemical testing. It sits in a plastic container in a refrigerator in his cellar.
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Dumont wonders what legal claims it may have against the other parties involved, the amounts it might recover under such claims, and its chances of recovery. It also wonders what its exposure might be to any claims by any other party. Advise Dumont regarding its legal rights and duties, and regarding the course of action it should now take. You may assume that all transactions are governed by U.S. law.
Question 2: 50% of exam; limit of 1500 words. Answer both parts A and B.
The market for commercial casualty and liability insurance in the state of Hutchins has undergone substantial dislocation in past months. In particular, the rates for certain lines of insurance, such as product liability, have increased by over 100%, and some types of insurance, such as that covering children's day care, have become unavailable at any price. Various observers have described the industry as being in a state of crisis, the causes of which are a matter of some dispute. Representatives of the insurance industry blame the situation on what they describe as an explosion of tort liability, while consumer advocates attribute recent conditions to mismanagement and anticompetitive collusion by insurance companies.
A. You are an attorney for the Northwest Casualty Insurance Company, one of the largest liability insurers in the state of Hutchins. Northwest markets its policies primarily but not exclusively to commercial businesses. It is the view of Northwest management that a substantial part of recent cost increases stem from its agents' increased willingness to write policies covering unsound and unprofitable risks. For instance, two of Northwest's ten largest claims in the past year arose from policies that its underwriters would probably have disapproved had they had the opportunity to do so. Moreover, Northwest's fourth largest claim last year (dealing with misuse of hazardous chemicals) arose from an event that was actually excluded by the language of the written policy, but that its agent orally represented in the course of the sales transaction as being covered.
You have been asked to draft contract provisions that would prevent Northwest from
being bound by any policy its agents write until Northwest's underwriters have an
opportunity to review the policy and consider the desirability of covering the particular
risks involved. You have also been asked to draft provisions that would protect
Northwest from being bound by oral representations by its agents that go beyond the
language of its written policies. Draft such provisions, and explain how they will
achieve the company's goals, as well as the extent to which they may fall short of the
company's goals.
B. You are counsel to the State Insurance Commissioner, who has jurisdiction to
regulate the language of all insurance policies offered for sale in the state of
Hutchins. In recent months, several liability insurers have submitted for the
Commissioner's approval policies containing two newly controversial types of
provisions. One type of provision purports in effect to reserve, with various
limitations of time and scope, the insurer's right to reject policies written by their
agents. A second type of provision purports to limit, in various ways, the authority
of agents to bind their companies to insure risks excluded by the company's standard
written policy.
The Commissioner informs you that she sees some merit in the insurers' arguments that they need greater control over the policies they write in order to keep insurance costs down and to earn a fair profit. But she also sees merit in the objections of consumers and of commercial insurance purchasers that such provisions would allow insurers to take unfair advantage of purchasers who reasonably rely on the representations of insurance agents, and who would be injured by the delay and uncertainty arising from an insurer's ability to reject after the fact policies entered into by its agents. She has asked you to draft a regulation to govern the permissible extent and scope of such provisions in insurance policies sold in Hutchins. You should also explain how your proposed regulation would work in practice to promote sound public policy.