Memorandum

Date: January 24, 2008
To: Contracts students
From: Avery Katz
Re: Feedback on Fall 2007 exam

This memo sets out what I considered to be the main issues raised by our Fall 2007 Contracts exam. The memo was composed after I read your exam papers, and so incorporates many of the points that you came up with in writing the exam, as well as those I had identified in advance. As a collective work product, then, it goes well beyond what I expected any individual student to produce on his or her exam paper [and it also exceeds the length limit you were allotted by about 25%].

You will therefore likely also want to consult the top student answers to each of the questions to the exam. What made these answers good was their coverage of arguments, detail and sophistication in their use of facts and in seeing both sides of the issues, and clarity in organization and explanation. If you drew different inferences from the facts than I or the top answers did, you may still have gotten credit, so long as your inferences were plausible and you supported them with legal argument.

If you want to discuss your individual exam, please feel free to contact me. You will find it useful, however, to read this model answer as well as the top student answers before we meet.

It was a pleasure teaching the class, and I wish you all well. Please keep in touch. 


 Question 1: Model answer


Gloucester’s claims for liability

Most straightforwardly, Gloucester [G] has a claim that Baywatch [B] has breached its employment contract with him it terminated his job on July 1. On this argument, the contract, formed when G agreed to join B back in 2004, included not just a promise of immediate employment, but promises of specific duties and a long-term future with B that would include promotions and salary increases. Some of these promises appear in the letter written by Eagle [E], some were made orally by E in conversations leading up to the writing of the letter, and some are implied from those conversations together with the parties’ subsequent conduct (i.e., G working for B and B accepting G’s work.)

Alternatively, in the event that the contract claim runs into difficulties for any of the reasons mentioned below, G can bring a count in promissory estoppel. His argument would be that E’s oral representations during the negotiation period induced him to rely by giving up his previous position, cutting ties to his family, selling his house and moving to New Jersey, and possibly giving up his rights in his family business. E knew that G would rely because G made clear in the negotiations that he could not relocate without assurances of job security.

G also has a good claim for rescission on grounds of misrepresentation, or alternatively on grounds of mistake. E knew that G was misinformed about B’s financial condition, and also that this information was material to his decision to enter into employment with B. Nonetheless, she not only failed to disclose the true situation but specifically misrepresented it. The rescission claim would only be useful to G, however, if he finds it advantageous to recover off the contract as opposed to on.

Finally, E’s behavior may be sufficiently egregious rise to the level of a tort (for which B may be responsible as her principal). She probably committed the tort of fraud when she induced G to enter into the contract as part of a scheme to enrich her and other B executives; and she may have committed the tort of defamation by releasing misleading and harmful information about G’s job performance, and intentional interference with contractual relations by making it difficult for him to search for a new job.

Baywatch’s defenses to liability

B will probably put forward several defenses to G’s claims, all of which should fail.

First, B will claim that G is an at-will employee who can be let go at any time for any reason. G should respond that while at-will is the default rule for labor contracts, in this case the parties’ specifically bargained around this rule. To establish this bargain, G will point to the text of E’s letter, which states that B will employ G “for so long as his work is satisfactory.” B may respond that such a statement should not be interpreted to prevent it from laying off an employee for financial reasons. Under other circumstances, this might be a fair argument, but here, G should respond that B is equitably estopped to raise it because of E’s earlier representations regarding B’s financial condition. Relatedly, G should argue that any layoff decision is subject to a general duty of good faith, and E’s previous misrepresentations, together with her participation in a scheme to enrich herself at the company’s expense, plainly breach this duty. [Some of you raised the possibility that B would argue that changed circumstances made it commercially impracticable to keep G on, excusing B from the agreement, but this is a patently implausible defense because circumstances have not changed, and even if they had, G would have assumed the risk of such change for the reasons outlined above.]

Second, B will argue that G failed to meet the condition of satisfaction that was necessary for B's obligation to continue to employ him. Specifically, it will claim that G’s work was not satisfactory because he failed to produce earnings or turn around B’s financial condition. G should respond that in a commercial setting satisfaction is measured by an objective standard, and that based on his successful designs and cost reductions, his performance was objectively successful. It is not commercially reasonable to expect a new manager to turn around a financially strained company in a single year, and again, B should be estopped on the issue of financial condition.

Third, B will argue that any specific promises of growth, promotions, and salary increases do not appear in E’s letter, and are thus barred by the parol evidence rule. This argument should lose for a number of reasons: (1) the letter is too brief, informal, and incomplete to be considered an integrated agreement; (2) the provision in the letter regarding adjustment of pay and promotion is ambiguous, so that the parol evidence can be brought in to explain it; (3) E’s promises were fraudulent, and fraud is an exception to the parol evidence rule. Additionally, G may argue that because of his reasonable reliance on E’s representations, B is estopped under Restatement §90 from raising the parol evidence rule. This last argument is somewhat weaker than the others because one might argue that it is not reasonable to rely on promises that do not appear in a final writing.

Finally, B will argue that all of G’s claims, including the promissory estoppel and rescission claims, are barred by the settlement letter he signed on July 1. This defense should fail because (1) the letter was signed under duress, as E improperly threatened to defame G’s professional reputation; (2) the settlement is unenforceable because it is not fair and equitable in light of unforeseen circumstances, as is required for a modification of the parties’ original agreement; (3) by leaking information regarding G’s termination and assigning him to conditions where he could not search for a new job, B materially breached any settlement agreement, entitling G to rescind. [Some of you suggested that G might attack the settlement on grounds of unconscionability, but this is a much less good fit to the facts of the case. Employers and their terminated employees enter into such settlements all the time, and putting aside aspects of duress, the settlements are usually enforced.]


Gloucester’s remedies against Baywatch

G is unlikely to receive (or to want) specific performance requiring B to keep him on. Specific performance is always dicey in the employment context, especially so when the employee is in a high administrative position requiring close cooperation with management. In addition, it is not clear that getting his job back would protect G’s interests better than money damages (in particular, because the company is failing.)

G’s expectation damages, which would be the usual remedial measure for breach of contract, would primarily include his salary of $300,000, together with any additional salary or benefits he would have earned had B not terminated him. This figure is difficult to measure because it is unknown how long it would have been before he received any raises (though E did represent that he would be earning $400,000 “quickly”), as well as how many years of pay he should receive. He does have a duty to mitigate damages by seeking comparable employment, and while he is not obligated to find a new job immediately (especially since B has interfered with his efforts to do so) one would expect that he would eventually find a new position, either in the New Jersey area or elsewhere (he is nationally known based on his designs and has already been willing to relocate once, so it is probably not reasonable for him to insist on staying in the immediate vicinity.) Thus it would be plausible to estimate damages of at least two or three years’ salary, perhaps with the assumption that he would receive his raise to $400,000 in the second or third year of employment. But given the uncertainty perhaps it would be more advantageous to use reliance or restitution as a proxy.

G’s reliance damages, available either as a proxy for expectation or as damages under an estoppel claim to the extent the court finds justice requires, are measured by what he gave up by leaving Portland and moving to Bayonne. Specifically, this would include his lost $250,000 salary, the value of any pension or ownership stake he gave up at his family’s firm, and his moving expenses. Reliance should not include the money he spent on his Bayonne house, because he still owns the house and it has held its value, but it may include the extra cost of living entailed in living in New Jersey (e.g., the difference in the cost of his monthly mortgage interest payments) for as long as it is reasonable to expect him to remain in New Jersey. As with the expectation measure, there is a duty to mitigate and some uncertainty regarding how many years of damages should be assessed, but if the combined value of his cost-of-living, moving expense, and lost asset damages exceeds the $50,000 difference in salary, he would be better off asking for reliance.

If G rescinds the contract due to E’s misrepresentation, he could also seek restitution damages based on the benefit he has conferred on B and on E. This benefit should include the value of the work he performed, which could be measured by his salary for the year he has worked, but presumably he has already been paid this. He might also seek the value of the designs he created while at B (intellectual property law ordinarily assigns ownership of the designs to B, but under the circumstances it would be unjust for B to retain this benefit.) If the value of the designs are difficult to measure, he might also request that B transfer their rights to him or even ask for an injunction preventing B from exploiting the designs, though this the availability of such non-monetary remedies might depend on other law. It is probably too much of stretch to seek restitution for the profits that E earned through her stock market manipulations; while E does not deserve to keep these gains, the victim of her scheme was not G, but the stock market participants she traded with, or perhaps even the B company itself. In any event, such a claim would have to be brought against E personally, since B did not receive this gain.

Finally, G might be eligible to receive punitive damages if he could make out a tort claim of defamation, fraud, or interference with contractual relations, but not based on any of his contractual claims (barring the outside possibility of punitive damages for bad faith breach of contract, since this is arguably an extreme case of bad faith.) As for any mental distress damages he might seek as compensation for his distressed family situation, these would not be available in contract, and probably not in tort either due to proximate cause problems, but that would be a topic for another course.


Question 2: Model answer

A disclaimer: Mint Condition’s contractual relationships with its customers are governed by UCC Article 2 (since it sells coins, which are a type of good). This question accordingly contained a potential pitfall that I did not foresee: namely, some of you spent time discussing provisions of that Article that are indeed relevant to the fact situation, but that we did not cover. This is not an advanced class in sales and I did not mean to hold you responsible for such provisions; and I should have stated that explicitly in the exam instructions. (I did mean for you to discuss the provisions that we did cover in class.) Accordingly, I did not deduct points for any misapplication of these provisions, did give credit for their correct application when relevant, and tried to adjust your scores so that you would not be disadvantaged by using up a significant chunk of your word limit on provisions that you did not fully understand.

General issues

Before addressing the individual provisions on which Mint has requested your advice, it was necessary to discuss the special legal problems that arise from online contracting. The most important of these relate to the requirement of mutual assent: just because a term appears on Mint’s website does not mean it will contractually bind his customers. As with all standard form contracts, Mint’s terms must be presented in a way that customers have a fair chance to discover them. In addition, the required manner of presentation will depend on the substantive content of the term. Terms that are standard in the trade, or that customers might reasonably expect to apply even if they do not read the written contract, may enter into the contract even if they are not prominently displayed. Terms that are uncommon or unusually burdensome to the customer will likely not enter into the contract unless they are conspicuously displayed (though given the variations in what different courts consider reasonable, it is difficult to be certain whether any particular boilerplate term will survive.). What counts as conspicuous in an online setting may depend on various technical features of web design; and many of you suggested methods such as popup windows, click buttons, and the like in this regard. And terms that are especially one-sided will risk being found substantively unconscionable even if there is clear proof that the consumer was exposed to their content.

Because Mint also sells to fellow dealers, it must also consider the possibility that it will find itself in a battle of the forms in which its terms are knocked out or replaced by terms supplied by its commercial buyers. The fact that any buyers must purchase through Mint’s website provides some assurance in this regard, but there is still a risk that such customers will subsequently send Mint their own purchase orders or other confirming messages that contain terms inconsistent with Mint’s. To guard against this, Mint will need either to attend carefully to such messages, or to insist on an integrated written contract when trading with fellow dealers. On the other hand, this is less of a concern to the extent that Mint’s terms match trade usage or the ordinary default terms of the UCC, in which case it will likely get such terms even after application of the “knockout” rule of UCC §2-207(3).

While this is unlikely to pose a practical problem, it is also worth noting that any coin sales for amounts above $500 will be covered by the Statute of Frauds (§2-201). This is not a problem for coins that are shipped and received (for which there has been part performance, taking the contract out of the Statute), but Mint will not be able to enforce any executory contracts without a writing signed by the customer. It is likely that this requirement can be satisfied through electronic signature or the like, but it must at least be attended to.

Finally, it is worth observing that Mint’s interest in repeat business and its own reputation in a specialized market may make legal protections a secondary concern. It has managed, after all, to operate online for a year and a half without running into any significant disputes; but it is still a wise precaution to make sure that its contractual practices are legally sound.

Clause conditioning sales on availability:

Mint presumably uses this clause in order to protect against the costs of acquiring new inventory in a rising market, before it has had the chance to raise its posted prices. In the case where the items in question are actually unobtainable, of course, Mint could conceivably be excused under the doctrine of commercial impracticability, but it is also possible that it could be held to assume the risk of unavailability by listing them for sale.

Under the traditional common law of offer and acceptance, there would be less need for such a clause, because an advertisement would have been classified as an invitation to make an offer, not as an offer itself, thus delaying any contract until Mint’s acceptance of the customer’s order. This result is less clear under modern case law, however, and in sales cases, §2-204 muddies the waters further by providing that a contract can be formed in any manner sufficient to show agreement. In the online setting, furthermore, a customer might assume that the website’s registration of an order constituted acceptance – especially in a context where real-time inventory tracking is technically feasible and many online merchants use it.

Mint is entitled to condition its obligation to deliver in this fashion so long as the buyer objectively assents to the condition when placing its order. In order to avoid liability for rejected orders, however, Mint should make sure that it fills orders in the chronological order received, and should notify customers promptly when items are unavailable. Rejecting earlier orders in favor of later ones may breach an implied duty of impartial treatment of customers (see also §2-615(b), which requires sellers to allocate short supplies in a fair and reasonable manner); and waiting too long to decide whether to fill an order may breach the duty of good faith by speculating at the customer’s expense. In addition, late notification may reasonably be regarded as acceptance by silence (especially if the customer reasonably relies on the silence by reselling the coins or foregoing the purchase of others).

A related problem might arise if Mint inadvertently posts inaccurate information on its website regarding prices or product descriptions, and a customer placed an order before the information could be corrected. Mint might be able to avoid liability for such an order under the doctrine of unilateral mistake, but it might be wise, as some of you recommended, to add a sentence to this clause providing that Mint will not be liable for typographical errors. Even with this amended language, however, Mint should be diligent to guard against such errors and act promptly to correct them once discovered, in order to avoid both estoppel liability and loss of goodwill.

Money-back guarantee

This clause is apparently needed to give buyers a fair chance to inspect coins before being bound to their purchase. However, it does give rise to a risk of opportunism if customers decide to return coins not because they are dissatisfied with quality, but because the price has dropped – a risk which is heightened by Mint’s promise to pay the costs of return shipping. Such behavior would be a breach of the duty of good faith but would be difficult to prove, especially in a setting where appraisal is subjective and multiple grading systems are in use. As a result, the return option does not extend to bullion coins, where the risk of opportunistic speculation is higher and the need for individual inspection is less.

The clause could be improved in at least two respects, however. First, as currently written it is ambiguous when orders are accepted, leading to the possibility of disputes if a customer tries to cancel before goods are shipped. To avoid such disputes, Mint should specify what action counts as acceptance, and ideally should notify the customer by e-mail when that action has been taken. Second, §2-601 gives buyers the right to reject shipments that are actually defective (and requiring them to waive this right is likely to be bad business). Mint should provide that if a bullion shipment is defective, it will cure the defect by replacing the shipment or offering an appropriate price adjustment, but that the seller is not allowed to avoid the sale in a falling market.

Additionally, a liberal return policy does run the risk that a dishonest customer will substitute a forged or less valuable coin when returning an order. It is possible that ordinary business precautions are sufficient to address this risk, but Mint might want to restrict its return policy to slabbed coins in order to contain it further.

Lay-away clause

This clause is legally unenforceable in its current form and needs to be rewritten. It has two main problems: first, the provision forfeiting prepaid funds if payment is not completed within the 60-day period violates the customer’s right to restitution under §2-718. That section provides that non-refundable deposits are limited to the lesser of $500 or 20% of the contract price, unless the seller can establish actual or liquidated damages in a larger amount. The clause also cannot pass muster as a liquidated damage clause because no reason has been given to think that ⅓ of the price – or ⅔ in the case where the customer defaults after making two payments – is a reasonable estimate of Mint’s anticipated damages from a cancelled sale. It is plausible that Mint will suffer some lost-profit damages following a cancellation, particularly in the rare coin setting where it may be a lost-volume seller, but the clause needs to be more closely tied to such damages.

Second and relatedly, the clause may be vulnerable to attack on grounds of substantive unconscionability. Layaway sales are likely to be primarily attractive to relatively poor and unsophisticated customers who lack access to other means of credit; and they give Mint the free use of the customer’s funds for up to 60 days and a guaranteed return, while subjecting the customer to a significant risk of forfeiture. Thus, a pro-consumer judge may see this arrangement as too one-sided to enforce. Mint might guard against this result by crediting layaway buyers with the interest earned from funds on deposit, or by offering a price break in exchange for pre-payment.

Additionally, the no-return provision on layaway sales raises the same problems discussed in the previous section with regard to non-returnable bullion coins.

One-year limitation on bringing claims

Many of you asserted that reducing the limitations period for claims was prima facie unconscionable or against public policy, but in fact such a reduction is explicitly authorized by §2-725(1) and is often used by commercial sellers. [I did not expect you to know about 2-725, but you should have at least argued for the unconscionability result instead of assuming it as obvious.] It is possible that under some circumstances such a clause would be held substantively unconscionable (for instance, if the buyer was unsophisticated or if a coin were an especially clever forgery), but given the nature of the coin business it is plausibly reasonable to require that defects be discovered and reported within a year. On the other hand, given the arguable harshness of this clause and its potential for working a forfeiture, Mint would be well advised to display it in a conspicuous place and to make special efforts to draw the buyer’s attention to it, in order to avoid a finding of procedural unconscionability.

Arbitration and choice-of-law clause

Finally, Mint should ensure that its arbitration process is fair and equitable in order to guard against the invalidation of this clause on unconscionability or public policy grounds. Arbitration clauses are widely used and often upheld, even in the consumer setting, but this is no guarantee of enforcement in cases where the buyer is unduly disadvantaged by the requirement to arbitrate. For instance, requiring a buyer from another part of the country to travel to New York may effectively deprive him or her of any remedy for breach, especially in low-value sales; and an arrangement where Mint chooses the arbitrator may create incentives for biased decisionmaking, given the arbitrator’s interest financial interest in future reappointment. A procedure that maintains arbitrator independence, that covers the cost of a buyer’s winning claim, and that provides for judicial review is likelier to bear scrutiny.

Additionally, it would be wise to present this clause in a place and manner where buyers have the opportunity to see it before they purchase, although there will be more leeway in this regard in sales to fellow dealers, professional investors, or other business buyers who are accustomed to using arbitration as a method of dispute resolution.

The provision subjecting the contract to New York law, on the other hand, is likely to be uncontroversial in the absence of an argument that this law is particularly disadvantageous to buyers. Since coin sales are governed by the UCC, which is the law in every state, such an argument may be difficult to make, except possibly with regard to any non-uniform provisions in NY’s version of Article 2.