Memorandum
Date: January 4, 2001
To: Contracts, §5
From: Avery Katz
Re: Feedback on the final exam
Here is a model answer laying out what I consider to be the main issues raised on our contracts exam, as well
as their likely resolution. This answer was composed after I read your exam papers, and so incorporates most of
the points that you came up with in writing the exam, as well as those I had identified in advance. Thus, with
regard to Question 1 in particular, it goes well beyond what I expected any individual student to produce on his
or her exam paper (and it also exceeds the word limit by a considerable margin).
Accordingly, as I stated in class, it was not necessary for you to discuss all of these issues to get a high score.
Good answers might have ignored some issues to go into greater depth on others, but missing a major cluster of
issues would have hurt your score. Pending permission from the authors, I will also post on the website the top
three 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.
I did not give credit for merely restating the facts without relating them to the legal or planning issues at
hand, and I gave little credit for reciting black–letter law in the abstract without applying it to the facts.
A few people did waste some space this way.
Your individual exams will be available for inspection after January 8 at the office of my assistant, Nadine Baker
(600/1 JG, 4-7594). I did not make many written comments on the exams themselves; instead, I used a system of symbols
to indicate my reaction to particular arguments and inferences. A key to these symbols is attached. I also kept
a score sheet containing my own notes on each exam. 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 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
Before evaluating the practical issues relating to settlement, we need to consider the legal exposure. Goldbrick
faces potential claims from both PBS (Popular) and TED (Turncoat). Since the claims from PBS are more serious,
we take those up first.
Legal claims by PBS against Goldbrick
The good faith negotiation and first refusal clause included three explicit promises on Goldbrick's part. First,
Goldbrick promised to negotiate with PBS in good faith for a contract renewal during the 90-day period between
April 15 and July 15. Second, he promised not to negotiate for his services with any other party for the 45-day
period between April 15 and June 1. Third, he promised to give PBS the chance to match any outside offer he received
for six months following July 15, and to accept such a matching offer if PBS made it. The first two promises were
conditional on PBS's election; the third was conditional on no renewal being reached by July 15. Before considering
these promises individually, briefly consider two possible defenses that Goldbrick might bring against the clause.
First, because it operated at PBS's election and only to bind Goldbrick, he could argue that the clause lacked
mutuality. Second, he could argue that it was an adhesion contract because it was a standard term and appeared
in PBS's form. Both arguments are weak, the mutuality argument more so. There is no requirement that every promise
in a contract be mutual; PBS has presumably paid other valuable considerations for Goldbrick's services and is
thus permitted to contract for a unilateral option on renewal, if Goldbrick chooses to grant one. As for the adhesion
contract argument, we are told this is a common term in the industry and that Goldbrick was represented by apparently
competent counsel and is apparently not without bargaining power himself. Additionally, the clause arguably protects
PBS's investments in the "Good Day" show and in Goldbrick himself. If the clause could be shown to be
unreasonable in business terms, and/or if Goldbrick can show that he was reasonably unaware of it, however, he
may have a colorable argument that it does not apply to restrict his actions. Assuming not, however, consider
the individual promises it contains.
Negotiation in good faith
We have seen that it is possible, contrary to the traditional common–law rule, to enter into a binding promise
to negotiate in good faith. Goldbrick has probably breached this promise. Factors supporting this conclusion
include: (1) he did not tell PBS that he had been negotiating with TED, even though PBS expected a period of exclusive
negotiation; (2) he showed TED a copy of his contract with PBS, which allowed TED to craft its offer in a way that
took advantage of loopholes in the first refusal clause, (3) he refused to consider PBS's May 28 offer at all,
partially on the grounds that the 45-day exclusive negotiation period was due to expire, and (4) most importantly,
Goldbrick bound himself, in the producer's contract he signed with TED on June 12, not to perform services for
anyone else without TED's approval. All these factors lead to the conclusion that he was not seriously bargaining
with PBS for the entire 90-day period as he had promised. This conclusion is not inevitable, however; Goldbrick
does have some counterarguments available. He could argue that good faith negotiation does not require disclosing
his contacts with TED; ordinarily there is no duty to disclose such information and he could have been bargaining
in earnest while keeping alternatives to himself. He could point out that he did engage in negotiation with PBS,
that he initially offered to sign with PBS for terms substantially similar to those included in the TED contract,
that he granted PBS additional time to get back to him, and that he initially agreed to reduce his salary demands
in exchange for prime-time specials. He could also argue that PBS's long delay in getting back to him between
April 1 and May 18, after promising an answer within 10 days, was an election to discontinue negotiations or was
itself a breach of good faith thus entitling him to look elsewhere. The fact that Goldbrick agreed to an extension
of time to negotiate after April 15, however, cuts against this last argument.
Exclusive negotiation period
Goldbrick promised PBS that he would not negotiate with anyone else between April 15 and June 15. Technically,
he complied with this promise in that all of his contacts with TED were before April 15 or after June 1. PBS nonetheless
has several colorable arguments here. First, it could argue that a court should imply a promise by Goldbrick not
to negotiate with anyone else before negotiating with PBS, even if this is prior to the 45-day window. The purpose
of the clause, PBS would argue, is to provide a period of exclusive negotiation for PBS's benefit, and the court
should interpret the clause so as to forward this intention (cf. Parev Products). Goldbrick of course would respond
that PBS is a sophisticated party and the contract is very clear on the exact limits of the negotiation and exclusivity
periods. Second, PBS could argue that even though Goldbrick did not contact TED during the 45-day period, his
previous contacts, the open state of discussions, and both parties' understanding that further communications were
anticipated after June 1, constituted negotiation for purposes of the exclusive negotiation clause. Third, PBS
could argue that Goldbrick and PBS, by initiating renewal negotiations earlier than had been contemplated, implicitly
modified the contract, hence accelerating the exclusivity period. PBS's oral request in February for additional
time to negotiate, agreed to by Goldbrick, could be interpreted as such a modification (and as one of you pointed
out, is arguably best understood in context as a request for an extension of the exclusivity period.) All these
arguments turn on contestable interpretations, however; and PBS's arguments here are probably not as strong as
those made above under good faith.
Right of refusal
Goldbrick promised not to accept an offer of employment between July 15 and January 15 without first giving PBS
the opportunity to match the offer. There appears to have been a question, raised by the exchange of letters
between Goldbrick and PBS in late June, about whether the promise is not to accept an offer before January 15,
or whether it is just not to begin working before January 15. The original clause seems clearly to anticipate
the former interpretation, and this interpretation was confirmed by PBS's letter agreement dealing with the three-month
extension till September. In either event, however, Goldbrick's formal dealings with TED have been designed to
skirt the right-of-refusal clause. Specifically, the clause prohibits Goldbrick from accepting offers to work
as a "program host, reporter, sportscaster, commentator, or analyst" but apparently does not cover acceptance
of contracts to work as a producer. Similarly, the clause does not explicitly extend to option contracts in which
Goldbrick obtains a irrevocable offer of employment, but does not accept the offer. Thus Goldbrick can plausibly
argue that he has not violated the letter of this clause.
PBS best counterargument would be that the casting of the TED agreement into a producer's contract and an option
to enter into a separate performer's agreement six months later is a sham, designed to conceal the nature of the
true transaction. Goldbrick has no experience as a producer and there is no indication that he is providing any
production services (especially during the period between June and September when he was working on an extension
of his PBS contract.) The real agreement was the oral deal that Goldbrick and TED's executives shook hands over
on June 5. Even though the oral deal would not be enforceable under the Statute of Frauds, and even though parol
evidence would be needed to prove its actual provisions, entering into it still violated Goldbrick's promise to
PBS. (Note as a technical matter, by the way, that the parol evidence rule would not bar admission of this evidence
in a suit by PBS, who was not a party to the arrangement; it would only bar such evidence as it related to any
dispute between Goldbrick and TED.) This counterargument is not a sure winner — a formalist court might well find
that Goldbrick successfully navigated the loopholes of his contract with PBS — and more importantly, in order to
make it, PBS would need information about the details of Goldbrick's oral negotiations with TED. It does not currently
have such information, and there is no guarantee it will obtain such information in civil discovery.
Damages and other remedies
Although PBS might have a good claim of breach of contract against Goldbrick on one or more of the above theories,
it is uncertain what remedy this would lead to as a practical matter. In principle PBS would be entitled to expectation
damages resulting from the breach, but these will be difficult to show. Even if Goldbrick had negotiated in good
faith, there is no guarantee that he and PBS would have agreed on a renewal (although the May 18 offer suggests
that PBS was ready to meet Goldbrick's basic terms.) Additionally, it may be hard for PBS to prove losses resulting
from Goldbrick's departure. Ratings and advertising revenues may not fall, and if they do, Goldbrick can argue
that this is due to consumer boredom or PBS mismanagement rather than his departure. (Although if his new show
at TED gets high ratings, the TED ratings could be used as a benchmark for calculating PBS's expectations.) If
damages are awarded, however, they could be high, though they would probably not include lost revenues from the
Shock-a-rama show, which would probably be regarded as consequential damages barred by the Hadley v. Baxendale
principle.
Because this is a personal services contract, PBS cannot get specific performance in the sense of forcing Goldbrick
to work for PBS. It probably could get an injunction prohibiting him from working for TED, but it is uncertain
whether such an injunction would be imposed beyond January 15. Courts are traditionally reluctant to deprive workers
of their livelihood for significant periods of time; and PBS did agree that Goldbrick would be free to work for
others after a six-month layoff. Since it is already December and it would take time (and probably significant
discovery) for a court to get to the point where it would issue an injunction, this risk may be minimal.
Legal claims by TED against Goldbrick
At this point, Goldbrick is contractually obligated to TED under his producer's agreement, but not under his performer's
agreement, which was set up as a binding unilateral option that he has not yet exercised. The producer's agreement
does contain a non-competition clause that has arguably been violated by Goldbrick's three-month extension at PBS
from July 16 through the end of September. Goldbrick has a good argument, however, that TED has waived its objections
to the three-month extension. His appearance on PBS was public knowledge and there is no indication that TED ever
objected to it; nor is there any indication that his duties at PBS interfered with duties he owed to TED. Additionally,
even if there was no waiver, it is unclear what damages TED could show.
TED could acquire other claims against Goldbrick, however, depending on what he does next. If he exercises his
option on the performer's contract after January 15, of course, he will owe TED two years of exclusive service.
If on the other hand he settles with PBS and returns to the "Good Day" show, TED would have several
potential claims, the first of which is that Goldbrick would again be in violation of the non-competition clause
on the producer's contract. While TED has probably waived this clause up till now, the waiver is retractable.
As observed above, the damages for this violation are uncertain, but TED could request an injunction prohibiting
Goldbrick from working for PBS. It is not obvious that a court would grant such an injunction (equitable remedies
are discretionary, and TED might run afoul of the unclean hands doctrine) but there is a risk.
In addition, TED could argue that Goldbrick was obligated by virtue of his oral promise of June 5 to exercise his
option on the performer's contract. Here TED would argue (the flip side of PBS's argument above) that the parties'
true understanding was that Goldbrick would work for TED for two years for $3.2 million, and that the casting of
the deal in two contracts was a formality intended not to operate between the parties, but instead to get around
the restrictions of the PBS refusal clause. The parties never intended to pay Goldbrick $1 million for non-existent
production services, or that he would fail to exercise the option. There is an obvious parol evidence problem
here, but if we are in a liberal jurisdiction there is a good chance of getting the evidence in. Alternatively,
TED could argue promissory estoppel, in that it relied on Goldbrick's oral promise to exercise his option on January
15 when it divided the contract in two and undertook liability on the production contract. Here again, TED has
an unclean hands problem (estoppel being an equitable doctrine), but at the least, it could probably get the production
contract rescinded and thus escape its $1 million liability to Goldbrick.
If TED were to succeed on all these claims (and admittedly some of them are long-shot) it would potentially be
entitled to expectation damages, in which case it would face proof problems similar to those indicated above for
PBS. Indeed, TED would probably face even more difficult problems than PBS in proving lost expectation, because
it would not be able to look back on past years' earnings as a proxy. Possibly it could recover out-of pocket
expenses, as in Security Stove.
Finally, if Goldbrick settles with PBS while PBS maintains its tort suit against TED, there is a small risk that
he will be held liable under the liquidated damages clause that appears in his producer's contract. PBS, after
all, does have a plausible if not a knockdown claim against TED for interference with contractual relations. TED
negotiated with Goldbrick knowing the details of his arrangements with PBS, and crafted its offers to get around
PBS's first refusal clause. It knew or should have known that Goldbrick was breaching his duty to PBS to negotiate
in good faith, and in signing him to a producer's contract containing an exclusive dealing clause, was complicit
in his breach. Thus TED may be liable to PBS for lost profits and possibly for punitive damages (the latter of
which are more likely if lost profits cannot be demonstrated with certainty.)
Goldbrick is not liable to TED for its losses to PBS in such a suit, since he has not signed a general indemnification
clause. The liquidated damage clause does hold him liable for $500,000 if he participates or cooperates with PBS
in its suit. What counts as such participation is unclear; Goldbrick would probably be asked to give testimony,
and even if the testimony were under subpoena, TED would argue that his settlement with and re-employment by PBS
makes him in essence a friendly rather than a hostile witness. It is unclear, however, whether this clause would
be enforced. Not just because it is a penalty clause — it would indeed be difficult to measure the losses suffered
by TED resulting from Goldbrick's cooperation with PBS, and it is plausible that the TED's losses could amount
to $500,000 if the suit were successful — but because it may run afoul of public policy. The clause essentially
attempts to buy Goldbrick's silence and to deter him from testifying truthfully in a civil action, undermining
the ability of courts to do justice. On the other hand, there are cases in which such clauses have been upheld,
and the effect on Goldbrick's incentives is probably not much worse than it would be under an indemnification clause.
Still, on the facts of this case, TED would not be in an especially sympathetic position.
Negotiation strategy
To summarize Goldbrick's legal exposure, he faces a risk of owing significant expectation damages to PBS, though
due to proof problems this risk may not be so severe. He also faces a larger risk of being enjoined from working
for TED, though probably not past January 15. If he goes back to work for PBS, he will likely have to return
any money he has received from TED under the producer's contract, and faces a smaller risk of owing expectation
damages to TED. If he goes back to PBS and PBS pursues its tort suit against TED, he may be liable for the $500,000
liquidated damages, but probably only if the suit is successful. Finally, there is an outside chance that Goldbrick
could wind up enjoined from working for either PBS or TED.
For this reason, it probably would be a good idea for Goldbrick to settle with PBS. Because Goldbrick remains
potentially liable to TED if he returns to PBS, however, it will be important to try to bring TED in on the deal.
One possibility would be for PBS to drop its tort claim against TED, in exchange for TED releasing its claims
against Goldbrick so that he can safely return to PBS. If TED is unwilling to do this, however, or if PBS thinks
that its tort suit is too valuable to drop, it will be important for Goldbrick to obtain protection against his
potential $500,000 liability on the litigation clause. One way to do this would be for PBS to indemnify Goldbrick
for any losses he suffers under this clause. Since there is some doubt that the liquidated damages clause is enforceable
anyway, and since PBS controls the litigation against TED and is thus in a position to take steps to minimize Goldbrick's
liability, PBS may be willing to agree to undertake such an obligation. This course of action, however, would
not eliminate the risk of TED seeking an injunction against Goldbrick's return to PBS.
If instead Goldbrick still prefers to work for TED, an alternate possibility would be for him to wait till January
15 and exercise his option on the performer's contract. If he chooses this option, he would remain subject to
the risk of owing expectation damages to PBS, but since PBS has not conditioned its willingness to settle on Goldbrick's
return, this risk could and should be eliminated in a settlement. The amount paid in settlement, however, should
reflect the facts that PBS's case against Goldbrick and its ability to prove damages are far from certain, and
that PBS has not yet learned the most incriminating details of Goldbrick's dealings with TED.
Question 2: Summary of suggested answer
Because there were so many ways to answer this question, no single answer is appropriate (and in fact I found that
I was unable to use a standard checklist when grading). It is possible, however, to identify the general themes
and issues that a good answer should have included. In particular, the question called for you to apply and integrate
material from several of our classroom discussions, most specifically those dealing with the law of construction
bidding (e.g., Baird v Gimbel, Drennan v. Star Paving, Kastorff v. Elsinore Union School District) and with
nonlegal enforcement of contracts (e.g., the Macauley and Bernstein readings on business reputation, and the arbitration
readings, among others). To give useful legal advice, you also needed to consider and apply concepts that arose
in our discussions of offer and acceptance, mistake, standard form contracts, and possibly damages.
A good starting point would have been to recognize that the various problems faced by Construction Contractors.com
[CCC] cannot entirely be avoided; they can only be managed. Errors and mistakes are an inevitable part of doing
business in an unfamiliar setting; and opportunism is a special problem when the parties do not know each other
and are dealing at a distance. The best that can be done is to allocate the burdens of precaution and risk on
the parties who can bear them most easily, and to make optimal use of the enforcement options that are available.
Similarly, there is nothing about Internet commerce that is special in this regard, except perhaps that people
are relatively unfamiliar with the medium and are less likely to have settled or divergent expectations about how
it will operate; this makes issues of coordination and communication particularly important.
Some of these problems may best be addressed by technical means: for example, by creating software interfaces that
require various forms of confirmation before a bid becomes final, or by requiring participants to undergo a screening
or training process before participating. While these sort of suggestions should not have formed the bulk of your
answer, it was surely appropriate to raise them. More important, however, were suggestions that emphasized the
role of contracts in clarifying and coordinating the parties' expectations, or that attempted to sharpen the parties'
incentives to take precautions and to keep their promises. By and large, the class was very creative in this
regard, offering suggestions that ranged from placing requirements on parties who wished to bid (e.g., carrying
insurance, putting deposits in escrow), establishing reputational mechanisms (in some cases finely graded ones)
to punish errant or opportunistic bidders or to exclude them from participating, and contracting for various types
of liquidated damages or enforcement mechanisms, including arbitration.
The best answers went beyond offering such suggestions to discuss how they might be implemented legally, as well
as what limits the law might impose on them. In this regard, you might have discussed (and compared) both the
UCC and common-law doctrines, since the client will be acting as intermediary for contracts dealing with both goods
and services. Most of you recognized that your suggestions were best implemented through an overarching contract
between CCC and the site's users; many of you also recognized that doctrines governing mistake, estoppel, and the
interpretation of standard form contracts might prevent such a contract from offering a complete solution. There
were various lines of analysis you could have pursued in this regard, three of which are worth mentioning in particular.
First, as many of you pointed out, the online interface and the use of standardized terms raise problems of mutual
assent. Many users will not read through all the terms of CCC's standard contract, especially if they have to
scroll down or click through several screens of text to do so. It may be debated whether this is a greater or
lesser problem in the online setting than it is for standard form contracts generally, but if CCC's customers are
new to online contracting, they may be surprised by various of CCC's terms. There are both legal and practical
issues here. Not only may some "clickwrap" terms not be legally enforceable, but as a practical matter
the use of such terms without adequate notification is likely to lead to disputes that could harm CCC's reputation
as it seeks to get its business off the ground. It was particularly important, accordingly, to offer advice on
how CCC could best communicate its contract terms to its customers and ensure that they found those terms acceptable.
The second issue goes to the problem of mistake. One popular recommendation for dealing with mistaken bids was
to require all bidders, as a condition of entering the site, to assume the risk for any typographical errors they
commit. As many of you observed, however, it is not entirely certain that a court applying standard mistake doctrine
would enforce such a provision, especially if the mistake were large and innocent and no reliance damages were
shown. The inclusion of such a provision, on the other hand, would increase the chances that the bidder would
be held to its bid, and would as a practical matter have some deterrent effect, at least if the bidder is made
aware of the liability it is potentially undertaking when it bids.
The third issue goes to the problem of strategic bidding. Since it is very difficult to prove that a particular
bidder has engaged in strategic bidding and since government prosecution is unlikely, one possible approach (following
along the lines of the argument of Prof. Klein's coursepack reading on at-will contracts) would be to provide that
the client retains the right to exclude bidders at its discretion, without having to show good cause. As we have
seen, however, the courts have been increasingly hostile to at-will terms, at least in the franchise and employment
settings, and it there is a risk that the client could be held liable for excluding an aggrieved customer if a
court did not happen to agree ex post that the client's suspicions were justified.
There were no common errors or shortcomings in your answers, which were by and large quite good. A few people
gave advice that was tailored excessively to the business setting faced by eBay, as opposed to the more specialized
context faced by the hypothetical client CCC, but by and large this was not a major problem. In general, the
class did very well in avoiding some of the pitfalls experienced by students in previous years. Most of you made
sure to balance legal and practical analysis, and to explain why you were making the particular suggestions you
did. In general, organization, clarity, analysis of the specific fact situation, considering the needs of all
parties to the transaction, considering the downside as well as the upside of your proposals, and offering multiple
alternatives made the difference between the top answers and those that were merely good or average. The top three
answers illustrate some of the possibilities.
Key to symbols used to mark exams:
On some exams I circled particular words or phrases that I found questionable or unclear, and attached these
symbols to them.