Memorandum
Date: February 5, 1999
To: Contracts, §1
From: Avery Katz
Re: Feedback on the final exam
Here is a summary of what I considered to be the main issues raised on our contracts exam, and of the most common
errors.
As I stated in advance, 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. I will put on library reserve the top three student answers to each of
the questions to the exam, along with a copy of the exam itself. The registrar will also have copies of these
top answers. 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 number of
people did waste some space this way, especially on Question 2.
Your individual exams will be available for inspection at the registrar's office. 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 to read the top answers on reserve, however, before we meet.
It was a pleasure teaching the class, and I wish you all well. Please keep in touch.
Question 1: Summary of suggested answer
1) Can the Franks (F’s) establish an enforceable agreement on the part of LoCardi (L) to relocate them in
a new distributorship?
The starting point for this question is to ask whether there really was an agreement of the sort the F’s claim.
First of all there is a practical problem of proof, in that the relocation agreement is alleged to have arisen
out of a conversation at which the F’s were not present. Their father Harold (H) is no longer alive to testify,
and L’s representative Younger (Y) may have a different recollection. Additionally, even if Y admits to the
events alleged, it does not necessarily follow that a binding agreement was reached. There is no problem
of consideration or mutuality, but it is ambiguous whether H and Y, who were old friends willing to deal on a basis
of trust, intended to establish a legal obligation between them (as opposed to a moral one), or if they did, whether
they completed the necessary steps to make it effective. The fact that L offered the F’s a distributorship
after H’s death indicates they attached some value to Y’s promise (or at least, that L and Y valued their relationship
with the F’s), but does not by itself prove that the promise was intended to be legally binding.
Arguing against a legally enforceable agreement are the factors that the promise to relocate was open-ended
and important terms such as location, price, and timing were not worked out, and that the promise never appeared
in the subsequent written contract that sold Twin Cities (T) to a new buyer. Both factors raise interpretative
issues that can be argued either way. In addition, the former raises the indefiniteness doctrine, and the
latter raises the parol evidence rule. With regard to indefiniteness, the modern rule is that open terms
do not prevent an agreement from being enforceable if the parties so intended and there is a reasonable basis for
a remedy, but both these elements need to be argued on the facts.
The parol evidence issue is more complicated and is, as most students recognized, at the heart of the dispute.
Under the parol evidence rule, a written integration of the parties’ agreement bars proof of additional oral terms,
so that if the September 1994 contract is deemed an integrated agreement, the oral promise cannot be enforced.
The modern trend is to treat the issue of integration as one of intent rather than form, and to be liberal about
admitting evidence, but not all courts follow this trend. Arguing in favor of an integration are the facts
that the transaction was a complicated and heavily negotiated one with much economic value riding on it, and that
Y, H, and L were commercially sophisticated actors who understood the importance of written contracts. Arguing
against an integration are the facts that the written contract contained much boilerplate and no merger clause,
that it was negotiated and signed by different parties than the oral agreement (the oral agreement was between
H and Y, while the written contract was between L acting thru another agent, the F’s, the Shenkmans, and the new
buyers), that the provisions dealing with a new distributorship were different from and might not easily fit in
a contract designed to deal with the sale of an old one, and that many aspects relating to the new distributorship
depended on future events and were not in a position to be written down. My own judgment is that most
modern courts would probably find that the agreement is not integrated, but it is not a sure thing.
Alternatively, the F’s might argue that even if the written agreement was intended as an integration, the oral
agreement with Y can be enforced under the collateral agreement exception to the parol evidence rule. This
is also worth arguing, but requires discussion of whether Y’s oral promise can fairly be described as collateral
and whether it contradicts the writing. I would expect, furthermore, that most courts that would view the
written contract as integrated would be unlikely to view the oral promise as collateral. In any event, even
if the parol evidence is admissible, proving that a binding agreement was actually intended will not be trivial,
for the reasons mentioned above.
Some students also discussed whether the promise to relocate was covered by the Statute of Frauds. Most
probably it is not (the only argument is that it falls into the one-year provision, but there is nothing in the
facts that says the relocation cannot occur within a year), but I did give credit for this analysis as well.
Finally, if the oral agreement was not intended to be binding, or if proof of it is barred by the parol evidence
rule, the F’s may still be able to assert a claim of promissory estoppel under §90. To do this they
would have to show foreseeable and reasonable reliance, and establish that equity required a compensatory remedy.
The reliance could be that they and their father would not have sold their interest in T absent Y’s promise (though
the fact that the impetus for the deal was H’s desire to retire cuts against this argument) or that they refrained
from pursuing other ventures after the sale. The elements of foreseeability, reasonableness, justice would
have to be argued on the facts.
2) If there was a binding agreement, did L breach it?
L may argue that even if there was an agreement, its offer of the Saskatoon franchise discharged any duties
it might have had under it. The details of the new distributorship were never specified and we are
not told that Y shared H’s subjective understanding of what kind of distributorship was expected, the size, the
location, etc. There is room to argue that H’s death affected L’s obligations (for instance, Y may
have understood the deal as premised on H’s being available to give his sons continued business advice, even though
he was retiring; similarly, a smaller distributorship would be appropriate given that only two of the five principals
of T would be running it). These issues can all be contested on interpretative grounds.
In addition, if we interpret the contract as requiring L to provide an acceptable location within reasonable
time, the doctrine of good faith becomes relevant, both on L’s part (they have to make reasonable efforts to find
such a distributorship) and on the F’s (they cannot unreasonably restrict what counts as acceptable).
Finally, the F’s will likely have to show that a new (and acceptable) distributorship was actually available
in order to establish breach. The alleged oral promise was to offer a new distributorship as soon as one
became available, not within any specific time period. There is no indication on the facts that Y promised
when or if that would happen (though maybe the F’s could make an argument that the implied duty of good faith supplies
such a promise.)
3) What remedies are available if the F’s can show a breach of contract?
The usual remedy for breach of contract is expectation damages; this would be measured by the anticipated profits
the F’s would have earned at their new location. This formulation of the issue makes it plain that there
is a problem with uncertainty of damages. We do not know where the new location would have been, how well
it would have done, etc. L may argue that damages are so uncertain that they cannot be awarded at all.
The F’s will argue that their experience in the business, and the fact that the new location is supposed to be
similar to the old one, resolves the uncertainty. There is much room to discuss the accuracy of the estimate
provided by the F’s accountant in this regard, and to propose other formulas. This uncertainty regarding
damages also goes to the liability issue of indefiniteness, as discussed above.
It is also possible that the F’s could collect reliance damages, either under a §90 theory, or more likely,
as a proxy for their uncertain expectation, as in Security Stove. Reliance damages would properly
be measured by profits at the old location, consistent with the accountant’s calculations, but there is room to
argue here as well. Additionally, under either theory, damages would be offset by the amounts that the F’s
could have recouped thru reasonable mitigation. They did invest in bonds, but maybe they could have done
more to pursue other profit-making ventures. Many of you discussed at length whether mitigation of damages
required taking the Saskatoon franchise. My view is the Saskatoon offer is more properly understood
as a interpretative question going to performance rather than one of mitigation (after all, at the time it was
made it was not yet clear that L had even breached) but I gave credit for such discussions as well.
Finally, specific performance is probably not going to be available, given that monetary estimates are possible
and that a distributorship entails an ongoing relationship that a court will prefer not to supervise, but there
is room to discuss the issue. In general, though my discussion here has been brief, it was possible
to say a lot more about the damage issue on the facts, and to receive credit for it.
4) Common errors
There were only two common errors that cropped up in your essays, and neither was really all that frequent.
They are still worth some brief discussion, however. The first error was to try to attack the oral promise
as being a gift promise or as lacking consideration. This was a bad argument, because it is not necessary
for every promise in a contract to be accompanied by separate and individual consideration; all that is necessary
is that there be consideration as a whole; i.e., that the transaction as a whole be an exchange. It does
not matter if the promise in question benefits one side more than the other, or if it is a bargaining concession.
Thus the sale of T is perfectly adequate consideration for Y’s promise. (In addition, even if the relocation
arrangement is characterized as a separate collateral agreement, there is still consideration. L provides
a new distributorship, and the F’s take it over and run it pursuant to contract. A new distributorship is
something they want and arguably a concession on L’s part, but it is still an exchange, not a gift.) In general,
as I stated in class, while the consideration doctrine is theoretically important, it rarely has any practical
effect in actual contractual disputes, most of which arise out of exchange relationships.
The other common error is perhaps more forgivable, since it related to material that I did not cover in class
and that was not even assigned as reading. Namely, a number of people spent time discussing whether the agreement
to relocate the F’s in a new location, if it was made, was a promise or a condition. On the facts it seems
plain that it was a promise (allegedly Y agreed that he would get the F’s a new location, not that if he got them
a new location he would then do something else). The promise did involve a condition in that Y allegedly
agreed to offer a new distributorship if and when one became available. But in any event, this condition
would only go to whether the lack of an available location would count as a defense to liability.
Some number of you argued, however, that if the oral promise to relocate was a condition precedent to the parties’
agreement, this would establish an exception to the parol evidence rule. This argument is incorrect.
This doctrinal exception, which we did not discuss in class, applies only to conditions that are intended to prevent
the written agreement from taking effect (e.g., this agreement isn’t official until my board of directors approves
it). Since the sale of T was completed and the assets transferred to the new buyer, the promise of a new
distributorship cannot reasonably be understood as such a condition. This is not something that I would have
expected you to know, but I also did not intend it to be relevant in analyzing this problem. (For more explanation,
see the note at p. 572 of your casebook.) I am guessing that the reason people spent time on this doctrinal
issue is that it appeared in commercial study outlines you used to prepare for the exam. If so, one possible
lesson is that it is risky to rely solely on such outlines for your understanding of black-letter doctrine.
On a lighter note, I was pleased to see that all but about ten students remembered the correct spelling of “parol
evidence,” a substantial improvement from previous years.
Question 2: Summary of suggested answer
This question called for a fair amount of creativity in applying your knowledge of contracts to a practical
negotiation problem; and there was no simple way to plug the problem into a standard outline. Accordingly,
the summary that follows is only one example of how the question might have been answered. The overall success
of your answer depended on your explanations of how the specific reforms you recommended would help address Lott
and Duffy’s problems, of what particular forms should be used to implement your suggestions, and of the likely
limits, both practical and legal, of your recommendations.
In order to provide a sensible basis for advice, however, you should have attempted to evaluate the legal consequences
of signing the agreement as offered by Pendant as opposed to other alternatives. You should also have discussed
both of the particular problems mentioned in the question: how best to ensure Pendant’s compliance with any
contract that is signed, and what to do about the boilerplate terms in its proposed contract dealing with suspension
of royalties and with potential liability to third parties. Good answers could have gone in a variety of
directions from there, depending on your inclination, and the top three answers illustrate some possibilities.
As with Question 1, organization, clarity, discussion of specific facts, and considering the needs of both parties
to the transaction made the difference between good answers and merely average ones.
1) General observations on contract enforcement
Though this is obviously not the only way to organize an answer, I myself would have started with some general
remarks assessing the relative advantages of legal and nonlegal methods of contract enforcement in this situation.
The value of legal enforcement is limited not just because Lott (L) and Duffy (D) want to stay out of court, but
because it will be difficult in the event of a dispute for a legal factfinder, especially one not conversant with
the practices of the publishing industry, to tell whether Pendant’s (P’s) royalty calculations are real or manufactured,
or whether any cancellation of the book contract is commercially reasonable. In addition, given that any
breach by P is likely to be occasioned by financial difficulties on its part, money damages may be difficult to
collect as a practical matter. This means not only that L and D risk going uncompensated, but that P may
not see money damages as much of a deterrent to bad behavior.
On the other hand, the scope for nonlegal sanction is also limited. We are told that P operates on the
fringe of the industry and is reputed to have behaved opportunistically in the past. Both factors call into
question the value of using reputation as a bond. Moreover, nonlegal sanctions do not work well for
firms on the edge of insolvency for the same reason that legal sanctions do not work; if P believes it is not going
to be in business much longer, it is unlikely to be willing to make sacrifices to maintain its (already checkered)
reputation. In this situation, therefore, it is probably better to offer a carrot than to threaten
a stick, as many of you suggested. D, who has a high profile in the industry and whom we are told is
currently on good terms with P, could hold out the possibility of future business as an inducement for proper performance,
either by referring her colleagues to P or bringing P future clients of her own.
Because neither legal nor nonlegal sanctions are likely to offer full protection against breach, however, it
is best for L and D to make attempts to cover themselves along both dimensions. In addition, as many of you
suggested, it would be a good idea to make special efforts are at the outset of the relationship to engage in careful
planning to minimize the chances of a dispute. This would include exchange of information during negotiation
(for instance, D might ask P to provide evidence of its current financial status before entering into an agreement)
as well as considering the various contingencies that might arise and clearly allocating responsibility for them
in the contract. This is always good practice when entering into a contract but it seems especially important
here. In the end, however, it will not be possible for L and D to enjoy the benefit of contracting with P
without accepting that there will be some associated risks.
2) Specific suggestions for ensuring P’s performance
The suggestion of an arbitration clause providing for punitive damages was intended to be a starting point to
get you thinking about enforcement devices, not the focus of your discussion. Still, it is worth noting that
the two aspects of this clause are separable; it is possible to have arbitration without punitive damages, and
arguably, vice versa (if a court finds fraud or egregious bad faith it does have the authority to award punitive
damages in tort.) In addition, the fact that this clause is not enforceable in New York is not a definitive
reason to omit it from the contract. It is always possible that L’s jurisdiction will follow a different
rule (remember, the NY opinion did spark a vigorous dissent) and including the clause may provide some incentive
for P, who may not wish to take the risk that it will be found enforceable, to perform.
In addition, even if punitive damages are not available, liquidated damages are; and a liquidated damages clause
is the most obvious suggestion for dealing with the problem of performance. It will of course be necessary
to comply with the doctrinal requirements for such a clause (namely, damages must be difficult or costly to estimate
ex ante, and the damage amount provided must be a reasonable estimate of lost expectation), but this should not
be hard on the given facts. In addition, there may be some leeway to estimate damages on the generous side
as a further inducement for P to perform. (The NY case referenced in the problem is a real case, Garrity
v Lyle Stuart, 353 NE 2d 793 (1976), which arose out of a dispute between the author and publisher of the early
1970's self-help/sex manual, “The Sensuous Woman.” The Garrity court took pains to distinguish
punitive from liquidated damages, however, and cited with approval an earlier NY case, Matter of Associated
General Contractors, in which the court upheld an arbitration award of treble liquidated damages (!) as specifically
provided in the underlying contract.)
Liquidated damages, of course, still depend on the defendant’s ability to pay, and do not offer full protection
in the event of P’s insolvency. Additional enforcement devices are thus in order, and students proposed many
of them. A popular suggestion was a guaranty from a surety company; another was to create a escrow account,
administered by a third party, to hold the royalties as they are earned. Another was to condition some parts
of L’s performance under the contract, such as going on promotion tours, on timely and accurate payment of royalties.
And yet another was to give L the right to terminate the contract and take the book to another publisher in the
event that P failed to pay royalties. One advantage of this last suggestion is that it could allow L the
option to recover off the contract in quantum meruit, which might well allow for damages substantially in excess
of expectation. (Recall the US Naval Institute case, at p. 221 of your casebook, in which the court
held that breach of a book contract that also constituted an infringement of copyright would require the infringer
to disgorge all earnings derived from the sale of the book, and not just the extra royalties that would have been
due under the contract.)
All of these suggestions entail some cost, both to L and to P, and it is possible that P will resist some of
them, but given the difficulties of traditional means of enforcement in this market and the value of the contract
to the parties, it is likely that some accommodation can be reached. Many of you offered specific practical
negotiating advice for D in this regard. I gave credit for such advice, up to a point, though some people
went on in this vein for too long. It was also worth noting that even if no special precautions are taken,
most of the opportunistic actions that D is worried about would constitute a breach of contract (or alternatively,
of the implied duty of good faith) under ordinary black-letter doctrine, and thus would at least give rise to a
claim for standard money damages.
3) The boilerplate terms appearing in P’s contract
Here the best way to start is by noting that while both clauses are overdrafted and operate unreasonably in
P’s favor, they do reflect legitimate concerns on P’s part that need somehow to be addressed. In particular,
the clause dealing with suspension and renegotiation of royalties arises out of a business environment where publishers
operate on the margin and the financial problems are real. It is not necessarily unreasonable for P to ask
L, who is offering a speculative project and who stands to benefit handsomely if it succeeds, to share some of
the financial risk of the endeavor. Some of the situations described, furthermore, such as labor disputes,
might constitute excuses to performance under the impossibility doctrine, and would thus justify disruptions in
payment even absent the presence of the clause. Other difficulties, such as unforeseen cost increases, would
provide the basis for subsequent good faith modification under modern common law even if they do not rise to the
level of an excuse for nonperformance.
None of this means, of course, that L and D have to accept the clause as drafted. As it is written, it
allows P full discretion to suspend payment for virtually any business setback whatsoever, while giving L little
recourse to contest P’s judgment in this regard. Indeed, the discretion given P in this regard is so great
that conceivably it could result in a finding that there is no mutuality because P’s promise to pay royalties is
illusory (though more likely, a modern court would find that P’s discretion is limited by the implied duty of good
faith; D might look to the precedent of her quasi-namesake Lady Duff-Gordon in this regard). The best
response to would be for D and P to sit down and work out in more detail just which business risks it is reasonable
for P to share with L, and which it is more reasonable for P to assume on its own. This discussion would
then form the basis for a specific force majeure clause or duty to renegotiate in good faith that could be inserted
in the formal contract.
Similarly, the hold-harmless clause reflects the real risk that L’s manuscript will be found libelous, an invasion
of common-law or statutory privacy rights, or a breach of her employment contract with her previous employers (copyright
is probably not an issue here). Because publishers are not in a position to know all the details behind an
author’s manuscript, and because their financial risk in case of liability is significant (an angry plaintiff will
often prefer to go after the relatively deep pockets of a publisher), it is typical, or at least not unreasonable,
for them to ask for such assurances in this regard. In this case, furthermore, the risk of such liability
is particularly great. By the same token, however, it may not be possible for L to be able to go forward
with the project if she has to insure P against all risk arising out of it. Some of the claims dealt with
in the clause may be better handled by P; after all they have a staff of editors and lawyers who are presumably
experienced in avoiding libel and similar tort claims, and they have some ability to pass along the expected cost
of liability in the price of the book. In addition, the likelihood of a claim may be importantly influenced
by the way the book is edited and marketed (e.g., L does not want to bear the risk for salacious advertisements
that she had no role in creating); and arguably, allocating such risks to her may even be deemed unconscionable
by a sympathetic court (as in the Weaver case). As with the previous clause, therefore, D and P should
work out in detail how the risks of liability are best allocated, and how the parties might best take care to minimize
them (for example, P might ask for input into the hiring of a ghost writer, and the parties should specify just
who will have control over final editorial, marketing, and legal decisions).
For both clauses, furthermore, it is worth discussing whether they would actually be enforceable if they remained
in the contract. They are probably boilerplate, and they appear in a standardized contract offered by (and
hence construed against) P, but it would be unwise to assume that for that reason alone a court would not enforce
them. Unlike some parties who enter into form contracts, L is a sophisticated businesswoman who deals regularly
with such contracts, and she has read and understood the terms in question, anticipates possible negotiations over
them, and has consulted a lawyer for advice. While P is the only publisher who is willing to offer L a large
advance, it is possible that L could publish her book somewhere else if she were willing to sacrifice the advance;
and in any event the project is a risky one that offers her the potential for large gains. And the
clauses in question do reflect legitimate business concerns on P’s part, even though they are overly aggressive
in defending those concerns. Voiding the clauses in question on grounds of duress or unconscionability
is therefore a long shot, although their overreaching nature and the incentive problems they create might well
lead a court to limit their effect under doctrines such as unconscionability, good faith, or public policy.
Even if one believed the terms to be unenforceable, however, it is probably bad business to invite a dispute by
misleading the other party about one’s expectations rather than working out a clear and acceptable compromise in
advance.
4) Common errors:
The most common pitfall lay in devoting too much time to a straight business analysis of the situation, and
too little time to specifically legal considerations. While the question did ask for a practical perspective,
for a lawyer this must always start with an understanding of the legal consequences of the alternatives, including
to what extent any contractual obligations would be enforceable. Similarly, a number of people made detailed
suggestions with regard to negotiation, business advice and drafting, but did not explain fully why they were making
these particular suggestions as opposed to others. In some cases the purpose was clear enough, but in others
I could only give limited credit.
A number of people suggested that a good response to the boilerplate terms was to draft a similarly one-sided
agreement in L’s favor and then to initiate a battle of the forms. For the reasons discussed above, this
is bad advice (it is likely to create misunderstanding and distrust between the parties, does not address the real
need to accommodate their competing concerns, and assumes that P will not notice). In any event, because
this contract is for the publication of a manuscript rather than for the sale of physical books, the UCC does not
apply, so ordinary interpretative principles (which turn on the reasonableness of the parties’ understandings and
what each knew about the other’s understandings) will apply to the contract rather than §2-207.
Negotiating advice based on the rules of offer and acceptance (e.g., suggestions that L should be careful to specify
when making a counteroffer that she is keeping P’s offer under advisement in order to avoid rejecting) was more
helpful, but it does not address the need for dealing with the substantive matters of conflict.
I did notice that over a quarter of the class answered this question, in contrast to the first one, in less
than the 1500-word limit. To the extent that this was because you had difficulty thinking of things to say,
this could in most cases have been addressed by paying more attention to the legal as well as the practical issues
raised by the problem. To the extent it was because of time pressure, on the other hand, I would appreciate
knowing about it for future exams. There were a few people who managed to write very concise answers that
managed to cover all the main point sensibly and clearly, while coming in substantially under the word limit; which
I very much appreciated. Such conciseness will be similarly valued by future readers of your written
work, and is a much better strategy than trying to exhaust the word limit by adding various sorts of filler.
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.
good point or
argument
! excellent point or argument
~ fair point, or incompletely or unclearly expressed
– weak point
… point needs elaboration
" point already made, repetitive, or unnecessarily restating facts
? unclear
?? very unclear, confused, mixing together separate points
? mistake of law, misstatement of fact, misuse of term
?? point appears mistaken
# irrelevant or tangential point
#? point's relevance unclear
ns non sequitur: conclusion does not follow
ff fighting facts: contradicting stated facts or making assumptions inconsistent with them
ll laundry list: throwing in relevant and irrelevant arguments alike, without distinction
lec lecturing: abstract discussion of legal doctrine, unconnected to the problem at hand