Memorandum
Date: May 1995
To: Contracts section 7
From: Avery Katz
Re: Feedback on Spring 1995 exam
The spring exam for our contracts class was a challenging one in my judgment, especially
question 2, which called for a fair amount of sophistication in interpreting contractual terms. What follows is
a sketch of what I considered to be the main issues raised, and the most common errors. It was not necessary to
discuss all of these issues to get a high score, good answers might have ignored some issues to go into depth on
others, but missing a major cluster of issues (such as damages on question 1) would have hurt your score. I have
put on reserve the top three student answers to each of the questions to the exam, along with a copy of the exam
itself. What made these answers the best was their coverage of arguments, detail and sophistication in use of facts,
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 facts without relating them to the legal or planning
issues at hand. A number of people did waste some space this way.
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.
As promised, your final grades were determined by a weighted average of your performance
last semester and this semester, with this semester carrying 60% weight and last semester carrying 40% weight.
I consulted with Prof. Bernstein in computing the exact grades, so you may contact either one of us if you have
questions in this regard.
It was a pleasure teaching the class, and I wish you all well. Please keep in touch.
Question 1
Sketch of suggested answer:
Stovall: The most complicated issue,
on which everything else depends, is liability between the contractor Crabtree and subcontractor Stovall. Crabtree
will argue that Stovall breached by not finishing the job; and Stovall will argue that Crabtree breached by its
various delays, failure to deliver materials, failure to supply adequate air compressors, and diversion of air
to other parts of the job. If Crabtree's breach was material, Stovall was entitled to rescind. The resolution of
this depends on detailed argument from the facts, but probably Stovall has the better argument. (In the actual
case from which the facts were taken, Boomer v. Muir,
24 P.2d 570 (Cal., 1933), the court affirmed a jury verdict in favor of the subcontractor.) Stovall may also have
a claim based on Crabtree's promise that the air compressors would be adequate, if it was made, though the oral
nature of the promise raises a parol evidence problem. Alternatively, Stovall has a colorable argument that a promise
that the compressors would work was implicit in Crabtree's promise to supply them. Crabtree's diversion of air
may also violate its implied duty of good faith, if the promise to provide adequate air cannot be established.
Stovall could also argue that its various problems afford it an excuse for breaching
on grounds of impracticability (or, less plausibly, mistake). Such an excuse would not, however, entitle Stovall
to any damages for breach; though conceivably it would leave open a claim for restitution.
Assuming Crabtree is in breach, Stovall is entitled to damages. Expectation damages
would be hard to establish, since a major part of Stovall's expectation was future business and referrals. Conceivably
a court could award $9 million, the difference between the amount Stovall expected to lose and the amount it actually
lost. Stovall could also claim any additional costs associated with the delay. As a substitute, Stovall could get
reliance damages in the form of reimbursement for its costs, which would mean a recovery of $10 million; quantum meruit, which could be calculated various
ways in various amounts, is also an alternative.
If Stovall is in breach, conversely, Crabtree is entitled to recover its increased
cost of completing the job, which comes to $7 million. It may also claim other damages from delay, including anything
it must pay in damages to the other parties involved as a result. Such consequential damages, however, will be
limited by the principle of Hadley v. Baxendale.
Portsmouth: Crabtree's contract with
Portsmouth is for the sale of goods and is covered by the UCC. The main issue here is whether Crabtree was obliged
to take delivery in 1994 (and whether Portsmouth is obliged to deliver past 1994.) This will depend on the explicit
language of the contract and on inferences that can be made from the circumstances. Some delays in a large construction
projects are to be expected; whether the delay here goes beyond accepted limits is arguable. Since this is a requirements
contract, Crabtree can also argue that its failure to take delivery reflected its good faith requirements, and
hence was not a breach.
If Crabtree is in breach, Portsmouth properly resold and is entitled to the difference
between contract and resale price under 2-706 of the UCC, multiplied by the shortfall in quantity, plus any incidental
damages under 2-710. Conceivably Portsmouth could also argue it is entitled to lost profits under 2-708(2), if
it can show that it would have made the December 15 sale independently of Crabtree's breach. If Portsmouth is in
breach, Crabtree is entitled to cover within a reasonable time and collect damages under 2-712 (and incidental
damages under 2-715(1). A fine point: Crabtree likely cannot collect contract-market damages under 2-713, since
the market price was below contract at the time Crabtree learned that Portsmouth would not deliver.
Skeletarch: This contract is also
covered by the UCC, and the issues here are similar to those vis-a-vis Portsmouth, although the difference in specific
facts (such as Skeletarch's need to set aside capacity, and the fact that steel supports can be manufactured in
advance and stored by the buyer) may lead to a different conclusion on liability. If Crabtree is in breach, Skeletarch
will most likely claim lost profits under 2-708(2), since the supports are custom-made and there is no ready resale
market. This would most likely be measured by the contract price, less the costs Skeletarch saved by not having
to produce. If Skeletarch is in breach, Crabtree has a good case for specific performance under 2-716, since there
are no ready substitutes on short notice and money damages would be difficult to calculate.
Yellowknife: Crabtree has breached
its promise to finish the construction on time and is liable for damages. The liquidated damage clause in the contract,
however, is almost certainly void as a penalty. Not only has it turned out to be greatly in excess of actual damages,
but it was inflated to begin with relative to Yellowknife's expectation interest. Crabtree will, however, be liable
for Yellowknife's actual damages. It cannot defend on grounds of impracticability, since it explicitly assumed
the risk of delay.
Common errors:
The most common error was overusing the duty of good faith as a general and vague
way to talk about breach or other doctrinal categories. This doctrine applies when a party given apparent discretion
under a contract behaves in an way that is opportunistic in light of (or inconsistent with) the contract's overall
spirit and purpose -- not when it has breached an express or implied-in-fact term. Thus, Crabtree's failure to
deliver materials or install air compressors, or its taking over the excavation of the cut-off wall, were not breaches
of good faith, since these issues were expressly dealt with in the underlying contract. Crabtree's diversion of
air and response to the compressor fire, in contrast, could be viewed as a breach of good faith. Similarly, a buyer
who fails to take delivery under a requirements contract will be judged by the standard of good faith, since it
did not promise to buy any specific amount; but a seller who fails to deliver on a requirements contract is simply
in breach of its explicit promise to supply the buyer's needs. As I said in class, you should use good faith only
as a last resort when you do not have a more conventional argument to make.
A number of people also failed to distinguish clearly between excuses such as impossibility,
and affirmative claims for breach. To be precise about it, excuses do not give rise to a right to collect damages;
they only provide a defense against having to pay damages. Thus, if Stovall wants to collect reimbursement from
Crabtree for its costs, it must either show that Crabtree breached the contract or make out a claim of unjust enrichment.
Another common error was spending scarce space and time on negotiating advice and
on the merits of proposed modifications. The question, in contrast to question 2, did not ask for such advice,
and I could give only limited credit for such discussions. Similarly, some people spent a fair amount of time discussing
whether modifications that had not been made would have been in good faith. The good faith standard of the UCC,
and the analogous rule of the Restatement, apply only to modifications that are in fact assented to, and go only
to whether such modifications are legally enforceable once made. A contracting party is not entitled to force a
modification on an unwilling partner on such grounds. Relief for such a party can come only from some form of excuse,
such as impracticability or material breach by the other side.
There was one other error that was not especially common, but I wanted to make
sure to correct it nonetheless. There were a few people who thought that efficient breach was a legally cognizable
excuse. It is not, of course; merely a way to organize one's thinking in the face of breach, and an argument against
supracompensatory damages in the context of policy or planning. To be excused from performance, a promisor needs
to show more extreme conditions, as reflected in the doctrines of impossibility and frustration. If you were under
this misimpression, however, I can see why you might have resisted the idea of efficient breach as unfair in our
class discussions.
Question 2
Sketch of suggested answer:
This question was more open-ended and left more room for individual creativity
and judgment; and the facts left more room for argument. In order to provide a sensible basis for advice, however,
you should have first attempted to evaluate the parties' legal position. Good answers could have gone in a variety
of directions from there, depending on your legal and business judgments, and the top three answers illustrate
some possibilities. I didn't necessarily expect anyone to have made all of the arguments suggested below. As with
Question 1, organization, clarity, and your discussion of specific facts made the difference between good answers
and adequate ones.
Initial problem -- Part A: In my opinion,
it is ambiguous whether the anticipated settlement and cross-license with Ferris-Burnham is part of the agreement
between Agron and Kellman. It could be viewed as a term of the agreement (so that Agron has promised Kellman to
reach a settlement with Ferris-Burnham, or alternatively, to use its best efforts to reach such a settlement),
a condition (so that Agron's inability to reach such a settlement means the Agron-Kellman contract is at an end),
or merely a background assumption relevant to an excuse for changed circumstances or a request for a modification.
This could be argued various ways on the available facts. For instance, the provision for indemnification in case
of a patent lawsuit indicates that Agron and Kellman foresaw the possibility that no settlement would be reached;
and the $2.5 million advance payment could be viewed as buying Agron an option to negotiate with Ferris-Burnham.
Characterizing the anticipated cross-license as a term of the agreement runs into
an obvious parol evidence problem, as there is a prominent merger clause. There are various ways that this clause
might be gotten around (e.g., it is boilerplate in a form contract, the circumstances show that notwithstanding
the clause the parties did not intend an integration, the oral term was a condition precedent for the existence
of an agreement, the oral term was a separate collateral agreement), but these are all arguable on the facts. It
is probably easiest to read into the contract a duty on Agron's part to use best efforts in obtaining a settlement
with Ferris-Burnham, since this can be implied from its exclusive license under the duty of good faith (cf. Lady Duff-Gordon).
Alternatively, the failure to reach settlement with Ferris-Burnham may afford either
party an excuse under the doctrines of impossibility, mistake, or change of circumstances. In order for this to
be the case one would have to argue that the anticipated settlement was a basic assumption (likely) and that it
was not allocated either in the agreement or by implication (more ambiguous). The presence of the force majeure
and indemnification clauses will be relevant here, as will Agron's greater size and expertise, previous experience
in dealing with Ferris-Burnham, and the inherent need to delegate discretion to Agron as the party conducting the
cross-licensing negotiations. There is a lot of room to argue details here (e.g., does an injunction from a federal
court qualify as a "regulation[] or order[] of [an] agenc[y] of the United States government"?)
Relatedly, it is worth discussing whether the clarification sought by Agron regarding
indemnification for infringing Vivitrine patents became part of the contract between Agron and Kellman. UCC 2-207
does not apply (since this is a license of intellectual property, not a sale of goods), but Kellman's silence in
the face of Agron's letter could be interpreted as assent to the clarification. Technically, the parol evidence
rule does not apply either, since the letter was sent after the formal agreement, but the merger clause will still
be relevant for the purpose of interpreting the parties' intentions. All of these are relatively fine points, and
could be argued both ways on the facts.
When it comes to giving advice, the various remedies for breach do not offer much
assistance. It would be difficult to calculate expectation damages for either party, since in advance of production
it is unclear how many sales can be made. Given the long-term nature of the contract and the need for close cooperation
among the parties, specific performance is a long shot (although Kellman could probably get an injunction to enforce
Agron's promise not to reveal trade secrets, since calculating damages for breach of this covenant is likely to
be highly uncertain.) Rescission and reformation of the contract on grounds are possibilities, if the excuses of
mistake or changed circumstances hold up. In this event, it would be necessary to consider whether or not Agron
has a right to restitution of the $2.5 million advance payment.
There is, however, substantial room for finding a legally enforceable modification.
It would not be hard to find consideration on both sides, especially for a rescission of the original exclusive
license. Moreover, the failure of the negotiations with Ferris-Burnham, even if they do not amount to excuse for
changed circumstances, could easily be characterized as supporting a modification without consideration, if fair
and equitable. The only potential problem is duress. Agron's threat to reveal Kellman's trade secrets is improper;
and any negotiating advantage obtained by this threat would likely be voidable. Aside from this limitation, you
might have suggested any number of possible terms for a modification.
Subsequent problem -- Part B: Several
of the issues from Part A are relevant here as well. At this point, however, there is a richer factual context
from which to draw inferences and argue. You first might have considered whether or not any of the terms of the
first contract, including the indemnification and force majeure clauses, survive into the second contract. The
merger clause can be read to exclude them, but there are various counterarguments that might bring them in, such
as course of dealing. One could also argue that the first contract, which is between Agron and Kellman alone, is
collateral to the second, which is among all three parties.
The Deering lawsuit leaves room for the parties to raise various claims and excuses.
It could amount to a change of circumstances sufficient to excuse one or more parties from the agreement. It could
fall under the force majeure clause, if it is still in the agreement (and if we can characterize a federal court
injunction as the order of a federal agency). It could provide the basis for a further enforceable modification,
if the parties can agree to one. It could give rise to a right to indemnification (if we can characterize the antitrust
suit as implicating the validity of the underlying patents.) Similarly, the Department of Justice inquiry and resulting
price war could be characterized as an unanticipated change of circumstances justifying either excuse or a modification
(and the DOJ, if it gets involved in the antitrust litigation, could qualify as a force majeure). All of these
issues would need to be argued closely on the facts.
If there has been a breach of contract, we also need to think about possible remedies.
At this point, since production has been underway for the last year, it may be feasible to calculate money damages.
Even if a modification is warranted, and even if Agron is entitled to be excused from the contract, it has little
basis for withholding the back royalties. Most likely, the royalties are part of Kellman's expectation interest
(and arguably its restitution interest as well, since they are in part the fruit of its patents and trade secrets.)
Specific relief of various sorts may also be available.
Nonetheless, it may be in the interests of the parties to find a further modification
that will preserve their relationship. A good answer here would discuss what substantive terms would help align
the parties' incentives in the future, and help manage any future changes in their business or legal environment.
Agron will need to be careful in its negotiating tactics, however; since if things go badly in the future, its
withholding back royalties could conceivably give Kellman an opening to attack such a modification on grounds of
duress.
Common errors:
One common error was in devoting too much time to a straight business analysis
of the situation and too little to legal considerations. The question did ask for a practical perspective, but
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.
Another common problem was in failing to distinguish clearly between the doctrines
of modification and excuse for commercial impracticability. Both doctrines have as an element some change of circumstances,
but the change of circumstances necessary to excuse a party from a contractual obligation is substantially more
than that needed to support a modification without consideration. Under modern common law, even a minor change
of circumstance can support a modification, so long as it is sought and granted in good faith. A full excuse, which
does not require both parties' assent, requires actual impracticability, and the change in circumstances must involve
a basic assumption of the contract.
A number of people tried to apply UCC provisions to this question. As I indicated
above, the UCC does not properly apply to a contract that is solely a license of intellectual property, only to
a contract between the buyer and seller of goods. In contrast, actual sales of Vivitrine and Creduline would be
governed by the UCC. This is perhaps a subtle point, though, and did not make much difference in the grading, since
in most cases the arguments you would make under the common law (such as implied duty of good faith under an exclusive
license) are analogous to those under the Code.
Finally, it is "parol evidence," not "parole evidence."
Key to symbols used to mark exams:
good point or
argument
! excellent point or argument
~ possibly good point, but incompletely or unclearly expressed
… point needs elaboration
? unclear
?! very unclear: , confused or confusing
" repetitive, point already made adequately, restating facts
"? point appears repetitive
x mistake of law or misstatement of fact, misuse of term
! serious mistake or misstatement
? point appears to be mistaken
# irrelevant or tangential point
#? point's relevance unclear
ns non sequitur: conclusion does not follow
ff fighting the facts: making assumptions inconsistent with stated facts
On some exams I circled particular words or phrases that I found questionable or
unclear, and attached these symbols to them. Additionally, on a small number of exams I circled grammatical and
spelling mistakes that were particularly glaring (for instance, it seems that every year there are a couple of
students who have not yet absorbed the distinction between "it's" and "its"). These did not
detract from your exam score but I wanted to call them to your attention as something to avoid in the future as
a matter of professionalism. A lawyer's effectiveness in the service of clients will often turn on the confidence
inspired by his or her writing, and unfortunately such mistakes do not make a good impression on the reader.