Memorandum
Date: May 1996
To: Contracts, §2
From: Avery Katz
Re: Feedback on the final exam
Here is a sketch of what I considered to be the main issues raised on our contracts
exam. As I told you previously, 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 would have hurt
your score. I have 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
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. As I said
in class, I did not give credit for merely restating facts without relating them to the legal or planning issues
at hand, and I gave little credit for reciting black-letter law without applying it to the facts.
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: Sketch of suggested answer
1) Did Dominion (D) properly terminate Poff (P) under the contract?
The contract provides that the relationship is terminable at will with ten days
notice. There is an argument that D is technically in breach of the obligation to give notice because its letter
told P to cease selling insurance immediately, rather than in ten days. This issue is relatively minor, however.
The letter can alternatively be read to give P ten days to wind up his business with D, and in any event breach
of this condition would only give rise to a de minimis claim for ten days' pay and commissions. The significant
issue is whether D has the right to terminate P at all.
Without more, this contract term providing for at-will termination would probably
be enforceable, notwithstanding that the contract is on a standard form drafted by D. P knowingly signed it; he
had the right to terminate as well, and at-will status is standard for employment contracts. Furthermore, insurance
companies have a legitimate interest in terminating agents who do not conform to contracts or to company policy.
P is violating his explicit promise not to act as agent for other insurers, which arguably puts him in a conflict
of interest. Furthermore, he is flouting D's nonsmoking policy. Since D is attempting to increase insurance to
nonsmokers, and since it was also offering life and health insurance to P, it had legitimate reason to be concerned
about his smoking. All this puts P in a difficult position.
Nonetheless, P has several moderately good arguments that D cannot terminate him
under the current circumstances. First, at the time P entered into his contract, Albright (A) assured him that
the at-will clause was a mere formality, and that D did not fire agents without good reason. D will undoubtedly
respond that (1) this was not reasonably understood as a promise, (2) A did not have authority to make it, and
(3) even if it was a promise, under the parol evidence rule it cannot be part of the contract, since it contradicts
an explicit term (and because there is a merger clause in the contract.) In rebuttal P could argue that the merger
clause, as part of an adhesion contract that he never assented to, cannot bar evidence of reasonable oral promises.
Second, P can argue that even if the contract allows at-will termination, it is
a breach of the implied duty of good faith to terminate without good reason. P has invested almost twelve years
of his life with the company, establishing a business reputation tied to D. He relocated in 1989 at significant
expense at D's behest. His whole-life policy, his major asset for retirement, is about to vest (and its cash value
will revert to D if P is terminated). It is contrary to the spirit of the relationship (as expressed by A's oral
remarks) to fire him now.
Third, P may argue on the same facts, that it would be unconscionable for D to
fire him without good reason under current circumstances. The facts that the contract was one of adhesion, and
the fact that P's livelihood and life savings are at stake, makes this argument stronger; the facts that P is an
independent agent rather than an employee, that he is in the business of writing and selling contracts, and that
he has other insurance companies to represent and a successful reputation to fall back on makes this argument weaker.
Fourth, P may argue for promissory estoppel liability under Restatement §90. On this theory, A's various oral
statements would constitute a promise of continued employment, the reliance would be P's relocation and the investment
of his reputation and retirement savings with D. One would need to argue that the reliance was reasonable and foreseeable
and that justice requires enforcement, but on the above facts it is not hard to make out a colorable claim.
Even if P can successfully argue that D promised only to terminate for a good reason
and that this promise is binding, he will still have to show that there was no good reason for his termination.
His flouting of the nonsmoking policy, and his representation of other companies without written permission, provide
plausible reasons. In P's favor are the facts that D refused to give any reason for the termination, and that A
did not appear to regard P's defaults as anything major -- other agents were allowed to engage in dual representation,
A did not press the point given P's successful sales record, and the products of the other insurers are not currently
in direct competition with D's products. Indeed, P even has a colorable argument that D waived the exclusive-agency
provision through A's knowing tolerance of it. With regard to the nonsmoking policy, while P may have objected
to it, there is no indication that he was unsuccessful at bringing in nonsmokers as customers, and we are told
that A received P's objections with sympathy. He was never actually in violation of any company rule, since the
memo requesting that P ban smoking at his office was merely a recommendation. All in all, P was never given any
indication that his performance was deficient enough to warrant termination, or any opportunity to correct it if
it was. Additionally, there is the fact that P's quarterly commissions have not been paid, and that his whole-life
insurance policy is about to vest. Because D has an obvious incentive to fire P before his insurance policy vests,
D's actions are suspect. A jury, especially one unlikely to be sympathetic to D's side in the dispute over the
smoking policy, may conclude that D did not have a good reason to fire P but merely wished to pocket the $83,000
cash value of his whole-life policy.
2) What are the parties' rights and duties if P's termination was proper?
If P's termination was proper, it remains to be determined whether he gets his
quarterly commissions, whether he gets his whole-life policy, and whether he has to return the customer lists.
The commissions are easy. We are told that P has done the work to earn them, so he is entitled to them. The fact
that A promised to pay the commissions makes this even clearer. There may be an argument about whether commissions
have been earned on the unsigned contracts, but P can argue that he has done the bulk of the work to earn them.
Alternatively, he can argue that the commissions are payable as part of a unilateral contract in which D promises
to pay if he sells the insurance; accordingly, D is obligated under to give him a reasonable chance to close the
deals he has begun (recall the Brooklyn Bridge hypothetical.)
The whole-life policy is a more difficult claim. The original contract provided
that P would only get rights to this policy after twelve years of employment. If P was properly terminated after
less than twelve years, it is hard for him to argue that he has earned such rights. He could argue that because
he fell just short of the twelve years necessary to earn the policy, and because he was not allowed the chance
to finish earning the policy, he has substantially performed. This argument will have a better chance of succeeding
if the court finds that the contract was at-will but that P was terminated without a good reason. In such case,
the court might split the difference by holding that D was within its rights to terminate arbitrarily, but not
within its rights to withhold the earned portion of the pension. P could also try making essentially the same argument
under a theory of unjust enrichment.
We are not told what the contract provides with regard to the customer lists. If
the standard contract covers the issue, then we still need to consider whether its language is enforceable as written
or nonenforceable as an adhesion contract or on other grounds . Trade usage and standard practice would be relevant
here. P has a reasonable need for the customer lists in his continued business, but so does D. Arguably both P
and D contributed to their generation. If D is entitled to the lists, or to a copy of the lists, it might replevy
them, or alternatively, might assert an claim against P in quantum meruit for their value. Conversely, if P hands
over the lists when D is not entitled to them, he might have a claim in quantum meruit.
3) What are the parties' rights and duties if P's termination was improper?
If P's termination was improper, then at the least he is entitled to money damages.
He may also be entitled to specific performance, if damages are inadequate. Arguably they are inadequate, since
he is not going to be able to find another job in the same location at the same money, with the same retirement
and health benefits. Money damages, furthermore, do not compensate for the indignity of being fired, or of being
unemployed. On the other hand, if D is required to pay P's benefits and damages equal to his lost earnings, this
is pretty close to full monetary compensation, and P has other alternatives for employment. Traditionally courts
were reluctant to require specific performance of labor contracts, but it is more common nowadays, and the fact
that P is an independent agent removes some of the flavor of forced association. Quite possibly, D would prefer
to rehire P than to pay his full salary and benefits without getting any services out of him.
Damages available to P under a breach of contract theory would include his commissions,
his whole-life policy, and past and future lost earnings, for he would have expected all these had his employment
continued. Lost earnings might be difficult to estimate, given that they depend on how much business he brings
in, but it is possible to extrapolate from past years. This extrapolation is complicated by the fact that the market
is stagnant (and possibly headed for a downturn), providing another argument for specific performance. Damages
for mental distress, for his family's psychological problems, and for the psychic losses suffered by his family
as a result of having to move, are probably not going to be recoverable in contract. There are problems of both
foreseeability and certainty in measuring such damages. A tort claim is a possibility though a long-shot. if P's
previous health benefits covered psychological counseling, however, D could be required to pay for equivalent coverage.
Under a promissory estoppel theory, P would be entitled to his expenses in lost
reliance, including moving expenses and lost profits in relocating his business to Norfolk. He might also have
a claim to the value of his whole-life policy, on the theory that had he not been under contract with D he would
have arranged for a similar policy with another company. He might similarly claim lost earnings under a theory
of opportunity reliance.
Under a restitution theory, P would be entitled to his earned commissions, and
possibly to the cash value of the earned portion of his whole-life policy. He would not be entitled to expected
future earnings, however, because he has not yet generated the sales that would confer those benefits on D. Clearly
it would be better to try to argue for expectation damages.
Under any of these theories, P would have to mitigate damages -- under expectation,
because mitigation would reduce the amount by which he falls short of his expectation, and under restitution and
reliance because if he does not mitigate than justice would not require full compensation. How far he has to go
to mitigate is a separate question. If work in the same town is available with one of the other insurance companies,
or if P could increase his sales of other companies' products, then his damages will be reduced by the amounts
that he could earn in so doing. Similarly, if a comparable white-collar job comes up in the area, he might be expected
to change professions. It is questionable whether his duty to mitigate obliges him to relocate to Wilmington or
Richmond. Ordinarily relocation is not required, but this depends on the nature of the plaintiff's profession.
The facts that P would have to build up a new clientele, and that his family is established in the community, argues
against his being obligated to relocate; the fact that he has successfully relocated in the past argues in favor
of it. On the other hand, while P's duty to mitigate would probably not require him to take part-time lower-status
job such as a baker's assistant, once he has done so, the amounts he earns will most likely be deducted from any
damages he can otherwise claim.
Question 2: Sketch of suggested answer
This question was a challenging one in my view, as it called for a fair amount
of creativity in applying interpreting your knowledge of contracts; there was no way simply to plug the problem
into a standard outline. In order to provide a sensible basis for advice, however, you should have first attempted
to evaluate the district's legal position. You should also have focused on the three particular problems mentioned
in the question: post-contractual cost increases, withdrawn bids, and substitution and renegotiation with subcontractors.
Good answers could have gone in a variety of directions from there, depending on your legal and administrative
judgment, and the top three answers illustrate some possibilities. As with Question 1, organization, clarity, and
your discussion of specific facts made the difference between good answers and adequate ones.
The main pitfall was devoting too much time to a straight political or administrative
analysis, and too little time to specifically legal considerations. The question did ask you to take a practical
perspective, but for a lawyer this must always start with an understanding of the legal consequences of the alternatives,
including the extent to which contractual obligations are enforceable. Similarly, a number of people made detailed
suggestions regarding negotiation, business advice and contract 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.
1) General observations
The basic goals of any reform in bidding and contracting practices include keeping
costs down, keeping quality high, encouraging reliable and timely performance, and preventing corruption. Given
the difficulties of the past, this would suggest adopting policies that lessen the discretion of subordinate officials
in the contracting process -- for example, through form contracts containing terms making it difficult for such
officials to vary or waive contractual terms. Reducing such discretion would make it more difficult for subordinates
to engage in favoritism in bidding, to consent to contract price increases after the fact, and to let district
contractors out of their contractual obligations. There are two main reasons, however, to tailor such policies
narrowly. One reason is provided by the political situation. The reforms are going to be unpopular, and those who
have to implement the reforms may be able to undercut them in various ways. A second and deeper reason, present
in any contracting situation, is that building too much inflexibility into contractual arrangements makes it difficult
to respond to new events as they arise. Because it is difficult to tell in advance how any reforms will work, and
because the district is a large and cumbersome bureaucracy, it may not be a good idea to remove all discretion
from those who must administer the district's purchasing contracts. Of course, with discretion comes the potential
for opportunism, and in this setting, potential corruption. The central problem to be addressed, then, is how to
trade the risk of such opportunism off against the need for flexibility.
2) The district's current legal position
To begin with, it is worth recognizing that many of the difficulties arising under
past contracts could have been dealt with simply by enforcing the district's existing contractual rights. In the
absence of significant and unforeseen change in circumstances or an excusable mistake, winning contractors are
not entitled to go back on their bids. If they try to raise their price after the fact in the absence of such an
excuse, there is no legal reason why the district must agree to the increase. Those who bid on district contracts
should understand that the risk that it may be more costly to perform than they had initially expected.
This does not mean that the district should never agree to price increases; in
particular, we are told that a more flexible policy will attract additional bidders, perhaps resulting in lower
prices in the first place. Holding a supplier to an obviously losing contract, furthermore, can encourage the supplier
to cut corners on quality and safety, and such lapses may be difficult to monitor. But modifications that are not
a response to unforeseen circumstances pose a great risk of incompetence, corruption, and kickbacks, and should
be avoided. Luckily, under applicable law promises to modify contracts without good reason are not enforceable;
they can be attacked as not fair and equitable or not based on unforeseen circumstances (for service contracts
covered by the common law) or as not in good faith (for sales contracts covered by the UCC). In extreme cases,
such modifications may also be voidable on grounds of fraud or duress, or in cases where bribery can be proven,
undue influence. Accordingly, it is not necessary to pay for inequitable or bad faith price increases just because
an incompetent subordinate approved the increase.
This protection, however, goes only so far. If the price increase can be characterized
as good faith or as an equitable response to new circumstances, the district could be bound by a subordinate's
promise to modify even if the subordinate's judgment was poor. This will depend, of course, on whether subordinates
have the legal authority to bind the district, and on whether potential suppliers know this. We may also want to
adopt policies to prevent local officials from waiving the district's rights to full performance of contracts.
This problem is less important, however, because waiver cannot apply to the essence of the consideration.
Similarly, contractors who withdraw bids after the fact are liable for damages
if the replacement contract involves a higher price. For contractors supplying goods, the district would be entitled
to the difference between the contract price and the market price of the goods at the time the district learned
of the breach (2-713). Alternatively, if the district finds a reasonable replacement within a reasonable time,
the supplier would be responsible for the differential under 2-712. (There are limits on this, though. If the new
contract were at a gouging price with a company with close ties with district officials, a court would not find
cover to have been in good faith.) The district could also collect incidental damages covering costs of running
a new auction and the like under 2-715(1), and might be able to collect damages resulting from delay under the
consequential damages provision of 2-715(2) -- if the damages were foreseeable. Analogous remedies would be available
under common law for service and construction contracts, though the district would have to prove its lost expectation
and would still have to mitigate costs by making reasonable efforts to find a lower-priced substitute. We may need
to adopt some internal and external rules to prevent local officials from releasing the contractors from their
obligations, though, since agreements to rescind executory contracts have clear consideration and are thus generally
enforceable.
With regard to bid shopping and bid chiseling, it is important to recognize that
the district's primary concern is the quality and timeliness of performance, not the employment of particular subcontractors.
In the absence of special contractual arrangements to the contrary, the contractor is entitled to run its business
according to its own judgment, to delegate performance where reasonable, and to substitute suppliers as it sees
fit. Under the usual rules of offer and acceptance, furthermore, the mere use of a subcontractor's bid does not
obligate the contractor to hire the subcontractor, even though the subcontractor may be bound under principles
of promissory estoppel. For this reason, it will be difficult for the district to argue, in the absence of explicit
contractual provisions to that effect, that the mere substitution is a breach of contract, or to raise a claim
in quantum meruit for the increased profits the contractor earns from bid shopping and chiseling.
If substitution of subcontractors or profit skimming results in delay or reduced
quality, on the other hand, the district will have a good claim for damages after the fact, and in extreme cases
where this amounts to material breach it will have the right to rescind. Because it may be difficult to prove such
damages after the fact, however, the district may wish the additional protection of being able to approve specific
subcontractors and to ensure that they are being paid a sufficient amount for their services. It will have to bargain
specifically for such protection, however, as it does not come automatically. The right to insist on particular
contractors, furthermore, may not be fully enforceable, as cases such as Jacobs
and Young v. Kent illustrate.
3) Possible reforms
Here there were a variety of proposals one could have suggested. With regard to
the problem of cost increases, possible legal reforms include no-oral-modification clauses, clauses disclaiming
subordinate officials' power to waive or modify the contract, clauses explicitly allocating the risk of increased
costs or unforeseen events to the bidder, and the like. With regard to withdrawn bids, the possibilities also include
explicit contract terms providing that bids were not retractable and allocating the risk of mistake to the bidder.
With regard to bid shopping and chiseling, there are various ways to make the specific identities of contractors
a material part of the agreement, if that is desired. The district's remedial position in all these areas could
also be strengthened by providing for bidder's bonds, sureties, and liquidated damages.
Students also suggested a variety of administrative reforms to address the district's
underlying functional concerns, including increased information sharing before the fact and auditing of various
types afterwards. Many people suggested drafting contract language reinforcing the district's existing rights.
Such language would also be a good idea, as it would remind bidders of these rights and put them on notice that
the district intends to take its contracts seriously in the future.
All of the above suggestions, as well as others, are plausible. The overall persuasiveness
of your answer, therefore, depended on your explanations of how the specific reforms you recommended would help
address the district'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.
Key to symbols used to mark exams:
good point or
argument
! excellent point or argument
~ fair point, or incompletely or unclearly expressed
- weak point
… point needs elaboration
" point already made, repetitive
? 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 inconsistent assumptions
with them
ll laundry list: throwing in relevant and irrelevant arguments alike, without distinction
[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.]