Top Student Exam Answers, Contracts: Fall 2004

Note: These were, in my judgment, the best answers received under examination conditions. They should not be taken as model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all take intelligent approaches to the questions, are well organized and reasoned, and make sensitive use of the facts.

Because answers were scanned from originals to prepare this page, be aware that odd characters and typos may have been unintentionally inserted into the text.

 

Question #1, Answer #1 Question #2, Answer #1
Question #1, Answer #2 Question #2, Answer #2
Question #1, Answer #3 Question #2, Answer #3

 


Question 1, Answer 1

 
PART A — ABC's Counsel

We must examine the legal status of ABC vis-à-vis Bobby in order to consider possible measures, contractual and non-contractual, that could be pursued to secure her cooperation. The first question is whether Bobby has the right to withhold royalties if the company's "national" plan gets underway and poaches clients from her territory.

I. Legal Status of ABC and Bobby

The new ABC business strategy is more likely than not a breach of Bobby's franchisee contract. There are two main arguments that Bobby will put forward claiming that our new plan breaches her contract.

First, she will argue that we are violating a duty of good faith in our behavior regarding Paragraph 2, which states that we will not "establish" an office in her franchise area. The letter of Paragraph 2 says "establish" an office — and this plain meaning analysis will be our strongest argument in rebuttal — but the spirit of the clause is probably violated if we reach out to clients in her area. This is especially likely to be read against us because the entire nature of the new plan is electronic and non-site based; emailing with potential clients in someone else's exclusive area is simply a form of establishing an office there in the brave new world of e-commerce. RSC 205 requires good faith and fair dealing, and our behavior here pushes up against those requirements. Further, since her contract is a form contract, it would be read by a court in the manner most favorable to the non-draftsman. (RSC 206).

Second, we are on similarly questionable ground concerning Paragraph 3 of her contract, but additionally we are probably violating an implied duty of best efforts. The language of the clause says "shall help" and "will furnish information," and it is clear that under the new corporate policy, we will not be giving our best efforts to do so. Again, our rebuttal will be textual: the contract doesn't say we'll steer her all business, just that we'll help. However, I believe a court would quite possibly find us in breach.

If we are in breach, then Bobby could potentially sue for damages; the most likely measure is expectation damages for lost profits on the clients we poach from her. Alternatively, she could seek an injunction for specific performance, but a court is unlikely to receive that favorably, as it involves significant court oversight. Lost profits wouldn't be too difficult to estimate: the court would examine our profits on the accounts that should have been hers.

 

II. Ideas for Procuring Cooperation

If we are potentially liable to Bobby, that affects the possibilities for securing her cooperation with the new business model (and receiving her royalties for Q4 expeditiously); obviously, we must step more lightly. However, even if we weren't in breach, it is important with a franchisee to take into account her needs and concerns in order to maximize corporate utility. Four options are set out below:

1) Our new plan requires a prioritization of franchisees that seek some of the same clients. Could Bobby ascend that list, in light of her unique geographic situation? Our franchisee in Kansas probably won't be as affected, so let's give Bobby some benefit. I understand your concern that her revenues have fallen, but she will soon complete her MBA. This would probably rectify any doubts about our legal position, because good faith would be restored.

2) We could simply buy her out. As we transition to this national plan, a natural consequence is reorganization. We have deep pockets and potentially are liable to her. Paying her a fee to disappear clears up our legal problem — if we take care that a "release from all liability for both parties" clause is attached to the payout.

3) More aggressively, we could require that she put a percentage of revenues into an escrow. The implication of distrust will upset her, but she has an explicit "best efforts" clause. A fear here is that if she chooses litigation, a court would deeply question our good faith. While this idea would assure us our royalties, practically speaking it might cost us our relationship with Bobby.

4) We could negotiate downwards her royalty schedule. The negative change of circumstances that her business faces is certainly real enough to warrant a good faith effort on both sides to lower what she pays to headquarters. Perhaps if the rate is lowered to 7.5% instead of 15%, she'd be induced to stay onboard. Two legal notes: a) this would be binding, because it's fair and equitable in view of circumstances not envisioned, and sought and given in good faith, and b) again it would take us out of breach of the original contract, because it is a major good faith gesture.

I recommend attempting option 4 and option 1, because that sends the clearest signal that we want her to stay and are willing to make concessions, while simultaneously clearing up our potential legal liability.

 

PART B — Bobby's Counsel

First, ABC is probably liable for breach of contract (analysis same as part A). In deciding whether to attempt negotiations with ABC for a better contract (on the threat of suit) or turn to XYZ, we must next evaluate Paragraph 3 of your contract.

 

I. Can Bobby take clients with her if she leaves?

The plain language of Paragraph 3 is explicit: you cannot take the client lists, they belong to ABC. However, you have two arguments: first, the language is ambiguous as to what "client lists" encompasses; and second, it's a form contract. There is room to argue in Paragraph 3 that "client lists" and "assistance in identifying" refers only to clients under development and potential clients (perhaps a corporate-wide database of industrial concerns, e.g.), while actual clients are not included and you retain the right to contact them after your employment with ABC. The form nature of your contract again makes it likely that the clause will be read in the light most favorable to the non-draftsman, but ABC's reply is fairly effective: you were a commercially sophisticated party. I must learn more about specifically New York case law with franchise contracts and employment contracts to make a final determination on this issue, though I think you might emerge victorious.

 

II. New Terms on an ABC Contract

Negotiations with ABC would be shaped by the legal liabilities between you and them. I believe you would enter with a probable claim on ABC's violations due to good faith and lack of best efforts, as discussed above, and with simply the potential, subject to a vigorous challenge by deep-pocketed ABC, to contact your clients if you were to walk.

Notwithstanding that concern, there are certain terms you could hope to extract. First, you will point to circumstances not envisioned at the time the franchisee contract was made, and request a modification, in good faith, of royalties. This would assuage some of your short-term financial concerns, and also keep you in business with a respected corporation in a known neighborhood.

Second, based on the same rationale, you could request an explicit waiver of the clause regarding client lists. A proper form for this could be the insertion of a clause reading:

"All rights and duties between signatories terminate at the time the business relationship is severed."

In order to assure that this waiver is binding, it is important to offer some consideration for it; I suggest offering to insert a contractual clause promising not to sell the franchise without giving ABC a first-purchase option.

 

III. Terms on an XYZ Contract

The terms of any contract you sign with XYZ would be informed by your pnor relationship with ABC. First, it would be perhaps possible to induce XYZ to assume any litigation costs associated with your exit from ABC. This indemnification clause makes sense because potentially the most valuable thing you would bring is your knowledge of your clients, and ABC might pursue you for violating Paragraph 3 of your old contract.

From experience gained through your previous employ, there are a handful of suggestions that I would make for negotiating a new contract with XYZ. You probably want to gain some assurances that the business plan will at least respect your office; you could effectuate this by a guaranteed revenue floor, subject to a clause of best efforts on your part. Further, a floating royalty rate seems to make sense. I heartily recommend, additionally, that you insist upon clearing up fully in the contractual negotiations how the boundary lines between company offices will be determined and modified. Finally, inserting an arbitration clause into the contract in the event of a dispute over royalties or a downtown office/head office dispute could be effective; it is a cheaper and quicker method of adjudicating disputes that don't need a full trial.

I recommend negotiations with ABC, and if those were to fail, we can decide whether to work out a deal with XYZ and/or proceeding with a lawsuit against ABC.

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Question 1, Answer 2


Current Legal Situation

Your agreement with Brewster is a legally binding contract. A change in business strategy will not change its legal effectiveness. Therefore, Brewster is not in default for undermining your new business strategy. However, failure to make royalty payments would constitute a default and could warrant termination if we can show that this default was not excused.

Currently, it does not appear that you have not breached any specific provisions of the agreement. You have developed a potential business strategy that suggests you might divert customers from Brewster's area, but have not taken any action. As such, Brewster does not currently have the right to withhold payments.

However, this analysis would be different if you execute your new strategy. You can argue based on a strict reading of the contract that this practice does not violate any provisions. Paragraph 2 merely states that you will not establish an office in the Franchise Area, it does not say that you will not divert customers out of the area. Paragraph 3, requires you to furnish information and identify potential customers, but it does not require you to provide all customers. Brewster will counter this by introducing contextual evidence to show the true meaning of the contract. Pointing to your course of performance on this contract and your dealings with others, she may be able to establish that the both parties intended for the franchise area to give her rights to all customers, within it if you have done so in the past or have never diverted customers. Most courts will allow this type of evidence to interpret a contract and a liberal court may hold you to your actual understanding. The strength of her argument will depend on what specific evidence Brewster can provide. .

 

Procuring Cooperation

Assuming that pursuing your new strategy under the current contract will constitute a breach, we must consider options to ensure that Brewster cooperates.

Your best option is to attempt to modify your contract with Brewster. You could propose that in return for agreeing to allow to modify the contract to pursue your new strategy you will lower Brewster's royalty rate or to supply her with one of the lucrative national customers to which she would not otherwise have access. Given Brewster's fallen revenues since she assumed ownership and that she is concerned that you may breach your agreement, she may accept. This does require you to give up some potential profit, but will be compensated by the value of your new business strategy. Further, it will promote your reputation as a fair employer. And, by giving something up you are providing consideration for the modification, ensuring that it will be enforceable. However, we will need to be careful in assessing specifically what to offer since you may make similar modifications with other franchisees.
 

Second, you could threaten not to renew Brewster's franchise agreement when it expires if she does not cooperate. Given Brewster recent investments, she is likely to want to renew. However, you the court may find that the new agreement is not enforceable because it was made under duress. Of course, you can allow the contract to expire and only agree to a new contract that reflects your changed policies. The desirability of this strategy will depend on how much time remains on your current contracts.

Third, you could sue Brewster for breach of contract for failure to use best efforts as provided in Paragraph 3 by point to her declining sales; given her hard work in the past and that she can likely establish that the decline in business is due to your opening new offices in the area this will not likely succeed.

Finally, if all of these options fail you should keep in mind that you always have the option to breach, if the benefit of the new strategy outweigh the litigation costs and potential harm to your reputation.

In selecting any strategy must mind that other franchisees will be aware of the choices you make and this couldfeff9ct future negotiations with them necessary to pursue your new goals.

 

PART B

You have entered an enforceable contract with ABC is enforceable even though it is a form contract where ABC had superior bargaining power, since it is customarily used in the trade and were not forced to sign it. Thus your actions and ABC's will have legal consequences which I analyze below.

 

ABC's New Business Strategy

The key to your dispute with ABC over their new business strategy comes down to whether or not they are in violation of your contract if they divert customers from your franchise area. (At this point I would detail much of the discussion I provided to ABC above.) If they are, you will be held in breach of contract for withholding payments. In this case they will be entitled to payment in full, plus interest. If they are not justified, you are entitled to withhold royalty payments and may recover. Expectation damages will entitle you to lost profit, if you can point to specific customers you have lost due to ABC's policy. Most likely it will be hard to show with certainty which customers have v been lost, especially considering your recently declining revenue. We may argue instead that ABC's breach goes to the essence of the contract and warrants rescission.

 

Offer from XYZ

If you accept your offer fro XYZ you will not likely be able to keep your customer list and you will also be in violation of the exclusivity clause.

Under Paragraph 3 of the Franchise Agreement ABC maintains that customers will remain their "sole property." However, we can argue that this clause does not cover all client relationships developed while working for ABC, but rather only pertains to clients your ABC has helped you in attaining. Clients you have found through local advertising and word-of-mouth, for example, are not specifically included. In response to this, ABC will argue that it is the intent of the agreement. Further, this argument may not be helpful if the majority of your clients have been obtained through ABC's assistance.

Further, unless your contract with ABC is rescinded due to materially breach on their part, your decision to go to XYZ will violate Paragraph 24 of the Franchise Agreement for two years following the termination of the franchise. If you violate this clause, ABC may be able to convince the court to enjoin your from participating in this work as long as it does not prohibit you from making a living.

 

Negotiations

Your claim that ABC has breached its contract if the diverts customers is strong, but all litigation entails a certain amount of risk. Your may want to negotiate with ABC to allow them to pursue their new strategy but only if they compensate you for allowing this. (Here I would review the contract modification suggestion above.)

However, given this dispute and your opportunity with XYZ you may not want to continue your relationship with ABC. This situation is best resolved through careful negotiations for settlement. ABC has made it clear that pursuing their new strategy is important which you can use to your advantage. On the other hand, you face certain liability if you choose to work for XYZ and you will not be able to keep your customer lists. You could propose that each party agrees to rescind the contract, leaving you both free to pursue your preferred course.

 

Contract Terms

While your relative bargaining power will not allow you to re-write the entire contract in your favor you may be able to get the following improvements when negotiating your next contract.

First, include a provision that states that performance is conditional on the good faith performance of both parties. While courts will generally read this provision into most contract it is good to specify it and then you can further specify what is meant by good faith. This will give you the right to rescind the contract if your employer fails to perform in good faith. This is will be especially important in that it will void the exclusivity clause.

Second, include a provision that gives you part ownership rights to customer list as part of your compensation. For example, that after ten years services you earn rights to customers that you have had for at least three years.

Finally, revise current terms of your contract to include greater specificity where conflicts have arisen or you expect they might in the future. I would incorporate the following:

* Paragraph 2: "[f]urnish information an assistance" should require that they identify a certain number of employees each year, subject to a reduction in fees if they do not. Further, you could also require that a certain number of these relationships be executed.

* Paragraph 2: Add "and will not divert customers from this area." This ensure that your current situation does not resurface.

* Parapraph 10: Add a sentence defining "[b]est efforts"

These alteration will help increase your rights, the best protection you have is to develop a strong relationship with your employer.

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Question 1, Answer 3


Part A - ABC's Rights

ABC probably has the right to notify Bobby that she is in danger of defaulting on her contract by refusing to pay royalties and undermining ABC's new business strategy. This is for two reasons.

 

First, Bobby has no legitimate reason to breach. Bobby's main contention — although loosely phrased — seems to be that ABC is stealing her clients. There was never a prohibition in the contract against this. ABC is not establishing an office so it does not violate Paragraph 2. Bobby may argue in return that their collective interpretation of the terms leans in favor of her interpretation. This is a weak argument since the contract could have easily been phrased to express this purpose and ABC's interpretation meshes with the wording.

Bobby might make the stronger argument that this was a form contract with boilerplate. But she is a professional training for an M.B.A. and will have difficulty disclaiming an understanding of the contract.

Lastly, Bobby could argue that the way ABC is interpreting the contract is unconscionable and that its discretion over policy changes is used in a manner that violates the implied duty of good faith. Whether or not this argument is reasonable turns on precisely how much business ABC seeks to move to its Midtown offices from Bobby's offices. Ultimately, though, ABC will probably prevail on this point. Although it does not have carte blanche to alter Bobby's business or to undermine it, it would not be unreasonable or in contravention of public policy for ABC to modify its business practices and to demand that franchisees conform to such reasonable changes when it does so for the benefit of all of its businesses. No evidence suggests that Bobby could not take advantage of ABC's new business structure (based on the internet). Also, ABC still retains the obligation to assist Bobby in acquiring national accounts so even if a few are moved away from her, ABC can just as easily offer her new opportunities elsewhere.

 

Second, Bobby has well-defined obligations to ABC. In the absence of a legitimate reason to breach, Bobby must fulfill her duties. Paragraph 10 is uncontested proof that she must give 15% of her royalties to ABC.

More questionable, however, is whether Bobby must cooperate with ABC's business strategy. ABC has some room to maneuver here. First, Bobby operates a franchise and thus must abide by certain policies set forth by ABC (as discussed above). Second, Paragraph 10 places on Bobby an obligation to use "best efforts" in operating her franchise. Such best efforts may include efforts to take into consideration the ABC's recommendations and policies. This is especially convincing in light of the fact that she has yet to acquire her M.B.A. and has operated a faltering business, evidence suggesting that her own efforts have been largely ineffectual. The fact that ABC offers — as consideration — "training, support, and business leads" is further evidence that its own skill in the market is superior. This argument ultimately turns on the definition of "best efforts" but ABC is not defenseless in this regard.

 

Approaches to the Problem

There are three possible ways to get Bobby's cooperation.

First, given the analysis above, ABC can simply threaten Bobby into submission. This is not on face a desirable solution since even if ABC managed to get her to cooperate it would have a recalcitrant franchisee on its hands with whom it must deal in the future.

Second, ABC could take a more devious approach and allow her to breach, giving it a chance to claim material breach and rescind the contract. This gets rid of Bobby but is also undesirable since it will damage ABC's credibility with other franchisees.

Third, ABC could try the "soft touch" and negotiate with Bobby. It can try once more to buy her out and offer incentives such as modifying the contract to remove the non-compete clause, increase the price for buying her out, or even offer to move her to a new location where she would be less in conflict with ABC's new internet-based solution. Alternatively, ABC could try and get her to fall into line. They could offer a continuation of the contract after the next term that it expires, giving her an incentive to be a cooperative franchisee with the prospect of future relations. They could also reduce royalty payments and they could promise to assign her other national accounts to compensate her for any lost accounts that go to Midtown. Coupled with the analysis above, this approach maintains cordial relations with Bobby while reminding her that her own position is weak at best.

 

Question 1: Part B

Conducting business with existing Clients

In terms of client lists, Bobby may be able to take away lists that she has created from scratch. Paragraph 3, the source of her concerns, can be interpreted to refer only to client lists that are created with the assistance of ABC. Any defense ABC raises to this assertion (such as interpretation) will confront the usual host of responses, namely that ABC, being an experienced and skillful business, should have added such client lists into the contract or been more specific.

The non-compete clause in Paragraph 24 presents a trickier issue. Bobby signing on with XYZ presents no problem since it is downtown and thus outside of her former franchise area. However, if she were to solicit customers from her old area then whether or not she breaches turns on the definition of a "business endeavor." In all likelihood, Bobby's solicitation would be a breach. Provided that "business endeavor" is a term subject to discretionary interpretation by Bobby, ABC could at the very least argue a breach of a good faith duty not to compete and Bobby's discovery of a semantic loophole would probably work against her.

Bobby's concerns over these two problems are well-founded for they could lead to suit by ABC to recover damages. As usual, damages calculations are difficult to assess. ABC has no way to determine whether or not a client would remain with ABC as a company, particularly if clients have established a relationship of trust with their financial advisors. However, if ABC could draw up enough convincing evidence that expectation damages of a certain amount would arise, then the true measure of damages would go to a factfinder in court and that could force Bobby to pay huge damages. Alternatively, ABC could seek an injunction against Bobby for taking the client lists and for competing in the same area as her previous franchise area. Walgreens. This prevents the possibility of a huge award against her and may actually help to flesh out exactly what her rights are under these clauses.

 

Better Terms of Contract

Possibilities for negotiating terms more favorable than her old contract are innumerable and only a few will be mentioned.

First, it would help dramatically in preventing a recurrence of her dispute with ABC if there was a very firm definition of rights and duties laid out in the contract. Such provisions would include precisely how much autonomy she possesses as a franchisee and to what extent she must abide to the policies set forth by the owner company.

Second, it might be wise to lay down a liquidated damages provision specifying practical means of calculating her losses for when the owner company breaches their obligations to her. That would provide some reliable estimates and certainty as to how much she can recover if relations between her and ABC or XYZ sour in the future. As a supplementary addendum, it would be helpful if there was a clause stipulating a quid pro quo for any business taken from her by the owning business. Thus, if they took business from her franchise area they would be obligated to supply her with a comparable national account.

Third, it would be highly beneficial if she could secure certain rights to priority in policies which distribute national accounts (such as the priority policies ABC is developing for its internet system). As more and more companies seek to develop these policies, her success in securing a legal right to priority would substantially help her business.

Fourth, Bobby might be interested in restricting the owning company as much as possible. A statement of policy would help cement the company into a set framework while taking away its leeway to modify those policies. Since Bobby has not relied on any outside negotiations to secure her contractual rights, she might add a merger clause to restrict the company further.

Lastly, as a side note and only for the sake of completeness, Bobby would do well to strike out as many of the restrictive clauses as she can (such as the non-compete and client list clause). However, since they are so often common terms of contract in the trade or business, and since they are so typical in a company's regular course of dealings, this is unlikely.

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Question 2, Answer 1


Mr. Kanavos:

You may have entered into up to three agreements, under which you have various rights and potential for liability. I will address each agreement in turn.

 

1. Nigella Lawsuit (NL)

NL will argue that you breached an agreement to make her your anchor tenant. However, traditionally the offeror is "master of the offer," and your revocation of the offer terminated her power of acceptance. Her plans to accept are irrelevant.

NL can claim that your statement, "I need a response within the next ten days," indicated that your offer would be irrevocable for ten days. However, your language does not support that interpretation. Your statement is best understood as a time limit on her power of acceptance, not a limit on your power to revoke the offer. The latter interpretation would be more viable if you'd said, for example, "I'll give you 10 days to think about it." Furthermore, offers traditionally require consideration to be binding. While this requirement has been relaxed in modern courts, a verbal, informal offer, without even nominal consideration, is still not binding.

NL can alternatively argue that your offer was for a unilateral contract that became binding when she closed her restaurant. Again, your language suggests otherwise. You requested a "response" within ten days, indicating that you sought acceptance by a return promise, not by performance. Even if a court did consider this a unilateral offer, your request for a response clearly indicates that you required personal notice before performance. Notice through publication in the Post is insufficient. Finally, notwithstanding the request for a "response," her argument will fail because selling her restaurant, unlike beginning to open a NY restaurant, is most reasonably classified as preparation for performance rather than beginning performance itself.

Having failed to establish a contract, NL will argue that you have some liability to her on a reliance theory. However, promissory estoppel requires a promise, and your conversation with NL was only an offer. Even if it was a promise, it was only a promise to enter a contract if she accepted it, and she was unreasonable in relying on that promise when she had not accepted the offer. You have no liability to NL.

 

2. Doringer Partners (DP)

To avoid liability to DP, you can argue that the contract depended on the basic assumption that you would own the building on which the work was to be done. When the deal for the building fell through, the building contracted over (a building you owned) essentially ceased to exist and the contract became void. However, you are unlikely to succeed with this argument, because you were in a better position to know of and avoid this risk. Even were a court to accept the impossibility argument, they would conclude that such a risk was best allocated to you.

The contract covers goods (e.g. heating and cooling systems) and services. Based on your description of DP's duties under the contract as "to design and to oversee the production and installation..." the services were contracted for and the goods were incidental to the contract. The common law, not the UCC, will govern damages.

A court will award DP expectation damages. You are liable to DP for the amount he has spent, plus his expected profits, minus the amount already paid. We reach the same number by subtracting the amount paid and the cost of completion from the contract price. We can argue that his profits would have been lower than expected, but $800,000 is a safe estimate of what you owe on the contract. This amount might be lowered somewhat by DP's possible mitigation or failure to make reasonable attempts to mitigate.

Given that common-law damages would be around $800,000, we will argue that the liquidated damages clause, under which you would pay $2.5 million after taking the deposit into account, should not be enforced.

First, we can argue that there was no mutual assent to this clause. Form contracts with fine print are frequently susceptible to such arguments. However, you indicate that you read, considered, understood, and consciously decided to accept the clause, and liquidated damages clauses are not presumptively unreasonable.

Liquidated damages clauses outside of the form contract setting are still subject to scrutiny. Liquidated damages clauses are only enforced if the amount set is reasonable in light of the difficulty of ascertaining damages and the amount of the actual or anticipated damages. Unreasonably large liquidated damages clauses are considered punitive and are unenforceable as a matter of public policy.

As the preceding analysis of common law damages suggests, the damages here are not unusually difficult to estimate. DP will argue that the amount is reasonable in light of anticipated damages, given that depending on the time of breach, damages could have been anywhere from $1 million to $9 million. We can concede this argument to DP, but counter that the clause is unreasonable in light of actual damages. A judge might favor either of these arguments, but the lack of difficulty in estimating damages at the time of breach weighs in our favor.

Either way, because it turns out in fact that the clause would require payment of an amount more than three times the value of expectation damages, the clause will probably not be enforced. Enforcement would be punitive under the circumstances and would award DP a windfall.

 

3. Willie Willkoff (WW)

WW suggested that he will first argue that any agreement to sell the building would be too indefinite to be enforceable. Indefiniteness is no longer fatal to a contract, but the discussion you ye relayed probably does not contain sufficient detail for a court to determine the terms of the underlying agreement.

Even if the material terms were agreed upon, the Statute of Frauds would prevent enforcement of a contract to buy a building established through conversation and e-mail. While we can argue that e-mails should be considered "writings" because they are easily proven and printed out, WW has a fairly strong argument that e-mails should not be considered "writings" because they are relatively informal and the Statute was meant to mandate a certain degree of formality for certain contracts.

Although you and WW did not make an enforceable contract for the sale of the building, you can still recover damages based on WW's breach of your agreement try, in good faith, to complete the deal for sale of the building. Such agreements are enforceable where, as here, parties indicate their mutual intention to be bound.

WW claims that he never offered to sell you the building. However, you had been discussing the sale for about a week, some negotiation had already occurred, and you had inspected the building and received legal documents relating to it. In this context, the words "let me know what you decide, the ball's in your court" are best interpreted as a firm and definite offer, giving you the discretion to complete the agreement by accepting it. Even if WW did not intend to make a firm offer, your reasonable interpretation of it as such is controlling over his hidden intention.

WW will next argue that your e-mail, "we've got a deal," was not a firm or definite acceptance. He will use your statement, "I'll start taking steps on my end to make this project a success," as evidence that the deal was not completed by your acceptance alone. This argument would successfully defeat a contention that the deal for sale of land was completed, but we are not making such an argument. You considered yourself bound to take steps towards the successful completion of the deal. He was similarly bound to take necessary steps on his end.

WW may further argue that he did not receive the acceptance in a timely fashion, or that he revoked the offer before receiving the acceptance. Since WW had demonstrated through previous e-mail communications that e-mail was an acceptable mode of notification, the offer was accepted as soon as it was available in his e-mail.

The communications between you and WW, in the context of continuing negotiations, indicate a mutual intent to be bound to your agreement to try to complete the deal in good faith. His action of buying the building for himself clearly violates his duty under this agreement.

Specific performance is an available remedy for the sale of real property. However, there is no guarantee that you would have gotten the property had he not breached. For similar reasons, your expectation damages will be difficult to calculate.

A court will consider reliance damages a good proxy for expectation damages in this context. In reliance on the prospect of negotiating in good faith and probably reaching a final deal, you made plans for the building. WW will be .liable to you for the $800,000 you owe to DP, plus the cost of the time you put into the project. You might also be able to recover for lost opportunities if you can demonstrate them with sufficient certainty.

 

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Question 2, Answer 2


Dear Keith,

In this memo I will address your legal rights and liabilities to each of the key parties involved in your attempted real estate purchase.

 

Wilkoff Realty

You do not have a binding contract with Wilkoff to purchase the property. Your discussions with Wilkoff did not meet the formal requirements of a real estate transaction. Wilkoff did not make a formal offer to sell the building. Wilkoffs April 15 email was merely an invitation for an offer even though it contained detailed information & regarding location, description and suggested price. The email contained no language to circumvent the common law default rule that buyers, not sellers, make offers. Likewise, Wilkoffs April 22 email was also an invitation for an offer.

Your April 25 email, although worded as an acceptance, could be construed to be an offer to purchase the property on the terms mutually understood at the time. You implicitly offered to purchase the building for $20 million, assuming that the other legal requirements were met. Nonetheless, the language of the email did not meet New York's law requiring detailed descriptions of financing, permits, etc. The court would probably view this email as an offer to continue negotiations and not as a legally binding offer to purchase the property.

Even if you could prove that you made an offer, Wilkoff's lack of response will not be viewed as acceptance. You did not stipulate that Wilkoff's silence indicated acceptance. In addition, Wilkoff will argue that he rejected the offer as soon as he received notice.

In the slim chance that the court determines that you had a binding contract with Wilkoff, you could seek specific performance of the contract. This equitable relief would be granted because it would be easy for the court to administer and the contract is for a unique property.

You could also seek equitable relief under the principle of binding preliminary negotiations. In this claim, you would seek court-ordered good faith completion of your negotiations with Wilkoff. Unfortunately, this claim would probably fail as well.

First you would need to prove an expression of intent to be bound by the negotiation. Wilkoffs actions and statements do arguably express such intent. Wilkoff will assert that his actions were intended to feel out your level of interest. Nevertheless, the court would not need to resolve this issue. Your situation does not meet the other elements of the test.

Your negotiations with Wilkoff left open key terms. Although Wilkoff may have assented to the ballpark price, he has not agreed to financing, time of sale, city permits, etc. The court will not impose a commitment when there is uncertainty on key terms. Besides, emails and conversations are not the customary form for $20 million real estate transactions.

Promissory estoppel provides your strongest claim for recovery against Wilkoff. By saying "the ball's in your court," Wilkoff promised to allow you to come up with an acceptable offer. Although not obligated to accept your offer, he does have a good faith obligation to consider your offer.

Wilkoff acted in bad faith. He says he went to Nepal on April 15 and could not read your email until sometime in May. The facts suggest otherwise. Wilkoff sent an email requesting a response seven days after he supposedly left on vacation. If Wilkoff was truly unable to read any response to the April 22 email, he had a good faith obligation to let you know earlier.

Wilkoffs subsequent decision to buy the property himself also seems to violate the principles of trust and fair dealing. As your friend, he had a fiduciary responsibility to disclose his conflict of interest. This was more than an arms-length transaction. He also served as your advisor.

You reasonably relied on Wilkoffs promise. Three days after you received the email, you told Wilkoff of your intentions. Wilkoff gave you the ball, and you ran with it. Wilkoff, an experienced real estate developer and friend, should have foreseen the implications of his promise. He had ample opportunity to cancel the deal.

The court should therefore award damages equal to your costs spent in foreseeable reliance. If Wilkoff never intended to sell the property to you, but led you to think otherwise, he should pay at least your out-of-pocket expense and perhaps even reasonable compensation for your time. You should seek recovery for the money you spent on the inspection team, the architect and on getting financing. You could also seek indemnification costs should you be found liable to Doringer and Club Lucky. Wilkoff will argue that such costs are consequential and barred by the foreseeability doctrine. This dispute would be resolved at trial.

 

Doringer Partners

You might be able to avoid breaching this contract. If you can still buy the property either through additional negotiations with Wilkoff or by court order, then telling Doringer to stop work on its design would only be a minor breach. You would be liable only for Doringer's cost of delay. Doringer might not even press the issue because the company would probably rather have the job then seek damages and ruin the relationship.

You could also argue that you made a unilateral mistake to a basic assumption of the contract, and therefore the contract should be rescinded. You mistakenly assumed that you had a contract with Wilkoff. You hired a construction firm to update a building that you did not and will not own. This mistake materially affected the agreed exchange of performance, and enforcement of the contract would be unconscionable.

However, Doringer will argue that the court should assign you the risk of such a mistake. You were in the position of least cost avoider. You should have at least waited or sought additional confirmation from Wilkoff. The court should uphold the contract to deter behavior such as yours in the future.

Nonetheless, if you can prove that you did not assume the risk and that the court should not assign you the risk, you would still be liable to Doringer for $300,000 in costs already accrued. You could recover $200,000 of your deposit.

More likely than not, the court will find you in breach of your contract with Doringer. Consequently, the construction company will seek liquidated damages under the contract totaling $2.5 million ($3 million - $500,000 deposit). Doringer will attempt to circumvent the penalty doctrine by asserting that $3 million is adequate compensation for its lost reputation, lost opportunities and partial performance.

The court will see through this argument award expectation damages, placing Doringer in the position of performance. You would be liable to Doringer for the company's expected profits from the contract plus any accrued expenses minus your deposit. Although profits are typically quite difficult to calculate, we may assume that stipulated $1 million is an accurate estimate, unless you have evidence to the contrary. Therefore, you may be liable to Doringer for $800,000 ($1 million + $300,000 —$500,000). This figure is much more reasonable than the penalty asserted in the liquidated damages clause.

Doringer would also be obligated to mitigate damages. You would not be liable for any costs accrued after May 13, when you told the company to stop working.

 

Club Lucky

Your liability to Club Lucky depends on whether or not there is a contract. You can assert the same unilateral mistake defense as above, but I recommend we seek enforcement of your right to withdraw an offer before it is accepted.

Nigella will argue that she accepted your offer implicitly in the May 11 Washington Post article. If you read the article and recognized her statement of intent as acceptance, then a binding contract was formed. However, an objective factflnder would probably not assign acceptance to a general statement made in a newspaper and not made directly to you.

     Nigella's partial performance is also not acceptance. You presented a bilateral offer requesting acceptance in the form of a promise. You did not present a unilateral offer to be accepted by performance.

On May 13, you acted within your rights when you withdrew your offer. Although the conversation occurred within the ten-day acceptance period, you could still exercise control over your offer. Luckily, you withdrew the offer before she accepted.

If the court finds a binding contract, Nigella would be entitled to her lost profits in the New York restaurant. These expectation damages would be nearly impossible to calculate, so the court would probably award reliance damages. You would be liable to Nigella for any costs already spent in preparation for her relocation.

If there is no contract, you might still be liable under promissory estoppel. These damages, based on reliance, would be the same as above.

Nigella might also try to recover for damages to her reputation stemming from her statement in the Washington Post. The people of "Chi-Town" might not like her comments in the article, and she will assert that the comments were made in reliance on your promise. Nonetheless, these damages should almost certainly be barred as unforeseeable, consequential damages.

 

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Question 2, Answer 3


Mr. Kanavos,

To answer your concerns, I will first discuss your potential claims against Willie and then claims by Doringer and Nigella against you.

For a claim against Willie, you could argue for liability based on either contract or promissory estoppel. Willie argues that he never made an offer but merely wanted to gauge your interest. This crucial distinction is largely an interpretive matter. The words in his April 22nd email are not as definitive as they could be, but the reasonable interpretation is that saying the ball was in your court implies you had the power to accept, reject, or make a counteroffer. That you were old friends reinforces this interpretation because it reduces the expectation of formality and allows Willie's more colloquial language to appear as an offer. Your April 25th email constitutes acceptance of this offer, and since your acceptance reached Willie before he revoked, he had no power to do so afterwards. Willie further argues that there was no contract because there was no description of financing, permits, etc. However, two parties can be bound, at least to continue negotiating in good faith, by preliminary negotiations that nonetheless leave some terms open. TIAA v. Tribune. This is a question of intent; clearly you intended to be bound, and Willie's language and conduct in supplying you with so much information, combined with your friendly relationship, suggest he did mean to sell, though Willie's intent likely rests on whether his email was an offer or not. The offer and acceptance should not fall victim to indefiniteness, as major terms (price, etc) were included in your negotiations. The Statute of Frauds may present a problem because it applies to sale of real estate; however, § 17(7) provides that an electronic record is satisfactory.

Given the indefiniteness of the offer and open terms, a court might find there was no contract, but you may still recover on promissory estoppel grounds as a distinct basis for liability. Red Owl. The primary difficulty here will be showing that Willie should reasonably have expected you to rely on his April 22nd email. We can argue that given your obvious excitement, Willie should have expected you to start refurbishing the building immediately. However, Willie will argue it was unreasonable for you to take such definitive steps before hearing confirmation, and reliance on such informal negotiations was not reasonable. We will also have to show that failure to enforce the promise would be unjust; this will depend on largely the same arguments and whether a court believes that you should not have taken the steps you did in reliance. You might be helped here by arguing that Willie acted in bad faith by basically stealing your good idea.

If Willie is liable, then you may be able to get specific performance on the contract because this V is a real estate transaction and Willie is in sole possession of the property (i.e., it would not deprive a third party of her legal rights to the property). Also, specific performance is usually available only when money damages are inadequate, as is the case here because an expectation damages calculation would be extremely uncertain given that there is no sure way to estimate profits. Reliance damages are more typical for estoppel claims, but Restatement §90 only reads that the promise is "binding if injustice can be avoided only by enforcement of the promise and thus may encourage, and does not preclude, specific performance. If you prefer, you may be able to elect reliance damages in the amount you expended in refurbishing the building and are found liable to Doringer and Nigella.

Regarding your liability, telling Doringer to stop working is clearly a breach. You cannot argue change of circumstances or impracticability due to New York losing its bid because: (a) this was speculation on your part ("cunning foresight"), (b) the risk is implicitly allocated to you as the developer and (c) performance has not become commercially impracticable, merely undesirable I7 Therefore, the main issue is the extent of your liability, focusing on the liquidated damages clause. A court should find this clause is a penalty and not enforce it expectation damages are not difficult to compute and the amount of liquidated damages differs significantly. The clause calls for payment of one-third the contract price ($3 million). However, actual expectation damages are only $800,000 ($300,000 spent ± $1 million expected profit —$500,000 paid). That said, in favor of enforcing the liquidated damages clause, despite the fact that it was in fine print, you did notice it, and as a sophisticated businessman you could have negotiated for a change. Moreover, it appears that you may have accepted a high liquidated damages clause in consideration for Doringer's reduced contract price. Doringer should not be able to collect for "potential loss of commercial reputation" because that will be difficult and too uncertain to demonstrate. "Lost opportunities" are not compensable here; awarding Doringer opportunity costs would give a windfall—not only would Doringer profit on your contract, but it would also profit on a contract it could conclusively show it passed up. On this note, Doringer's expectation damages will be mitigated by another contract it can enter into with the labor and materials freed by your breach.

Nigella's claim is weaker, hinging on whether you had the power to revoke your offer. Nigella will argue that you agreed to give her ten days to respond. While your words could be interpreted as creating a firm offer, offers are generally presumed to be revocable at any time before acceptance, Dickinson v. Dodds, a condition which you satisfied when you called her May 13th before she could accept. The ten-day expiration just sets an absolute final date for acceptance, but does not affect revocability. Moreover, Nigella's Post interview—even if you had read it, and there is no indication you have—should not constitute an adequate acceptance. Similarly, the butler telling you that Nigella had closed the restaurant is not adequate notice. The fact that Nigella admits she "was just about to call and accept" implies that she knows she had not accepted. Furthermore, there was no consideration, nominal or otherwise, that Nigella could argue suffices to create an option contract. Restatement §45 applies to unilateral contracts, whereas this is a bilateral contract since you did not invite acceptance by performance. As such, she will try to argue for liability on estoppel grounds under Restatement §90 or §87(2). She should fail under §90 because closing down her restaurant should not have been reasonably expected by you. She even said that she did not want "to make a premature judgment," which implies that she would not do anything rash. Section 87(2) focuses on an offeree's action that an offeror should reasonably expect to occur before acceptance, and thus it should not apply because it is not reasonable to expect that Nigella would have to close down her restaurant before accepting; in fact, it makes more sense for her to keep it open and continue doing business so there is no gap in her income stream. You can also argue that Nigella's reliance was not justified because your offer was not specific, and at most bounded you to enter into good-faith negotiations. It appears that your conversation consisted merely of the broad offer of relocating to your new building; this leaves out many details, including significant ones such as rent/royalties, crucial to a binding contract. As such, Nigella had no right to assume that relocating to your building was definite. Additionally, since an anchor tenant would be a lessee of more than one year, the Statute of Frauds should apply and prevent binding effect of any non-written offer (the description of the May 10th contact implies a telephone conversation with back-and-forth descriptions of the conversation and verbs like "told" and "complained", though it could have been otherwise).

If you are found liable, although expectation damages are typical, in this case they would be too p— uncertain—calculating her potential profits from her restaurant in your building is not feasible. Moreover, reliance damages are actually more typical for estoppel claims. You would therefore have to compensate for her expenses in shutting down and reopening the Chicago restaurant (assuming she does re-open) and the profits she lost during the closure period.

It is worth noting that Nigella's estoppel argument bears substantial resemblance to your estoppel argument against Willie. As such, we will have to carefully distinguish the nature of your negotiations with him and those with her. We would focus on your close relationship with Willie, the extensive nature of your negotiations with him, and the more concrete language he used in his offer.

As a final note, given the questionable reasonableness of your reliance, you may want to consider settling with Willie, perhaps trying to own the building in a partnership or paying him to transfer title to you. This way you could have Doringer continue its work, thereby obviating a breach there, and even still bring in Nigella.

 

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