Top Student Exam Answers, Fall 2000
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.
Question 1, Answer 1 (1499 words)
Dear Mr. Goldbrick:
Both PBS and TED may have valid claims against you. Below, I assess the merits and consequences of these potential actions and possible settlement options.
CLAIMS BY PBS
PBS may argue that you breached the following terms of your employment contract: (l) 45-day exclusive negotiation period and (2) first refusal period. First, despite your early initiation of renewal discussions, at the meeting on May 26, both you and PBS seem to have understood the 45-day period to finish at the end of June [May?]. The first two meetings with TED were held before that period; none were held again until after its close. Second, since you have not yet "accept[ ed] . . .any [ on-air ] offer of employment" from TED, you are also in technical compliance with the first refusal stipulation of the agreement.
Alternatively, PBS may allege a violation of your duty of good faith in performing under the contract, particularly with respect to the first refusal clause. Modern courts often look beyond technical compliance and aim to ascertain the principal purpose of a stipulation. Functionally, first refusal clauses solve an informational problem. Unbeknownst to PBS, suitors may try to woo away valuable on-air personalities; with notification, PBS may be able to match the offer. Notification also allows for promptness in new casting, programming, marketing or other remedial measures if no suitable arrangement develops. Naturally, you were not obligated to notify PBS of every single offer, just ones you were likely to accept, such as TED's offer. Thus, the option contract with TED, although not explicitly covered by a contractual term, circumvents these purposes of the first refusal provision. You and your former counsel found a gap in the contract but the court is likely to fill it with an implied duty of good faith. (Wood).
Application of the good faith duty is unpredictable, as it is based on the court's impression of any opportunistic behavior that violates the spirit of the contract. I am afraid evidence of such behavior is ascertainable here. Your twenty years of experience in the field (quashing any impression of naive dealing), use of legal counsel in your negotiations, and willful omission concerning your discussions with a rival all will work against you. Moreover, the court is likely to impute tactical motive to your presentation of the contractual provisions to TED during your first meeting.
Two weak defenses remain to be discussed. First, PBS refused your request to relax the first refusal stipulation. The next day, on June 24, you sent a handwritten note to PBS, that a court may interpret as an attempt to affect a waiver that was never expressly rejected. One helpful interpretation of the note is that you were free to accept any offer after July 16 to work elsewhere after January 15, 2001; another is that six months after July 16, you were free to accept a job elsewhere. PBS will likely claim it only had the latter take in mind, while it is inferable from its prior refusal to waive, that you understood both interpretations. In such a deadlock, courts generally honor the intention of the party with one interpretation (Rest.2nd §201).
Second, the first refusal clause appears so one-sided that it is arguably unconscionable. However, as it seems to be a standard term, and bargained for using counsel both the procedure and the substance of the agreement are not likely to shock the conscience of the court.
For the above reasons, in my view, you will likely be found in breach of contract.
DAMAGES OWED TO PBS
Courts usually grant expectation damages so as to return the parties to a position of performance. PBS may argue that it deserves to get its lost profits resulting from possible weaker ratings caused by your departure. Pointing to the doubling of ratings at "Good Day" and its lead-in benefit to other shows, PBS is likely to demonstrate how badly it wanted to keep you. It did compromise on some of your initial demands and it might convincingly show that given the opportunity, it would have crafted a suitable counter-offer to TED's, at least comparable in substance if not in particulars. Further, PBS would have to demonstrate that you could have contemplated the consequential damages (Hadley). Assuming the court is convinced by these assertions, it may grant PBS any lost profits from "Good Day" for the duration you are now signed to TED.
In defense, you can argue that such damages rest on too many unknown factors. Courts are generally reticent to predict profits in the entertainment field in general (Kenford Co.). Consequently, even credible data on past ratings and profits from advertising during relevant times lots may not be enough to calculate damages to a reasonable certainty.
Other measures of damages seem likewise unavailing. Arguably, since June 13, when you sent your letter of resignation, PBS has known of your intention to leave "Good Day ." As a result, it would be tough for PBS to demonstrate that it relied on you staying.
Further, the court is unlikely to compel you to work for PBS. However, because the first refusal clause obligated you to privilege PBS ahead of any competitor, the court can by implication bar you from working for TED (Lumley). The court may set a six-month injunction from July 15 to January 15 in accordance with your contract with PBS. Obviously, this would only maintain the status quo and so this specific performance would not be a preferred remedy for PBS or one likely to be demanded by the court.
In summary, although PBS, in my view, can demonstrate that you breached, it is unlikely to be able to advance the necessary proof of its damages.
DAMAGES OWED TO TED
As part of a settlement, PBS might demand you cooperate in its tortious interference suit against TED. If you should choose to do so, TED would invoke the liquidated damages clause in your contract. The court would probably not enforce the term as the damages appear to be an unreasonable estimate of lost expectation. If TED wished to indemnify itself from such a suit, it could have stated so. Instead, TED's lawyers included an atypical clause that compels payment of $500,000 even if actual damages resulting from a suit were less. For these reasons, the court is likely to see the clause as punitive. However, although it is a nonstandard clause drafted by TED lawyers, you and your former counsel discussed and accepted it. Further, the term explicitly states immeasurability as the rationale for the damages. This does not work in your favor. Thus, there remains a possibility, though slight in my estimation, that the clause will be upheld.
If as part of any settlement, you leave TED, it may sue for breach. Measuring profits lost from your failure to move to its station would be more speculative than with PBS's damages. However, despite not having accepted the performer's contract yet, TED may likely recover against you as your preliminary negotiations indicated your intent to sign both contracts and join its ranks (Hoffman). TED would claim that it justifiably relied on your promise to its detriment. Out-of-pocket costs sunk into developing both the game show and talk show might be recoverable on a reliance damage theory (Anglia Television). The court might not perceive injustice in relation to contracts designed, as your former counsel stated, "[t]o get around PBS's refusal clause." However, since you were arguably complicit, damages, most likely reliance costs, may likely be awarded.
SETTLEMENT OFFER
As mentioned above, PBS has offered to discuss settlement. Its terms include your possible return to "Good Day" and a new prime-time show in development. For three reasons, I advise you to have me pursue negotiations. First, while money damages owed to PBS and/or TED seem unlikely to me, they cannot be ruled out absolutely. Second, legal action, especially of this kind, may harm your popularity among viewers and future employers. Third, I believe that you will be able to arrange an agreement satisfactory to your desires.
PBS's motivations for settling are likely based on fear of bad publicity in taking legal action against a venerable celebrity. Perhaps, it also wishes to avoid costly litigation with uncertain yield in damages. More importantly, PBS no doubt recognizes how valuable a financial asset you are, not just for "Good Day" but the timeslots that follow.
This leverage should allow you to condition further negotiation on the immediate dropping of the tortious interference suit. Further, I can negotiate with TED to disavow any claims against you in exchange for PBS's backing down.
PBS's proposal of May 26 seems a good starting point for discussion. The compensation package and the prime-time interviews are not far off from your stated desires. I understand that you would prefer a two-year commitment. While PBS has formerly stood firm for a three-year contract, this new soreness in your relationship may have changed matters. Naturally, you and I need to have further discussions about your preferences before I negotiate.
Question 1, Answer 2 (1486 words)To determine whether Goldbrick (G) should settle with PBS, the first step is to analyze his defense. PBS's claim is that G breached the "good faith" clause of the contract, so G's first defense is that the clause itself is invalid.
G may argue that the clause is an illusory promise. It states that negotiations will occur "if we so elect." Since it leaves the choice of engaging in negotiations solely to PBS, there is no consideration for this promise. The clause may also be unconscionable. As a large network PBS is in a stronger bargaining position than G, leaving him no meaningful choice but to adhere to the clause. Also, requiring G to negotiate with PBS exclusively for an amount time while PBS does not have similar obligations to G, and requiring G to notify PBS of other job opportunities are unconscionable terms.
PBS has strong counterarguments to both claims. First, since the "good faith" clause is part of the contract as a whole, it does not need separate consideration. Second, G is not in a grossly unequal bargaining position. He has been in the broadcasting business for twenty years and has many local and network shows. Also, the clause seems to be commonly used within his trade. Finally, courts do not often hold contracts substantively unconscionable, preferring to give parties autonomy, and here the terms are not inequitable since PBS still has a duty to negotiate with G in good faith, and G can opt out of disclosure by foregoing six months employment, and the clause requires PBS to match a rival's counteroffer in substance.
If the "good faith" clause is valid, G must argue that he did not breach it. While every contract has an implied duty of good faith, this contract expressly states that both parties should enter into good faith negotiations over G's contract. PBS may claim the following: It was inconsistent with the spirit of the contract for G to meet secretly with TED prior to June 1 SI, since the purpose of the first 45-day negotiation period was for the two parties to negotiate exclusively. Exclusivity was thus implied when G began negotiations with PBS in February. Likewise, G's 6-month option and split salary agreement with TED was contrary to the clause's purpose, since G the true intent of those contract structures was to get around PBS's 6-months else disclosure requirement. It was also inconsistent with reasonable expectations for G to discuss with and give a copy of the "good faith" clause to TED representatives, since it was a private agreement between G and PBS. By doing so, G behaved opportunistically. It gave TED a way to work around G's arrangements with PBS. G's rejection of PBS's offer of May 26th was in bad faith, since the offer acquiesced to the terms G had been negotiating for. G's acceptance of TED's offer prior to July 15th was also in bad faith, since it prematurely ended the 90-day negotiation period outlined in the clause. Finally, G did not use his best efforts to try to arrange a contractual extension with PBS. Lucy, Lady Duff-Gordon.
Generally, PBS may run into proof problems, especially regarding intent, since G and TED will be reluctant to testify about their relationship. This will give PBS a greater incentive to settle, and may give G an advantage in settlement negotiations.
G will counter that he acted in good faith. He began negotiating with PBS earlier than stipulated in the clause, indicating his desire to attempt renewal. G offered to lower his salary and was willing to continue negotiations even after PBS broke their promise to get back to him in 10 days. His rejection of PBS's offer was proper since he had every right to see what his other options were before being bound to PBS. G did not break the 45-day or 6-month stipulations. His dealings with TED exemplified strategic negotiation tactics but not bad faith.
An important aspect in this analysis is whether G had a duty to disclose his relationship with TED to PBS. PBS's strongest argument is that prior to June 1st, exclusive negotiation was an implicit agreement on which it was making the contract. Restatement § 161(b). G knew that telling PBS about TED would correct their mistaken assumption, and withholding this fact amounts to a failure to act in good faith.
G can rebut that it did obey the 45-day exclusive negotiation period, and he was not obligated to inform PBS of his negotiations with TED. This was just hard bargaining tactics against a network who was in a stronger bargaining position. PBS was free to negotiate with other potential hosts at any time, just as much as G negotiated with TED.
PBS's other disclosure claims are weak. G's only possible misrepresentation is his statement that he wanted to "see what the other options are," implying future rather than past exploration of other options, but it is not a direct contradiction. Also, neither an employment nor a negotiations relationship is reasonably one of trust and confidence.
Because equity is only as long as the chancellor's foot, the outcome of this case is highly uncertain. It may be a good idea for G to settle. If G were to lose, the court may issue an enjoinment against working for competitors, in which case G's contracts with TED would become void. Lumley v. Wagner. The court may also award reliance damages, if ratings and advertising revenue fall after G's departure, although this is more difficult to justify for "Shock-o-rama" since G did not appear on the show. Money damages are hard to justify generally because G's contract was already terminating. However, if G is found to have negotiated in bad faith, and PBS relied on at least a genuine opportunity for renewal, the court may issue damages. Finally, PBS had pleaded it, there is a slim chance that the court would require G to re-enter into contract negotiations with PBS. This could also place his contracts with TED in jeopardy. Additional factors favoring settlement are time and expenses of trial and negative publicity.
However, if G settles, TED may argue that he cooperated with PBS in a lawsuit against himself, in violation of his contract with TED. Additionally, should PBS continue their suit against TED, TED may argue that G cooperated in that lawsuit by settling, if in the course of settlement G provided information that helped PBS ' s claim. G can argue that this clause is unconscionable, similar to the argument against PBS's "good faith" clause. This time his argument may be stronger, since this is not a standard clause, and the terms prohibit his legal right to sue TED. (To rebut, TED may argue that contracting legal rights is valid under Inman.) Likewise, the liquidated damages portion of the claim may be unconscionably punitive. This is especially true if PBS settles a claim with G and drops their claim against PBS, in which case actual harm to TED is nominal. Should this clause be held valid, G may argue that settlement is not akin to cooperation, especially if one does not acquiesce to the other party's demands.
As part of his settlement, G should ask PBS to drop its suit against TED. This should not be too difficult, since PBS may not be willing to spend the time and resources to follow through. Also, their suit against TED for tortious interference with contract is weakened if G is never found to be in breach of contract.
G should not retain work with PBS. Assuming it is held valid, this would put him directly at odds with the exclusivity clause in his contract with TED. If G foregoes work with TED all together, he would fully breach his contract with TED, and unless it can be shown that either a contract did not exist or performance was excused — both unlikely claims — he and/or PBS would have to pay expectation damages and he might possibly get an enjoinder against working for PBS. Also, if he breaches contract with TED, TED will file suit against him for his breach of the exclusivity clause in working for PBS through September, a suit they currently may be willing to ignore to maintain good ties with G.
As a settlement term, G should mitigate the unfavorable publicity that led PBS to sue. G can publicly state reasons why he left PBS that allow it to retain an untarnished image. He can make guest appearances on "Good Day" or promote PBS in conjunction with his own show-getting TED's approval first if need be. Finally, G may need to settle in part through a monetary award that both parties determine to be reasonable, possibly reflective of advertising loss related to lower ratings on "Good Day" after his departure. However, given that reasonable negotiations could lead to G's departure anyway, this may be difficult for PBS to justify.
Question 1, Answer 3 (1496 words)
PBS has a strong case against you (Garner Goldbrick) for breach of contract based on your violation of the "good faith negotiation and first refusal" clause. Although the "good faith" clause only binds you at PBS's discretion without a reciprocal right, the contract as a whole (in writing-no statute of frauds problems) has sufficient mutuality between two sophisticated parties, providing a legally enforceable contract. Furthermore, this type of clause is standard in the industry and even if hidden within boilerplate, would still be valid because it is reasonable and expected in this type of contract. (R2d § 211).
PBS can argue you violated both implied and express duties. They will argue you violated an implied duty not to negotiate with others before the 90-day period. The purpose of the clause was to give PBS first rights to negotiate for your renewal without outside competition; early negotiations would impede this purpose. This duty can be implied in fact, based on the purpose and language of the 90-day provision and your actions in keeping negotiations secret. It can also be implied in law; PBS can argue had you thought about it ex ante, an express statement would have been added.
PBS will argue that your negotiations and subsequent agreement with TED was in violation of both the "good faith" and "first refusal" part of the clause. The agreement with TED was completed during the "good faith" period. Because you signed an agreement with TED, you were essentially unavailable to negotiate, so could not continue with "good faith" negotiations. Although it can be argued the term "good faith" is ambiguous, the court will at least imply reasonable efforts to be taken. (Wood). PBS could argue you did not take reasonable efforts and were planning to strike a deal with TED all along. The court could also interpret it as UCC § 1- 201(19) (although the UCC does not govern employment contracts), "honesty in fact in the conduct or transaction concerned." It is easy to argue that you have not been honest with PBS in failing to disclose your negotiations/agreement with TED.
In your defense I could argue that because the clause reads, " You agree, if we so elect...," we can infer that PBS waived this term by waiting 33 days from April 15 before contacting you and failing to get back to you in the promised ten days. In support of this construction, we could argue that your response to the May 26 proposal stating you wanted to "see what the other options are" was not met by any objection even though stated during what would be the exclusive period. In addition, during the ninety-day period PBS only presented one proposal, which could lead to the conclusion they did not intend to "elect" to activate the clause, otherwise there would have been numerous correspondences going back and forth. This argument is weak, and is furthered weakened by the letter you sent on June 24 to clarify your understanding of the clause, this would prove you did not believe there was a waiver of this term and you were not relying upon this implied understanding.
If the clause was in effect we could argue, because nothing in the clause forbids pre-90 day negotiations you were free to negotiate with TED during this time. During the exclusive negotiation period no contact occurred. During the 90-day period you negotiated in good faith but PBS never offered "mutually agreeable terms." Although your refusal of the May 26 proposal, after earlier indicating you would take the lower salary if the specials were added, provides evidence (in addition to signing an agreement with TED during this period) of opportunism and bad faith dealing. We can argue you have not yet accepted employment in violation of the first refusal clause, only created on option to accept. Although PBS has a strong argument that the option contract was designed to get around the clause and the real agreement was accepted orally. In interpreting compliance with the PBS clause, the court will consider all circumstances together with the purpose of the parties (R2d § 202). With this in mind, PBS has the stronger case.
Expectation damages is the predominant measure. To calculate PBS's expectation the court may look at PBS's loss in advertising revenues, salary difference your estimated salary and what they had to offer to get a comparable replacement, plus any foreseeable incidental or consequential damages. PBS is required to mitigate damages and prevent additional loss. PBS may ask for specific performance, but courts generally will not award specific performance in employment settings. (Lumley/MacLaine).
Before making any recommendations we also need to establish your position with regard to TED. The performer's agreement is in the form of an option contract; therefore, you can back out by not accepting. However, this contract was drafted to get around PBS's first refusal clause and does not represent the real intentions and agreements between the parties. It can be argued that the true offer and acceptance occurred orally on June 5, and the subsequent option contract did not alter this original agreement. If dealing with just the oral agreement, there is a statute of frauds problem because the contract performance will last more than a year.
TED may want to bring in parol evidence to establish the intention and true meaning of the contract, although the pending tort suit may deter them from doing this. Most jurisdictions have relaxed their parol evidence rule to determine parties' intent and true meaning. Illustration four R2d §212 provides an example of an agreement written in code, not representing either parties understanding of the agreement, concluding the oral meaning should be used to preserve the true intent of both parties. Some of the more liberal jurisdictions (Corbin/R2d view) may hold you to your actual understanding, while others (Wil1iston/R1st view) may not allow parol evidence to contradict a written agreement. If TED fails to establish a contractual claim, it could also argue liability based on promissory estoppel based on foreseeable actions/inactions taken based on reliance (§90). Damages on this claim could be calculated similarly to those of PBS.
The producer's agreement binds you to exclusive employment with them for the next 2½ years, unless they give their approval or allow for a rescission (likely if there is no longer a performer's agreement) and prevents you from participating in a lawsuit. The lawsuit term is not standard or expected, but you discussed the term with your attorney and knew what it meant, therefore the court is likely to uphold it. It is questionable whether the court would uphold the liquidated damages part of the clause. It would be difficult to prove loss, but the $500,000 figure must be a reasonable estimate. (R2d§356) Court's may view this figure as a penalty and refuse to enforce it.
It is likely PBS has a successful tort claim against TED for interference of the contract under. Upon entering negotiations you provided them a copy of the "good faith and first refusal" clause. They continued to negotiate with you and took measures, drafting agreement as option contract, to undermine the intent of the clause. Some courts have allowed large verdicts for this offense, even when the third party did not initially instigate negotiations. (Texaco).
I would suggest settling with PBS because you do not have a strong defense. (although if they found a good replacement the damages may not be high) My first suggestion is to propose a three-way settlement. Because PBS is still willing to work with you, I would agree to host "Good Day" and the new " reality" show. Because of your past success driving up ratings and PBS will not want to ruin your relationship with a lawsuit, we will likely be able to negotiate a mutually beneficial deal. We would require PBS to agree to drop the tort suit, which they may have done anyway, this may require extra inducement (possibly lowering your compensation). In exchange for the lawsuit being dropped, we will have TED agree to a rescission. They will probably be willing to agree to this because of the uncertainty of enforcing the oral agreement, with the option contract contradicting it. Also, their potential liability could have been high, which would put us in the position to ask TED to cover loss in compensation, if any, as a result of getting PBS to drop the suit.
If you would prefer staying with the TED agreement, we could also suggest a simple monetary settlement. Because I do not know factors such as their advertising revenues in the months after the breach and how hard it was to replace you, I cannot provide you with a realistic figure to offer PBS. If losses as a result have been low, they may be willing to settle for a nominal figure to avoid court costs. In any event, I would recommend not voluntarily participating in the PBS lawsuit, for fear that the liquidated damages clause may be upheld.
Question 2, Answer 1 (1494 words)
The three main obstacles we must overcome to establish a successful online auction site can be thought of in terms of three goals: deterring mistake, deterring opportunism, and devising methods of non-legal contract enforcement. Solutions to these problems will to some extent overlap, especially the last with the first two.
Deterring Mistake
Though our goal is to deter mistake and spread its resulting cost as much as possible, it is important to realize that no system is going to deter all mistakes or absorb all of the cost. Some of the costs will be built into the system, and will be absorbed by us at this stage, though we will be better able to distribute them to our customers when we are more established and can charge more for our services.
There are a few simple non-legal methods that we can adopt to reduce the likelihood of mistake, such as a confirmation screen which asks, " Are you sure you want to bid... ? ," or an email asking for confirmation whenever a bid differs significantly, 10 or 15 percent, from the other bids in that auction. However, while these approaches may somewhat reduce the number of mistakes, they will not deter all inexperienced bidders.
A more successful approach will be to reallocate the risk so that all the costs of mistake do not fall on us. To this end, I suggest we establish a policy of charging a penalty for mistaken bids. In light of the courts' distaste for liquidated damages, we should try to connect the penalty to the costs imposed on us by such mistakes. I propose a prominent clause on the site which reads:
By bidding on our site, you are making an offer. In making this offer, you have accepted the risk that your offer is mistaken. We realize that errors occasionally occur in the bidding process, and therefore grant a 24 hour window to correct bids at no cost. If you must withdraw your bid after this window, you will be charged a penalty based on the loss we incur as a result of such errors, computed as $____.
Such a rule disincentivizes irresponsible bidders from taking part by raising the cost of their irresponsibility, with little effect on responsible bidders. Though this approach may deter some visitors, these will mostly be bidders who feel likely to make mistakes, and we would prefer not to serve those bidders anyway.
We should also make it clear that any bidder whose erroneous bid causes a loss to the acceptor of that bid will be liable for whatever damages the acceptor incurs in reliance on that error, except where the acceptor knew or should have known that the bid was in error. Though this doctrine is somewhat controversial, (see Baird and Drennan), our preemptive policy statement explicitly incorporates the risk into the bid, making it likely to be enforced. This measure will increase confidence in our site in those seeking bids, knowing that the risk of error does not lie with them, but with the bidders.
Deterring Opportunism
As with mistake, deterring all opportunistic behavior is impossible. Nonetheless, there are steps we can take, using both legal and extra-legal means, that may reduce its prevalence.
One step is to make good faith bidding a condition precedent to all completed contracts. This will allow any contractor who has accepted a bid from a subcontractor found to have acted opportunistically to nullify the contract immediately and rebid the job, possibly getting a better price. Furthermore, anyone found to be bargaining in bad faith will be barred from the site. For this purpose, "bad faith" will be defined as any bidding procedure designed to reduce competition or mislead rivals, including bidding rings and phantom and predatory bidding.
We can deter both phantom and predatory bidding by limiting participants to one bid per auction. While this may limit some of the competitive aspects of online bidding, it also serves a positive function. Because our site involves bidding by subcontractors, the bidding is all downwards. Allowing multiple bids by participants could have the effect of driving costs down too low and encouraging undesired cost-cutting, including on safety measures and insurance.
Another step we can take is to explicitly not adopt the UCC default rule with regard to bid revocation (which applies to the bids for suppliers). 2-328(3) allows a bidder to retract a bid before the completion of the sale. With the exception of mistake, buyers should not be allowed to withdraw bids at any time. While it is likely that all revokers will then try to claim mistake, we can prevent widespread revocation by defining specifically what constitutes a mistake, essentially transcription error. This will prevent the attempt to drive prices up by bidding high and then revoking the bids before the gavel.
One factor to remember is that much of this behavior is already illegal under the antitrust laws. Though we cannot count on governmental prosecution, we can use the law to our advantage by forwarding complaints to the relevant authority's office and encouraging them to follow up. In addition, we will post this policy on the site. The threat of criminal prosecution, however small, should serve to deter some opportunists.
Non-legal Contract Enforcement
We would like to take advantage of various non-legal means of contract enforcement, since recourse to the judicial process will prove inefficient and expensive for our customers. These approaches will rely on a variety of carrots and sticks to encourage all participants to comply with the rules and punish those who do not.
The first step I would suggest is that everyone who wants to bid or request bids on our site be required to register. In addition to standard information like business name and email address, I suggest we request the business's federal tax identification number. Unlike Ebay, where participants can have numerous aliases and can leave and reappear after reneging, each participant on our site will be locked in to one identity. This will discourage malefactors from reappearing in various guises and will ensure that those who would break the rules do so at the cost of their reputation. In this vein, I would also suggest that aliases be prohibited and participants be restricted to the actual name of their business.
One traditional approach is to require all bidders to place a deposit in escrow. This is undesirable for us, not just because it is costly, but also because it is contrary to the ideal of the online business model, which seeks speed and simplicity . The question is whether reputational damage is enough to discourage bidders from reneging. I would suggest that at this stage, while we are struggling to build a customer base, we hold off on requiring deposits, especially given the clause allocating reliance damages to the bidder who reneges.
Additionally, I would advise the site to put up notice that bidding includes assent to a binding agreement to arbitrate all disputes arising from bids on the site. Such arbitration would be before arbitrators chosen by the site who are familiar with the construction industry . In addition, a list of all disputes would be posted on the site, along with the result. This would serve the reputation signaling and monitoring function that reputation ratings have often been used for. These disputes are ideal for arbitration insofar as they involve repeat players who will rarely be requesting punitive damages, and the nature of the circumstances makes it unlikely they would make use of the judicial system. The potential disadvantage of the dispute-posting system is that it limits notice of troublemakers to those cases that actually go to arbitration, perhaps protecting some. However, this is not necessarily bad, as we might want to be hesitant in giving participants a bad name, and those who deserve the bad name will end up in a dispute before long anyhow, thus making it onto the list.
One final method of contract enforcement is to remind participants of the possibility of repeat business. Unlike sites like Ebay, highest bid (or lowest) is not a guarantee of victory; bid requesters will look at the bids and factor in reputation as well. Construction is a heavily local business and one with relatively few competitors in each area; a good name goes a long way. Setting up an area on the site where those who have successfully contracted through the site can post reports about their co-contractors will encourage participants to strive for good reports. This system will not fall prey to the problems of Ebay's reputation ratings since they can only be posted by other participants that have formed contracts through the site, eliminating postings by cronies, and the limited number of contracts anyone contractor will be involved in will encourage more detailed evaluations than quick and impersonal vendor transactions.
The adoption of these measures will surely allow for greater confidence in the bidding process and ensure the establishment of a large and stable customer base.
Question 2, Answer 2 (1457 words)
Speaking generally, ConstructionContractors.com's problems stem from two root causes: the ignorance and the opportunism of bidders. Problem #1, inexperienced bidders, comes from inattention or carelessness in the bidding process (in the case of mistakenly entering high bids) or from ignorance of trade custom in describing their bids. The other two problems come from opportunism. Problem #2 arises because bidders make bids not based on their actual valuation of services but as a way to manipulate other bidders into a higher bid or to collude with other bidders in a lower bid. Problem #3 also arises from opportunism, which induces bidders to escape bids whenever they want to, secure in the knowledge that enforcement will be difficult.
The solution to these problems is to implement policies that will force bidders to internalize the full costs of bidding and thus undertake a proper cost-benefit analysis in making their bids. In this memo, I will make some suggestions about how to do this through legal means while keeping in mind the firm's overall goal of creating a large user base. My recommendations also attempt to keep ConstructionContractors.com out of court by anticipating consequences in the contract rather than waiting for things to go wrong.
If users do not bear the risks of their own actions, they will not put enough effort or attention into making their bids, which translates into carelessness in thought and deed. One solution would be to set up a sign-on process for bidders, during which they must read and sign a form contract (by clicking on "I agree"), which would stipulate that they alone bear the risk of mistakenly entering bids. We want to allocate this risk to the bidder, because he is the cheapest cost-avoider. This policy should help deter bidders from carelessly entering bids by allocating to them the risks of such an error, but such a policy would not come without some negative consequences.
First, there is the question of the extent of enforceability. Although the caselaw on these kinds of click-through contracts is relatively light, I can make some guesses based on my knowledge of interpretive principles relating to form contracts in general. The major problem with this kind of contract ("adhesion contracts," as they are known somewhat pejoratively) is misinformation. In this case, we want a prospective bidder to know that he will bear the cost of a mistaken bid, but he may not take the time to read the form contract before he agrees to it. Two problems follow from this tendency: one practical, one legal. Practically speaking, if the bidder does not read the term on risk-allocation, he will not change his behavior. To counter this problem, we could make the form contract very short, highlight the most important terms, or write them in plain, clear English rather than legalese. Legally speaking, the law sometimes refuses to uphold form contracts. According to Restatement Second § 211, a term will not be enforced if the offeror (the website) had reason to know that the offeree (a bidder) would not have assented to the contract if he had known about the term. I will need to gather further evidence on whether this kind of term would be customary in the contracting business before giving my legal opinion on the matter. But at least we will probably not have any problems with parol evidence, a common irritant when using form contracts. Because of the impersonal, computer-based method of signing these contracts, there should be little opportunity for supposed oral modifications of the writing in question.
Another problem with enforcing these adhesion contracts may be the possibility of substantive unconscionability . If a bidder adds one or two extra zeroes onto his bid price, he could be liable for so much money that he is forced out of business. Courts would probably not enforce the contract in such cases on the grounds that this result shocks the conscience. We could provide some procedure on the website for withdrawing a bid, but, while this option may fix the occasional mistake, it will also increase uncertainty for the general contractor and may lead to bad-faith withdrawing of offers if bidders can too easily withdraw their offers.
Problem #2, opportunistic bidders colluding with each other, represents another kind of problem: illegal activity is happening but the costs of enforcement are too great to make it worthwhile. We could attempt to fix this problem by putting a clause in the form contract stating that bidders agree to be subject to arbitration, which usually provides dispute resolution quickly and more cheaply than the court system. Especially in the case of buying goods, arbitration combined with UCC §2-713 (buyer recovers difference between market and contract prices, plus proper incidental and consequential damages, UCC § 2-715, minus cover, UCC § 2-712) should make for a relatively simple decision. Arbitration, however, comes with its own set of problems. For example, putting such a clause into a form contract gives rise to the same problems of form contract enforceability as mentioned above, so we will have to examine trade custom to see if courts might strike the arbitration clause because of unreasonableness. (A similar clause was upheld by Judge Easterbrook in Hill v. Gateway.) Another solution, therefore, might be to take advantage of the inherent weakness of collusion: collective action. By restricting bidders to one sealed bid only per contract, which, based on my limited knowledge, may in fact be the norm in construction contracts, we would give each bidder an incentive to break a bidding ring by substantially rewarding whoever broke first. Therefore, as opposed to other on-line auction sites such as E-bay which make all bids available to all bidders, ConstructionContractors.com may actually benefit from restricting information as much as possible in this respect. Bidders can still try to communicate with each other outside of the website's bounds, of course, but the collective action problem will remain.
Problem #3, long-distance contract enforcement, can be solved in four ways: first, by using the same kind of reputation system used by E-bay, which records praise and criticism after a job has been completed. Such a system has problems, however: the general contractor has not much incentive besides altruism to evaluate the subcontractor once the job is complete; again, parties can collude to make a certain bidder seem more attractive than he is; and such a ratings system has few independent standards by which to judge parties. Second, the website can restrict its service area to a certain city or region and only accept bids from subcontractors located within that area. This solution, although it perhaps conforms to the local nature of a construction business, also militates against the overall goal of the website, namely, to create a large base of users. Also, a restricted service area would seem to defeat the particular strength of the Internet, i.e., the ability to reach anyone, regardless of geographical location, for the same cost. Third, the website could require bidders to deposit money in an escrow account, but they may resent this requirement as too onerous. Also, such a system would add paperwork and bureaucracy costs to the website's balance sheet. Fourth, the website can try a legal solution and include a liquidated damages provision in its contract. Courts do not always uphold liquidated damages clauses and will especially look askance at such clauses in a form contract, even if the transaction involves sophisticated parties, for the same reasons as stated above. But in this case, a liquidated damages clause may significantly improve the efficiency of the website by effectively contracting around the inefficiencies of the court system in enforcing long-distance contracts. Liquidated damages must, however, reasonably approximate expectation damages from breach of the contract, so perhaps the website could be divided up into contracts of different value so that a liquidated damages clause could be adjusted accordingly. With proper notice, adding this clause to the contract may help remedy the third major problem.
Finally, we could try other options such as adding a good faith duty to negotiate clause to the contract, which might help an arbitrator or court by setting a lower, freer standard for judging parties' behavior. Of course, as with any form contract, the problem quickly becomes one of information overload; each additional clause in the contract lessens the effectiveness of the contract overall, because people become less likely to read it. Thus, we must add clauses judiciously. ConstructionContractors.com can contract around these problems, but of course a necessary consequence of raising entry costs to bidders by making them internalize risks will be to reduce the numbers of bidders who wish to participate in the service. If these contractual provisions work, however, the bidders who do not participate may be the ones we do not want.
Question 2, Answer 3 (1479 words)
The problem areas generally encountered by electronic auction sites relate to (1) inexperienced bidders, (2) problems caused by opportunistic bidders, (3) long-distant contract enforcement, and (4) legal concerns, My following policy recommendations address each respectively.
PROBLEMS CAUSED BY INEXPERIENCED BIDDERS
The high rate of mistaken bids, bids that inaccurately describe the underlying goods or services, and withdrawal can be addressed by CC in several ways.
(1) CC could require bidding training for first time users. The potential deterrence of mandatory training could be offset by a reasonable deduction on their first premium.
(2) CC could institute a "three strikes you're out" policy against those who inaccurately describe goods or services, or who make mistaken bidding amounts. That is, if a company commits either of these infractions a total of three times, the company is barred from the site. This could be indefinite or for a pre-determined amount of time. Such a strict policy might deter some customers and eliminate others who have made good faith errors ( although users would be excused for any errors that they immediately report), but such a policy would provide a type of insurance to other users that bidding is generally accurate.
(3) CC could install a program that would automatically flag any bid that was significantly greater than the last previous bid (the formula for which will need to be determined), and require confirmation from the bidder before further bidding, acceptance, or reliance is made.
(4) CC could stipulate that bids are valid only upon completion of a confirmation page by each party. Such a page would present each party with the terms of the contract they have just agreed to and require that they retype in mirror image all provisions relating to the type of goods, price, and time. If either party fails to complete the requirements, cc can provide that the bidding is to continue, or alternately that the bidding is to begin anew. There are pros and cons to each of these results that will need to be evaluated.
PROBLEMS CAUSED BY OPPORTUNISTIC BIDDERS
Bidding rings, strategic or "phantom" bidding, and predatory bidding concerns can be addressed by the following policies and provisions.
(1) CC could require that users agree to a CC contract before entering the site. This contract should, at minimum, require good faith from all users, and specifically reserve the right of CC to bar use of its site by users who have violated the "three strikes provision" (followed by an explanation of this clause), or who are suspected or accused of violating the good faith agreement (e.g. through bidding rings, strategic bidding, predatory bidding, etc.). CC could stipulate that barring will commence immediately upon receipt of a given number of complaints (a reasonable number will need to be determined), and note that the fraudulent filing of such complaints will qualify as a breach of the contract's good faith requirement, thus discouraging users from violating this provision. CC could also disclaim liability for any good faith mistakes it may make in enforcing its provisions (see also discussion below on this point). It would behoove CC to mention that such agreements are present for the primary purpose of protecting its users. This type of contract and complaint system is an efficient way for policing users. If it is possible to identify first time users and their email addresses, I recommend that a copy of this contract be sent to them immediately upon the user's initial assent.
This type of contract does present several legal and business concerns. Barred users may claim that they were inappropriately barred from the site. This may not be a problem since the users will have agreed to accept all of CC's provisions by electronically assenting to CC's contract. However, there is a chance that a court could hold this contract unenforceable since it is in effect an adhesion contract. Unenforcement is unlikely though since users are under no obligation to use the site, and since the contract is largely designed for their protection.
(2) CC could require that all users clearly display their company names. This policy would utilize non-legal enforcers such as reputation, trust, and future business concerns.
LONG-DISTANCE CONTRACT ENFORCEMENT
This is the most difficult problem to remedy by policy, but there are several ways to address the difficulties of enforcing contracts when parties are at a distance aside from escrow and/or current auction site rating systems.
(1) To a large extent CC can rely on the construction industry to self-regulate since it is a restricted population made of companies that are likely to repeatedly contract with each other. Companies that fail to perform their duties in bad faith risk future business.
(2) CC could also encourage or require its users to report all significant problems or exceptionally good experiences had through contracts made via CC, which could be stored in a site data bank. It may be difficult to enforce mandatory follow ups, and users may be disinclined to provide feedback due to inconvenience, however, the fact that users would likely resource the data bank at some point may encourage compliance. This is information that may not otherwise be available. Any rating-type system will need to be easy to utilize and interpret.
GENERAL LEGAL UNCERTAINTY
Since there is uncertainty as to what rules will apply to CC since both services and goods will be contracted for through its site, I advise careful compliance with both the UCC and common law. Contracts for goods made by site users will be governed by the UCC, and contracts for services will be governed by common law. Disputes between users may raise jurisdictional issues, but this problem may be rare since most users will contract with others in their geographic vicinity. It is most likely to arise in contracts for small goods, such as nails, which may be shipped from afar . This will generally only concern CC though were CC is implicated in a dispute or law suit.
(1) CC can best minimize its involvement in legal issues by contractually limiting its liability . The site contract should include a prominent disclaimer in large and bold print, with words to the effect of, "While CC makes it their priority to provide a dependable site for accurate and reliable construction related bidding, CC disclaims liability for any legal problems arising from contracts made through this site. Use of this site is an express waiver of any claim against CC that might arise from dealings made in whole, or in part, on CC's site." Elsewhere in the contract CC should include an arbitration clause to minimize costs and inconveniences arising out of viable legal claims.
There are several concerns about such contract provisions. First, is the concern that courts will construe the contract as an adhesion contract and not enforce its provisions, as mentioned above. Second, is the larger concern that while liability can generally be minimized through contract, it is virtually impossible to contract around all liability, and furthermore, such action may not be in CC's best interest. The acceptance explicit and even implicit acceptance of liability by CC, even if limited, would signal an enhanced interest in the viability of contracts formed on its site. This may increase user confidence and security. Developing a large customer base substantially depends on users' perception of CC. Thus, I advise that CC secure a good insurance policy and accept at least some liability. With respect to arbitration clauses, these are sufficiently common that I doubt such a stipulation will affect customer confidence.
(2) CC could take such measures as requiring companies to be backed by surety providers for large sum contracts, however I would advise against such direct involvement in users' contracts. Not only might this discourage users from contracting, the risk of legal claims against CC will likely increase in proportion to such involvement. Instituting site policies that encourage good faith dealings and facilitate CC's goals of providing a fast, reliable, and efficient site that caters to those in the construction business is the preferred course of action.
CONCLUSION
CC will necessarily face some legal uncertainty due to in part to being a business, and in part to its relative novelty. Implementing the above policies and contractual provision should help CC secure a base of regular users whose anticipated satisfaction will decrease the likelihood of legal actions and satisfy CC's desire to establish its business through a large customer base. As discussed above, strict site policies may eliminate and deter some users, but this cost needs to be evaluated in light of the stable base of repeat users that such "sacrifices" will help to create. Since CC is targeting a limited population of users, long-term success depends not only on wide-spread use, but on return use. A careful application of the above policies and legal provisions will boost CC's reputation and help to further broaden its customer base.