Top Student Exam Answers, Fall 1991
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
Neither Sterling nor any of its agents ever made Bell an offer. Such an offer would have been in the form of acceptance into the Educational Loan Abatement Program (ELAP). Bell would still have been free to reject that offer, and no contract would exist until he entered an appropriately low-paying position. Nevertheless, Bell may have a claim against Sterling and or its agents under Restatement 2nd, Sect. 90, which makes binding "a promise which the promise or should reasonably expect to induce action or forbearance on the part of the promisee. . . . and which does induce such action or forbearance if injustice can be avoided only by enforcement of the promise."
If Bell is to have a claim against Sterling or its agents, he must first show that the documents and verbal information received constitute a promise, individually or collectively, and that the promise included no conditions such as to make reliance upon the promise unreasonable. The law school bulletin makes a general promise of eligibility with objectively verifiable conditions: income and type of work. The November materials further specify these conditions, but they also introduce new, weaker conditions to which Sterling might appeal to weaken Bell's claim that reliance on the promise was reasonable.
The November materials elaborate on the terms in the bulletin, defining eligibility and forgiveness rates in terms of Adjusted Gross Income (AGI) and other factors. They also include a less specific promise of eligibility for those with incomes "significantly below" their class average, qualified by the statement that comparative need and other factors will be used to select from a large number of eligible applicants. It is not entirely clear, however, whether this selection process will be used only to narrow a broad group with loosely defined "below average" incomes, or whether, alternatively, the discretionary selection process will limit even the group precisely defined as eligible in the accompanying payments schedule.
The 1990 application materials also mentioned that the program has in past years funded all "eligible" applicants. Assuming the IRS definition of AGI, this group includes Bell even under the exclusive reading of the term "eligible." But the materials warn that "success in future years" depends on funds, and it is unclear whether "future years" includes the class of 1991.
Thus far, nothing in Bell's knowledge justifies reliance. Nothing which Bell learns from Upson in December justifies reliance, either. Some of it, however, does not make reliance any less reasonable: the only potential reduction to the income cap which Upson points out concerns living costs, which Bell knows will be high for him in Chicago. Although one might interpret this warning to mean that the general income cap could be lowered to offset a number of special individual needs, neither Upson nor the materials suggest this reading. Moreover, Bell knows his prospective income (under IRS definition) to be well below the present $33,000 gap. But Upson only confirms that his numerical calculation is correct: she does not confirm that the ELAP materials employ the IRS definition of AGI. More importantly, she warns Bell that his eligibility will not be determined until April, implying that reliance prior to that date would be imprudent. On balance, what Bell learns from Upson in December makes reliance prior to April somewhat unreasonable.
Reliance becomes more reasonable, however, after Upson tells Bell in February that applications are up only slightly, and that the program will likely be able to fund all eligible applicants. Because Bell called her, it might be more plausible to take her words as a prediction that a condition will occur, rather than a promise. However, as Restatement 1st, Section 261 codifies, "where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise." The law seeks to uphold the intentions of the parties, and Upson presumably would have warned Bell more forcefully had she not thought reliance on her February statement to be reasonable.
Bell's February conversation with Peretz also makes reliance more reasonable. Although Peretz's statement that "your debts ought not to stand in your way" could be understood as a recommendation to Bell take the PD job regardless of whether he qualifies for ELAP, it is more reasonable, given Peretz's intimate connection to ELAP, to interpret him as suggesting that Bell would be funded. Even if Peretz was actually in no position to know this, he should have known that Bell would assume that such encouragement, coming from him, rested on privileged information.
One claim which Bell might bring is that by December, Sterling had already promised him eligibility, and that he reasonably relied on the promise by rejecting the Jasper and Blank offer. It is unlikely that Bell relied at all in December, however. He disliked J&B, and had scheduled other interviews with private firms despite his definite offer from J&B. Moreover, he suggests in May that he would take the PD job over J&B even without law school assistance. So the only action he claims to have taken in reliance on Sterling's December promise -- rejecting J&B -- is an action he would have taken anyway.
Bell would best bring the stronger claim that he relied in February, after conversing with Upson and Peretz, by 1) taking the PD job, and 2) canceling his interviews and notifying firms that he taken another position. In the fact that Bell immediately took pains to confirm that he would receive ELAP funding, prior to taking his actions, suggest that he relied upon the assurances he received from Upson and Peretz. As noted earlier, this reliance was perhaps reasonable.
Bell might also bring the claim that he relied between February in May, after taking the PD job, by slacking off academically. This claim is weak, however, because Bell would undoubtedly have accepted some job around that time, and his subsequent slacking would have ensued, regardless.
Finally, Bell might claim that distraction and distress hurt his exam performance. This claim will be void for indefiniteness until he receives grades. Even then, recovery will be difficult. Bell will have to show that, under the Hadley v. Baxendale rule, Peretz and Upson should have foreseen that some students would fatally assume the IRS definition of AGI, and that the administrators' failure to contradict this assumption would result in "unfair surprise" to some students and trauma-induced exam disasters, since ELAP rejections would be issued near exam time.
All of Bell's claims are invalid, however, if it was unreasonable for him to assume that ELAP used the term "Adjusted Gross Income" according to the IRS definition. A strong argument for Bell is the IRS definitions are valid both under the trade standard of financial aid forms in general, and in his course of dealing with Sterling. Moreover, under the holding in Frigaliment Importing, the IRS is an authority "obliquely referred to" by the inclusion of income tax forms in the application process.
Bell might argue that, even if it was unreasonable for him to assume that ELAP materials used IRS definitions, it was still reasonable to assume that ELAP applied definitions consistently across all applicants. Peretz's comments in May, and his refusal to reveal how many others were rejected, suggest that ELAP may have used an idiosyncratic definition of AGI in Bell's case as a discretionary way of finding him ineligible, based on what the committee viewed as his lesser "comparative need" due to his benefits package. Even if this was true, however, Bell cannot invoke promissory estoppel merely because the promisor breached some provision upon which Bell reasonably relied (e.g., consistent use of definitions). He must show that he did not unreasonably rely on any provision of the promise. Thus, if Bell does not prove that it was reasonable to assume the ELAP used IRS definitions, then his claim fails even if: 1) ELAP used non-IRS definitions just in his case, and 2) it was reasonable to assume that ELAP would apply definitions consistently.
If Bell is to recover on any of his claims, therefore, he must show that it was reasonable to assume the IRS income definition to be in effect. Had he not assumed this, he would have been able to determine his ineligibility promptly, and could bring no reliance claims. For the reasons given above, however, Bell could probably show reasonable reliance on the definition. He will be able to recover reliance damages under Restatement 2nd, section 90 ("limited as justice requires.") Assuming he can prove that he would taken a firm job (other than J&B) had he known himself to be ineligible for ELAP, he may be entitled to lost salary from the time when he would have begun that job until the time of the first reasonable opportunity he gets to enter an equally lucrative position. If he already has a legal obligation to the PD to work for some period, this opportunity would be the first one arising after that obligation ends. Bell could mitigate by taking the J&B job, but has no legal obligation to do so. Doing so, furthermore, would likely preclude any recovery, assuming the J&B position starts as soon as would any other job, and that its salary is competitive.
Question 1, Answer 2
Can Bell make a valid claim that Sterling Law School (Sterling) has breached a contract to abate Bell's student loans? The contract, if valid, would be a unilateral contract in which Sterling agreed to abate Bell's student loan payments as long as Bell worked at a law related job at low enough pay. Such contract would have adequate consideration (both parties are giving up something valuable).
The key question is whether there was mutual assent. Can Bell persuasively claim that Sterling made an offer and he accepted? There are several communications from Sterling to Bell that should be examined. First is the announcement of the Loan Abatement program (Program) in the fall of 1987. Since Bell entered Sterling in the fall of 1988, he would have been sent that bulletin after he applied (in late 1987 or early 1988) , unless he was a deferred admission.
Is the bulletin's description of the program an offer? The description is likely to be considered as an advertisement, since it is part of an inducement to enroll at Sterling. Advertisements can be offers under certain circumstances, but this description is probably not. The description is not clearly phrased as an offer. It is definite about the maximum qualifying income, but uninformative about other provisions, such as the amount of the abatement. A reasonable person reading it would not think it invited them, individually, to take action without further communication, since an applicant must presumably be accepted and enrolled at Sterling, and apply to the Program, once there.
The second relevant communication is the Program application itself. This is more likely to be considered an invitation to make an offer than an offer. The very word 'application' implies that perhaps not everyone who wants to enter the Program will be accepted. The two disclaimers warning applicants of the Program's limited funds (one in the paragraph above the schedule of figures, the other at the bottom of the first page) also make it clear that the application was not an offer that Bell could accept, thereby binding Sterling.
Next we consider whether the two communications, combined with Bell's first conversation with Madeline Upson (Upson) can be considered an offer. This is doubtful. Upson answered Bell's questions about the Program. She also confirmed Bell's calculations of his abatement , but apparently did not verify the figures Bell supplied. She then explicitly warned him that he might not be offered an abatement if there were too many applicants.
Bell's second phone conversation with Upson cannot be considered an offer, Upson simply stated that all eligible applicants were likely to be accepted, she did not tell Bell that he himself was accepted. It is not even clear whether Upson knew to whom she was speaking. Peretz' conunents to Bell cannot even be considered a statement about Bell's likelihood of acceptance into the Program, much less an offer to Bell. Peretz simply urged Bell to take the job he wanted, regardless of his financial situation.
Since there was no offer made to Bell, there can be no binding contract, therefore Bell should not sue Sterling for breach of contract. Bell can still recover damages, however, if he can show that Sterling should have reasonably expected him to rely on their representations, and that he did so. This promissory estoppel argument will rely on the Restatement (second) of Contracts §87(2). Even though that section, and other sections (45, 90), refer to inducement resulting from an offer, it is not necessary that these representations literally amount to an offer, as shown in Hoffman v. Red Owl Stores.
Section 87(2) of the Restatement should be used because conmentators have said that §87(2) refers to preparatory actions rather than the actual beginning of performance of a unilateral contract. Here, Bell's actions allegedly taken in reliance on Sterling's communications (accepting the Public Defender position, withdrawing his other applications, and turning down his job offer) are not a beginning of performance of the unilateral contract, but are preparations to perform.
In deciding whether promissory estoppel holds, the main issue is the definition of the term 'adjusted gross income'. If Bell relied, he did so because of his understanding that the term did not include benefits. Bell will be able to recover reliance damages if he can show that Sterling should have reasonably expected him to rely on their representations of the Program, and that he did so. Since there is no valid contract here, it is irrelevant that Sterling may have a different, equally reasonable definition of AGI (i.e. we cannot apply the doctrine of misunderstanding). Actually, it is irrelevant whether or not Sterling had any clear idea at all about how its representations might have been taken. The bulletin states that any graduate whose 'income' does not exceed a certain amount qualifies for the Program. But the next sentence seems to qualify' income ' to mean "adjusted gross income", which is not defined or explained elsewhere in the bulletin.
The application for the Program refers to 'available income', which equals 'adjusted gross income' for Bell, who is unattached. Again, 'adjusted gross income' (AGI) is not defined or explained (except possibly in the 'more detailed statement of the criteria for eligibility', these criteria should be examined carefully, but I will make no assumptions about them one way or the other). The schedule of figures indicates that AGI is meant to be the appropriate measure of income for Bell in calculating his loan abatement.
The record of the conversations between Bell and Upson and Bell and Peretz, discussed above, reveal no indication that Upson or Peretz made any statement about the income measure used in the Program. Bell can argue that since Sterling never gave a precise definition, they should have realized that most people (especially law students, who are likely to know accounting and tax concepts) would believe meant the IRS definition. Sterling could respond that Bell should have seen that Sterling was using its own idea of AGI in operating the Program. Sterling can point to the many exceptions and adjustments used in the Program, many of which were spelled out in the documents received by Bell. These included adjustments to 'available income' for tuition payments, extraordinary work related expenses, and spousal income The application also specifically requested benefit information; it would be unreasonable to assume Sterling would not use the information in the selection process.
Sterling will probably lose this argument. Bell's understanding of AGI was reasonable; the term is widely understood in just the way Bell understood it, and Sterling did not clearly explain its own procedures. Sterling should have reasonably expected that the combination of the chart of figures in the application and the statement to Bell by Upton that all eligible applicants would be accepted would convince Bell he had been accepted.
Sterling can argue that even at that point, no one had guaranteed Bell's acceptance into the Program, so he should not have relied and accepted the Public Defender job. However, this argument would undermine the stated goals of the Program. How can graduating students be expected to wait until May, when the Program acceptances were mailed, to accept a job? By that time many of the choice public interest jobs have been filled, as have the plum law firm jobs that those denied abatement might choose as an alternative. The only students willing to wait until May are those who would have taken public interest jobs anyway. The program would then do little to encourage sensibly risk averse students to take the public interest jobs the Program is supposed to encourage them to take.
Upson also told Bell in their first phone conversation that his abatement might not be the $4,000 he expected. This statement does not hurt Bell's case, though, since the materials she referred Bell to all discuss possible upward, rather than downward, adjustments in the abatement amount (since Bell was hoping to work in Chicago, a cost of living adjustment would benefit him).
We next ask whether Bell did rely, by action or forbearance. Sterling might claim that since Bell still wants the Public Defender position even without the abatement, he did not rely on the Program. This argument is likely to fail, since Bell can persuasively claim that by canceling his interviews, he lost the possibility of getting a preferable job. It would be unfair to make Bell prove he could have gotten a better job, we must give him the benefit of the doubt. Feinberg v. Pfeiffer.
Bell's case for reliance damages is convincing. Bell could try to collect for the cost of setting up new interviews for all of his cancellations. However, since reliance damages are limited as justice requires, a court will probably simply order Bell to be put into the Program, which is what Bell would prefer anyway. This is also the remedy suggested by Restatement §87(2). Any damages caused by Bell's reduced grades and emotional distress are probably speculative and hence unrecoverable.
Question 1, Answer 3
ACTION AGAINST STERLING LAW SCHOOL (SLS)
Bell can argue that the 1990-1991 application materials constituted an Offer by SLS for a unilateral contract. The materials were detailed, definite, and complete, describing all the terms and conditions of the program. The Offer was addressed to a defined group of which Bell was a member. The performance which the Offer requested was the completion of the application and proof of eligibility in accordance with its terms. Bell began performance by completing the application with the information from the PD's office indicating his anticipated eligibility under the program. This part performance was communicated to SLS who confirmed that his calculations were accurate. By accepting the public interest job, Bell completed the performance. This completion was done during the school year which would be a reasonable time given the market for public interest jobs. The facts indicate that this was communicated to SLS although the timing is unclear. Thus, a contract was created between the parties which complied with the Statute of Frauds.
Alternatively, the Offer was for a promise to accept qualifying public interest work. Bell kept this promise. This alternative is problematic because Bell would have been bound to SLS before he accepted the offer with the PD.
Because SLS could not guarantee that funds would be available, the Offer contained a condition subsequent that if funds were not available, SLS would have no obligation under the program. The condition is found in the phrase "success [in funding all eligible applicants] in future years will depend on the continued availability of resources". Based on the last phrase of the "Selection" paragraph (which Bell received in 1988 and which may have been carried over to the 1990-91 materials) and Mr. Peretz's statement that Bell had been denied funds because he was not as needy as other applicants, this phrase should be interpreted to mean if funds are not adequate, they would be allocated to the most needy first. [The parol evidence rule doesn't apply because this is an interpretation question, Peretz's statement was subsequent to the writings, and the interpretation doesn't contradict the writings.] The May letter is only a courtesy letter to advise each participant whether SLS considered this condition to be applicable. In order to deny coverage under the program, SLS must prove that funds were inadequate and those who were accepted had less need than Bell.
SLS ARGUMENTS
SLS would argue that because the program depends on fund availability compared to the number of applicants, a reasonable person would not understand the application materials as an Offer. An Offer must be the next to last communication. In this situation, the application, notification of qualifying employment, and SLS's letter of acceptance followed. SLS will argue that Bell's application was at most an Offer. It shouldn't even be called an offer since the information it contains is only preliminary. If it was an Offer, SLS had no obligation to accept it. This is consistent with Upson's statement that she couldn't promise Bell would be accepted.
Even if the materials were an Offer, Bell did not comply with its terms by presenting proof of a qualifying position. The logical interpretation of Adjusted Gross Income (AGI) is that it included all benefits. Assuming the 1990-91 application was the same as the 1988-89 one, the form asked for the value of employer paid benefits in the section on income. This request would make no sense unless AGI was meant to include it. Terms should be construed to give all provisions meaning,
I believe Bell's interpretation of AGI is the better one. The term was capitalized which means it is a term of art (trade usage). The IRS meaning is widely used especially in forms like the financial aid forms used by SLS which are subject to government audit. SLS should have realized that Bell interpreted the term as such because of his course work and because of his conversation with Upson. Since Upson could have corrected his understanding and didn't, his meaning should govern. RS2 20, 201. Moreover, contracts should be constructed against the draftsman. Even if AGI included certain benefits, no reasonable interpretation of AGI would include Social Security payments. If those are subtracted, Bell remains eligible for the program.
SLS may also claim the program is gratuitous unsupported by consideration. This claim is without merit because of the benefits SLS receives in recruitment and enhanced reputation by SLS students' accepting public interest employment. Under formalistic rules, the communications may not form a neat Offer and Acceptance, However, from all the circumstances, it appears that the parties intended to be bound if Bell met the criteria and the funds were adequate. Bell met the criteria under any reasonable interpretation of AGI. Therefore, SLS should be required to prove the funds were not adequate and no less needy applicants were selected or to fund Bell under the program.
ALTERNATE RECOVERY/ RST2 90 AND ESTOPPEL IN PAIS
SLS made several assurances or promises to Bell on which they should reasonably have expected he would rely. Together, these statements show that the equities lie with Bell. First, during Bell's law school application process, SLS published a glowing statement in its bulletin of its loan abatement program. This statement defined eligibility as anyone . whose income was $27,000 or less. Although SLS knew the program was subject to availability of funds, no limitation was mentioned in the bulletin. Since Bell had an interest in public interest work prior to law school, and he knew he would need to borrow extensively to attend school, he could persuasively argue that this statement induced him to attend SLS instead of other law schools. His estoppel argument is strengthened by the fact that one of SLS's reasons for the program was to recruit applicants away from other schools.
At SLS, Bell continued to show reliance on the program. He obtained the 1990-91 materials early in his planning process. Prior to even interviewing with the PD, Bell verified his figures with Upson to confirm his eligibility, Although Upson told him his funding depended on the number of applicants, and cautioned him that the actual repayment could be other than $2000, the text she pointed to indicated that generally figures were adjusted downwards.
His eligibility having been confirmed, Bell checked availability of funds, prior to accepting the PD job. Upson told him that it looked like the program could fund everyone. Based on this statement and his understanding that if fund were inadequate, those less needy (category 4) would be struck first. Bell accepted the job and cancelled all other interviews. He even let his grades slip which he never would have done unless his employment was secure. After Bell's reliance, SLS should be estopped from saying that he was ineligible.
SLS will argue that Upson's statements were only opinion and could not reasonably be relied on, SLS continually informed Bell that his being funded was not guaranteed. His frequent inquiries show that he wasn't relying on past statements. Hayes. Moreover, Bell took criminal law and accepted the PD position not because of any.statements SLS made? but because he likes criminal law and the PD job was the "job he had hoped for".
I believe a court would find Bell's reliance on SLS's assurances that he met eligibility to be reasonably expected. His understanding that if funds were inadequate, the 4th category would be cut first is also reasonable. A court would not be sympathetic to SLS's last minute reanalysis of the figures. Hoffman. However, Bell will have difficulty proving any reliance damages. He declined the Jasper and Blank position even before the second interview with the PD apparently because only the money was interesting. He may never have received offers from the other firms. However, a court might require SLS to pay Bell the excess, if any, he spent to attend SLS rather than other law schools.
PD OFFICE
Since Bell's employment at the PD is most likely terminable by either at will, he can renege on his acceptance without liability. In Grouse, the court found that an employer had an obligation to give an employee a good faith chance once employment was offered and accepted, but a court would unlikely impose this obligation on an employee. Moreover, since Bell would only renege if he couldn't afford to work there, a court would unlikely find his reneging to be bad faith. Even if a court would find a legal obligation, specific performance is inappropriate for employment situations, and other damages would be difficult to prove because lawyers are a "dime a dozen".
LOANS
Bell is obligated to repay his loans. Impracticability would not be a defense because a court is likely to find that a student assumes the risk of not being gainfully employed. (I believe students sign a form to that effect.)
Question 2, Answer 1
If I were Ultimate Information System's lawyer, I would first try to find out what considerations are most important to it about this proposed transaction. For example, can Ultimate somehow survey its potential investors to ascertain whether or not Mnemtech is a sufficiently established company to play such a central role in the production of the progeny computer? If the potential investors do not consider it to be a problem, then Ultimate might as well go ahead and bind itself. Mncmtech currently is willing to bind itself to an exclusive supply agreement; will that desire remain? If not, perhaps it is wise to sign a contract now limiting Mnemtech's future options. Ultimate currently thinks Mnemtech is the best components supplier it is likely to find; are there any reasons that belief will change? If there are, maybe Ultimate shoud wait to contract. Or maybe it should set up conditions in the contract specifiying any circumstances under which Ultimate can void the contract. Are them any other reasons Ultimate would not want to go through with the contract even if it receives the requisite financing? If there are, the contract should specify those as conditions.
But my basic concern as counsel to Ultimate would be for Ultimate to try to make up its mind: does it want to have some sort of binding contract with Mnemtech or not? My advice would be to set up some sort of contract. The main reason for this is that presently Ultimate is in a vulnerable situation. It has allowed substantial technical information about the Progeny computer and about Ultimate's intended business strategy to pass back and forth in the negotiations, but it has no commitment from Mnemtech. If Mnemtech were at this point to withdraw from the Progeny project, and establish a relationship with one of Uhimate's future rivals, the competitive disadvantage to Ultimate could be severe. But if any sort of contact is signed, all aspects of the transaction become subject to the "good faith" provisions that pervade the Uniform commercial Code, since the computer and the chip are both "goods" according to UCC §2-105. If the contract is then set up with a covenant not to compete, Ultimate will be adequately protected against its technology and marketing strategies falling into the wrong hands.
Another thing for Ultimate to remember is that it does not have to sign a contract to bind itself legally. Already, it may be bound as a practical matter to Mnemtech, with all the technological and business information that has been passes to Mnemtech, and with all the extra expenses and addtional time involved in commencing a relationship with another supplier, Ultimate is for all practical purposes bound to Mnemtech. Now the task is to bind Mnemtech to Ultimate legally and/or commercially.
I would also advise Ultimate that it may need not worry about the precise production specifications for the K626 micmprocessing chip and the research and development that still needs to be concluded that will determine the price Ultimate will pay Mnemtech for the chips and the expected time of delivery. Under the UCC §2-204, a contract remains enforceable even if many of its terms are left open as long as the parties inteded to contract and can fiIl in reasonable terms through the process of implication with the UCC's "gap-fillers." If the parties intend to conclude a sale even though no price is , specified, a reasonable price will be applied at the time of delivery under $2-305. A reasonable time for delivery is used if no time is specified under $2-309. The only remaining difficulty is that the UCC obviously has no provision for the specifications of the chip that a court can simply apply if no reasonable ones can be found by the parties. But Ultimate and Mnemtech will still be bound by good faith requirements to come up with reasonable specifications, ahhough there is a chance a court will say that the omission of specifications is a material gap rendering the contract unenforceable. Keep in mind, however, that Mnemtech is the party desiring an exclusive supply agreement so it will not seek to have the contract voided. Only Ultimate will likely want to have the contract voided, so this omission can only work to Ultimate's advantage. In addition, Ultimate might not want to specify every single term in the contract because of commercial practices. It is expensive to negotiate for all possibilities: it takes up time that Ultimate could better spend on research and development of the Progeny project and it means Ultimate will have to spend more money on maining my services. And my time does not come cheaply. Also, Ultimate is considering entering into a long-term business relationship with Mnemtech and desires a supplier with whom it can deal flexibly and cooperatively. If Ultimate acts too ‘lawyerly" or "legalistically" by arguing contentiously over every little detail and possible occurrence, it may alienate Mnemtech or set the stage for a contentious business relationship. In that case, it may be smart to leave some terms of the contract indefinite.
One other consideration is that Ultimate would best bind Mnemtech now so it can prevent any delay of the Progeny project. This brings up another question to my Client: why will delay hurt? Might another company come up with a competitive project, or is Ultimate just anxious? If Ultimate is only anxious to start the project, it may be able to afford to wait to sign a contract. But on the other hand, Ultimate must consider that Mnemtech is willing to bind itself at this point while Ultimate is a bit ambivalent. Ultimate would then be smart to at least negotiate further because it will have at this point have more bargaining leverage to obtain for itself a more lucrative contractual arrangement.
As lawyer to Ultimate, I also have to keep in mind that potential investors in Ulitmate may believe that Mnemtech is not a sufficiently established company to play such a central role in the production of the Progeny computer. If a significant number of investors get cold feet, then arranging the remainder of the financing far the Progeny may take even longer than the expected three to six months, thereby delaying the project Ultimate will have to ascertain just how important a factor that is when deciding whether to bind itself to Mnemtech. A few things it may keep in mind are that UItimate may be bound to Mnemtech in practice, Ultimate may be vulnerable to Mnemtech without an express or implied contract, and that if these investors are willing to put their money into Ultimate, a company with nothing besides the exclusive rights to the K626 chip and the leadership of a 30-year-old hotheaded wunderkind, they probably will not be overly phased by the presence of Mnemtech, which is also relatively new company headed by a 30-year-old.
The next set of issues relate to the content of the contract. As far as the need to obtain financing before entering into a commitment, Ultimate can set up financing as an express condition precedent to performance. This way, Ultimate will not be liable for breach of the contract if it fails to find the requisite financing.
Or the contract can be an option contract or a "firm offer" under UCC §2-205. Under an option contract, Ultimate would pay Mnemtech to produce the component chip of the Progeny if it decided it wanted to within a specified period of time. A covenant not to compete and good faith requirements can then be inserted to protect Ultimate. But because Mnemtech appears so willing to enter into an exclusive supply agreement at this point, Ultimate will probably not have to pay Mnemtech to promise to hold the offer open for Ultimate to exercise if it wants. Instead, Ultimate can set up a "‘firm offer" unsupported by consideration where Mnemtech promises to hold open an offer to sell goods for a specified or reasonable period of time. In this contract, a covenant not to compete and good faith language can be inserted.
The substance of the agreement would be an exclusive dealing requirements contract under UCC §2-306. Here Ultimate would agree to buy all of its requried K626 microprocessing chips from Mnemtech and Mnemtech would have to agree not to sell any chips it produces to Ultimate's competitors. The quantities of the chips must be made in good faith, and the Mnemtech must use its best efforts to supply the goods and Ultimate must use its best efforts to promote the sale of the chips. This should guarantee that both sides have committed themselves to each other until commercial exigencies force a party to cease production or consumption in good faith.
If ultimate still feels comfortable with that, the contract can provide for royalties to give incentives for each side to produce either the chips or the Progeny computer itself. Ultimate would pay Mnemtech a certain percentage out of each computer it sold with Mnemtech chips in them. The royalties would be a good substitute for a high contract price for the chips. That way, if the Progeny turned out to be a poor seller, Ultimate would not have to pay Mnemtech too high a fee because it would not need to pay many royalties to it.Lastly, a liquidated damages clause could be provided in the contract under UCC §2-718 in the event of a breach. This way, if Mnemtech by some chance breaks the contract, Ultimate is insured against too high of a loss. Without a liquidated damages clause, Ultimate would have difficulty in court proving expectation damages. This is because damages in an output or requirements contract, or where loyalties are involved, are impossible to compute with any degree of certainty. The parties cannot prove how many chips they will require. So often courts only allow nominal damages or a figure below what the victim of the breach would like. A liquidated damages clause can insure against this possibility, it can provide a disincentive to Mnemtech to breach, and it can lower the transaction costs for both parties. For example, Ultimate will not need to retain for very long the services of their high-priced attorney to recover damages for it. Instead, it can enforce the liquidated damages clause, which is likely less time-consuming and probably would not need to be litigated.
Question 2, Answer 2
Before drawing up a contract, it would be helpful to know the substance of the on-going negotiations between Ultimate and Mnemtech. Any offers Mnemtech may have made would be a good starting point in trying to determine how badly Mnemtech wants to contract with Ultimate. Also, any promises their negotiators have made, especially guarantees as to the quality of a not-yet-developed microchip, might enhance our bargaining position during contract negotiations. At the same time, it is important to know what Dysart may have promised to Mnemtech; her promises, if relied upon, could bind Ultimate. Dysart's prediction of Mnemtech's willingness to agree to certain terms, or its adamant rejection of others, will help us to draft language that will further Ultimate's needs but still be acceptable to Mnemtech.
The speculation inherent in technology research and development is nothing new, and Dysart, a veteran of computer design, should be able to assess the strengths and weaknesses of the agreements used by Avocado in that company's dealings with microchip suppliers in the past. Such an agreement would be a good starting point in drawing up a contract between Ultimate and Mnemtech, and would inform a rookie attorney about the trade usage and industry standards to which Ultimate may be bound, even as a fledgling company.
There are also specific, practical questions that Dysart must answer. When does she expect that Ultimate will need the microchips? How long is she willing to stick with Mnemtech before giving up and looking for another supplier? Is there an objective measure for how to decide if the microchips are of good enough quality? How much will Ultimate pay for microchips designed exactly as specified? How much financing is Dysart seeking? The answers will allow precise contract language, which will make the contract better serve our purpose and will avoid conflicts later.
Finally, perhaps the most important question is how bound to Mnemtech Dysart is willing to get. The more security we want from Mnemtech, the more we must give to them. The following suggestions are preliminary, and are obviously made without the benefit of answers to the preceding questions.
Ultimate and Mnemtech should sign two agreements. The first should be an exchange of promises that provide sufficient consideration to make the contract binding; it could be something like the following:
CONTRACT FOR EXCLUSIVE BUSINESS RELATIONSHIP
(1) Ultimate promises to refrain from negotiating or contracting with microchip suppliers other than Mnemtech for six months from the signing of this agreement.
(2) Mnemtech promises to refrain from entering into negotiations or contracts with any microcomputer company other than Ultimate for as long as a contractual relationship exists between Mnemtech and Ultimate, unless permission is granted in writing by Ultimate.
(3) Mnemtech promises not to divulge any knowledge of Ultimate's business practices, except as necessitated in good faith to further other contractual agreements between Mnemtech and Ultimate.
(4) Ultimate and Mnemtech agree to meet at least monthly for the duration of this contract in order to discuss subsequent agreements. Neither party will be bound by any subsequent agreement unless both parties consent in writing, but both parties agree to negotiate in good faith.
(5) If Ultimate breaches provision (1), Ultimate must pay to Mnemtech the cost of Mnemtech's research expenditures undertaken in reliance on this agreement, to be determined by the auditing firm of _______. Ultimate must also pay to Mnemtech the sum of $50,000, which represents the anticipated opportunity cost foregone by Mnemtech by entering into this agreement.
(6) If Mnemtech breaches provision (2), Mnemtech must pay to Ultimate the sum of $250,000, which represents the anticipated opportunity cost foregone by Ultimate by entering into this agreement. (7) If Mnemtech breaches provision (3), Mnemtech must pay to Ultimate the sum of $l,000,000, which represents the anticipated loss of competitive advantage occasioned by the breach of provision (3).
(8) Provisions (5), (6), and (7) are NOT to be considered penalty clauses. They reflect the anticipated damages that would result from breach of other provisions of this agreement, and are included because precise determination of damages after breach would be inconvenient or infeasible.
The contract should give some security to Mnemtech. It has at least a six month head start on any potential competitor, which due to Ultimate's time constraints makes it a very likely choice as Ultimate's supplier. At the same time, Ultimate gets to protect itself against disclosure of sensitive information, and prevents Mnemtech from signing a concurrent agreement with a competitor like Avocado. Clause (4) will probably not be binding because it represents an "agreement to agree." But it indicates that the companies intend to further their contractual relationship, if possible. Clauses (5) through (7) give the contract its bite. The language about anticipated loss or anticipated damages is designed to show a court that these clauses are reasonable ex ante, and should be enforced. Clause (8) drives this point home, noting explicitly that these liquidated damage clauses are not penalties, and thus enforceable ex post. Though the UCC does not apply, because the agreement is not for an exchange of goods, 2-718 helps explain the importance of these provisions by way of analogy. Under the UCC, a liquidated damages clause will only be enforced if it is "reasonable in the light of the anticipated or actual harm" and another remedy is precluded by "inconvenience or nonfeasibility." The common law will uphold a liquidated damages clause if it is reasonable at the time the contract was formed. One concern about liquidated damages clauses - that they will induce parties to induce the other party to breach - will not likely be a problem here. Because the contract expires in six months, it will be more practical to wait than to chance a breach and pay damages. The provision in clause (5) requiring an independent firm to determine Mnemtech's expenditures is designed to overcome the problem of proof of damages.
The second contract should be an exclusive sales agreement. This agreement should bind Ultimate if everything goes well, but it should be filled with caveats that will protect Ultimate if it wants to get out of the contract. An abbreviated version might read as follows:
EXCLUSIVE SALES AGREEMENT
(1) Except for the non-occurrence of any condition listed in provision (5), and pursuant to the limitations of the rest of this contract, Ultimate promises to buy, and Mnemtech promises to sell, all the Extel K626 microchips that Ultimate needs for its production of Progeny™ microcomputers.
(2) This agreement will expire on _______.
(3) The price of the microchips will be as agreed by the parties. If the parties fail to agree on a price term, the contract will be void. The parties do not intend for the court or any other non-identified party to set the price.
(4) The dates, times and places of delivery will be as agreed by the parties. If the parties fail to agree on these terms, the contract will be void. The parties do not intend for the court or any other non-identified party to set these terms.
(5) The following conditions are essential for this contract to be binding:
(a) Ultimate must secure $______ by __________
(b) The Extel K626 microchips must conform to to the specifications outlined in Appendix A, or as modified by consent of the parties.
(c) Ultimate must continue with its plans for the production and marketing of the Progeny™ microcomputer system.
(6) The parties intend this agreement to be binding only insofar as all the conditions herein are met.
(7) This contract can be modified only by a written agreement between the parties.
Essentially, neither party will be bound by this contract unless it wants to be. But given the first contract, it is likely the parties will prefer to come to an agreement rather than return to square one. Mnemtech's potential to charge a., high price for the microchip will be tempered by the fact that it will have expended a great deal on development; if the first contract is fulfilled, Ultimate will not be required to buy anything, so Mnemtech will want to compromise. Ultimate will be in a position where it needs to start producing computers quickly; it will look to compromise as well, to avoid having wasted nearly a year of negotiating exclusively with Mnemtech. Provisions (3) and (4) are included to avoid the UCC gap-filler terms — because microchips are goods under UCC 2-105, the Code will cover this contract. UCC 2-204(3) indicates that if the parties intend to form a contract, open terms will not always void it. UCC 2-305, 2-308, and 2-309 give courts power to fill in missing prices, delivery locations, and times for delivery, respectively, unless the contract indicates that this was not the parties' intent. Clearly, the whole of this contract says such missing terms should void the contract. Provision (7) is permitted explicitly by UCC 2-209(2), and prevents Dysart from making a mercurial oral agreement without the sage advice of her trusted attorney.
Question 2, Answer 3
(A) First, I would ask if Ultimate has made any promises or representations to Mnemtech, or Mnemtech to Ultimate, during the negotiation process – even in their encoded messages, because courts are willing to see such examples of course of dealing as giving content to an agreement. I would want to be sure Mnemtech’s promises were included in any subsequent writings and not chance that they would be excluded because of the parol evidence rule. Also, so as not to be surprised later on, I would ask what representations my client had made to Mnemtech and how Mnemtech could have relied on those.
I would also want to know approximately how much monetary damage could result if Mnemtech began working for Avocado, in order to put this into an enforceable liquidated damages clause (see below). Further, I would get more information about the trade to know what an appropriate price index might be (see below). Lastly, I would ask about the personality of Mnemtech’s CEO and just how eager that company is to get this exclusive supply contract, in order to know how advantageous an agreement Ultimate can ask for.
(B) and (C) Both parties anticipate making a considerable relationship-specific investment in research and development. The work to be done by Mnemtech on the K626 chip will have no value to Mnemtech if that company does not obtain a contract to be Ultimate’s supplier. Ultimate has exclusive rights to use the chip in its computers, so without a serious commitment from Ultimate, Mnemtech will be reluctant to put in the necessary work.
I would advise Ultimate to enter into an agreement for one year to pay Mnemtech for its cooperative work in research and development. Though three to six months into that agreement Ultimate’s financial backers may force the company to find a supplier other than Mnemtech, if the research and development agreement is lucrative for Mnemtech, it may not be inclined to breach just because it was not chosen as the supplier. In any case, this agreement would give Mnemtech an incentive to cooperate with Ultimate, knowing that it will be costly for Ultimate to drop Mnemtech altogether after this working relationship had developed, and teach another supplier the technical details of producing the unique K626 chip needed for Progeny. This agreement would also have the advantage of reducing Ultimate’s vulnerability to Mnemtech’s salary, and Ultimate will still have the benefits of Mnemtech’s work. While it may be costly for Ultimate to switch to working with another company, its financial backing and, therefore, very existence, may depend on who its K626 supplier is, so it may be forced to find a new supplier.
I would include in this agreement an express negative covenant stipulating that Mnemtech cannot enter into a supply agreement for microprocessor chips with competing major computer companies, and a clause stipulating liquidated damages resulting from breach of that covenant. This provision should be specific enough that Mnemtech will sign it, yet still have to protect Ultimate’s interests. "[M]ost courts routinely enforce these clauses" (Clarkson, Miller & Muris, "Liquidated Damages verus Penalties") perhaps because it is clear one party will not unjustly profit if damages must be paid since the party receiving the money will have clearly been injured by the competition. In addition, a court may see bad faith if Mnemtech begins working for a competitor when we have expressly stated it shall not.
This liquidated damages clause should impose "double responsibility at the margin" (Cooter, "Unity in Tort, Contract, and Property") so that both parties will be fully responsible for the harm and both will have incentives not to breach. The inclusion of this clause may cause Ultimate to have to pay more for the microchip when it negotiates the price, and it may be struck down by a court unless it approximates rather closely Ultimate’s damages. Because the profits of Dysart’s new business may be uncertain, it will be difficult to estimate those damages beforehand. However, the clause is still worth it since it will serve to put Mnemtech and a court on special notice that this is one of Ultimate’s concerns.
I would then suggest that the parties negotiate a separate agreement relating to the supply of the chip, in order that Mnemtech and, if necessary, a court would know that the agreement to develop the chip and the agreement to supply the chip were not mutually dependent. The tricky part about this second agreement will be binding Mnemtech to perform while allowing Ultimate to back out of its investors disapprove of Mnemtech as the supplier. Dysart should probably make clear in negotiations, if he has not already, that Ultimate lacks full financing and the second agreement must be conditional on obtaining funding. Ideally, Ultimate wants in the agreement an explicit condition precedent that Mnemtech’s supplying K626 chips for Progeny will take effect unless Ultimate’s investors approve it. Ultimate may have to pay Mnemtech and additional sum or raise its research and development salary to get Mnemtech to sign such a conditional agreement, but the condition’s importance justifies the extra expenditure. Since enforceability may depend on how sure a court is in deciding whether a condition has been met, that condition cannot be too subjective. This condition, however, seems clear; a court is not likely to second-guess how reasonable the backers were in approving the agreement but will instead look at whether or not approval was in fact given. I would advise including an integration clause stating that the writing constitutes the entire agreement entered into by the parties, to protect Ultimate from any claims by Mnemtech based on the extensive negotiations between the parties.
Though there are continuing service aspects to the relationship in the second agreement (working out the fine-tuning of micro chip and computer), it is primarily for the sale of goods, and the K626 microprocessor chips at issue are "future’goods" under UCC §2-105. Therefore, the UCC applies in this case.
Since the price to be paid and time of delivery are still to be determined, we need to make some provisions for those in the second agreement. Knowing that both Ultimate’s and Mnemtech’s CEOs are highly independent, it is doubtful that either would want to let these open terms be filled by an arbitrator or by the "reasonable" UCC gap-filler terms in §2-305 (Price)and §2-309 (Time). Further, we want to reduce possible post-signing jockeying for position.
I would look at what an appropriate price index might be to track a computer microchip; if there is no relevant market price, we might tie the price to the cost of electronic components of the chip plus a certain amount over that for Mnemtech’s profit. The time for delivery could be tentatively set in the agreement for a certain number of months after Ultimate decides the development of Progeny and K626 is reasonably final, perhaps using some projections by Ultimate's marketing specialists. After the research and development is complete, these provisions should be explicitly subject to some renegotiation, and if those discussions break down, the parties will continue with the terms set out in the agreement. That contingency is relatively safe for both parties since both have a substantial amount of time and energy invested in this project.
Probably, the best course would be to explicitly agree to agree, while putting the above limitations on each party's discretion so that it will be enforceable by a court . Even if the agreement leaves a term as important as price to be negotiated, courts have enforced vaguer agreements to agree. (e.g., Lee v. Seagram & Sons) Finally, if Mnemtech does get to be Ultimate's supplier, the two companies may decide to tear up the first agreement and renegotiate the price of the chip to include research costs.
This second agreement is a potential exclusive dealing contract for Ultimate's requirements. UCC §2-306 imposes on Ultimate "best efforts to promote [the] sale" of the goods. The computer business is dynamic, and Dysart may want to diversify under the old "innovative... design" philosophy of Avocado. Therefore, Ultimate will want to protect itself to be able to begin other product lines which may compete with Progeny. Though Mnemtech will not be able to challenge Ultimate successfully if Ultimate develops new product lines in good faith and thereby reduces production of Progeny, Ultimate might want to try to negotiate a clause reserving the right to reasonably decrease sales of Progeny as market conditions and new product lines demand. Depending upon how certain Ultimate is that Mnemtech is "the best components supplier it is likely to find," it may also want to include a provision stating that, if the agreement goes into effect, the parties will negotiate in good faith regarding Mnemtech being Ultimate's supplier for further electronic components. While this may have little legal effect, practically it will demonstrate Ultimate's interest in maintaining an on-going working relationship with Mnemtech.