Top Student Exam Answers, Summer 1993
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
Dear Mr. Knuth,
The first step in a solution to your problem is establishing that Thrifty Mart (TM) is in breach of contract. This will be difficult as TM has a strong case, but there are two avenues we can pursue, contract interpretation and promissory estoppel, both of which are plausible (unlike Ypsilanti v. GM).
The first option is to show that the correct interpretation of the existing contract is to bind TM to act as the anchor store. As it is a form contract drafted by TM, errors in interpretation will be construed in our favor. Our argument will be that the exchange that was bargained for was not a simple lease, but an agreement for TM to be the anchor store. In the shopping mall business, the anchor store is the "keystone" to the whole mall. Because of trade usage, the most reasonable interpretation of the contract in the world of shopping centers would be that TM promised and contracted to be the "keystone" anchor store.
Moreover, because of the letter of intent and, in general, being in the business so long, TM knew the importance, the benefits and the responsibilities of anchor stores, and it assumed those responsibilities by contracting to be the anchor store, and was not a simple tenant. Additionally, SGA provided benefits, notably consideration for TM's promise to be the anchor store. Consideration included such benefits as a reduction in rent, participation in the planning of the center, and choice of location. As further consideration for remaining the anchor tenant, SGA provided 12,000 ft. expansion as well as a raise in the floor. As it bargained for these provisions, which SGA provided, one side of the contract is fulfilled, and TM should not be allowed to breach.
Unfortunately, TM has a good defense against this line of reasoning, namely the parol evidence rule, which states that oral evidence is inadmissible to contradict an integrated written contract. With the merger clause, TM can claim that the all agreed terms were as specified on the 1986 contract. Our best defense to this is that the letter of intent was a prior extrinsic agreement and that the proof offered is for interpretation, not modification, purposes, especially as the parol evidence rule does not preclude proof of usage of trade.
Even if we lose on actual contract grounds, our case for promissory estoppel is strong, claiming in the alternative that even if there was no bargained for exchange in which TM agreed to act as the anchor store, there representations would induce a reasonable person to rely on TM acting as the anchor store for Shady Glen. Through the letter of intent, TM made a promise that it could reasonably expect that SGA would rely upon. Moreover, SGA did rely. It stopped negotiations with other anchor tenants, it secured a loan, it made TM's position as an anchor tenant known to other tenants as well as the other actions previously described as consideration. If it was not consideration it was definitely unjust enrichment and detrimental reliance.
More recently, the floor was raised on the assumption that there would be more traffic through the store. This includes an implied promise to stay as that is the only way to give meaning to the words. Even if there is doubt about an express promise from TM the First Restatement says, "where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise." This was not only uncontroverted by TM, but championed as part of the assumption that there would be a growth in total rent because of a growth in sales. While this was not a promise to have higher sales, it certainly is an indication of continued occupancy. TM also approved of the expansion of the TM premises. As it is reasonable to assume that TM would not want to expand an empty building, it is reasonable for SGA to rely on TM operating a supermarket on the leased land, especially as TM was planning on it as well.
Furthermore, the contract itself states "The leased premises shall be used only for the operation of a supermarket". While the clause was intended to keep TM from converting the grocery store into something else, it can also be construed as a promise to run a grocery store, as no one could possibly presume that TM would run it as a hole in the wall. If nothing else, this reliance should keep TM from removing the trade fixtures as without them, it would not even look like an empty supermarket.
The main question in promissory estoppel arguments is fairness, which is definitely on the side of SGA. SGA tried everything possible to save the shopping mall and mitigate damages, including renting to otherwise unappealing tenants, but TM is not cooperating or acting in good faith, by not informing SGA of the possible move at the earliest time, by not attempting re-negotiation, and by setting impossible assignment conditions.
TM seems to have three possible counter-arguments to this reasoning. First, that the contract is simply as stated and should be enforced only so far as the provisions within it indicate. To do anything else, like promissory estoppel, would be to grant relief to SGA for a bad bargain. As the contract is not unconscionable, TM is willing to give SGA the rent on the lease, for the contracted period of time, and that is all SGA should get. Next, even if SGA initially relied on TM being the anchor store because of the letter of intent, the purpose of that was to secure a loan, and that purpose was accomplished. Even if you go so far as to say that SGA expected a long term relationship, TM has provided a long term relationship - almost twenty years. Finally, even if there was an obligation for TM to stay the anchor store, SGA waived the right by accepting and cashing the two checks for only the base amount.
There are a few other, more far-fetched arguments we could make in support of SGA's position. The most reasonable is arguing that public policy supports SGA's claim for relief. Public policy in general supports competition and TM is currently severely restricting it, especially as there is no possibility that the community cannot handle two stores. (If 83,000 people allowed for the profitable operation of one store, a community of over 206,000 could support two.) Therefore, it is in the public interest to have two supermarkets.
If through these two arguments we can establish breach of contract. we look to the remedies. It seems that SGA has multiple courses of action open to it at this time.
1. Suing for damages.
2. Suing to force (TM) to stay.
3. Suing to force TM to sub-lease to another Grocery Store.
4. Suing to void the lease with TM so SGA could re-lease.
5. Suing for an immediate injunction to stop TM from removing the fixtures.
6. Connecting to Pharm-Aid and dealing with consequences from Rexall.
7. Opening a delicatessen to mitigate losses.
I recommend that you immediately file a law suit against TM for breach of contract, and immediately asking for a preliminary injunction to keep the fixtures. The best thing that can happen is that TM wilI be scared into a good faith sub-lease (or we win and the court grants us relief).
Considering them in order, I do not believe that the court will grant monetary damages. Expectation damages are incalculable as they are very uncertain and speculative. Although we could give a ballpark figure based on previous proven record, these incomes . are without the added detriment of Z Brother's competition. SGA has attempted to mitigate the damages, but in this case that will apply more to a show of good faith than damages. Reliance and restitution damages in this context are also incalculable and inappropriate, even though reliance damages are the standard for promissory estoppel.
While monetary damages are unlikely, specific performance is probably the most just, and as damages for promissory estoppel is "limited as justice requires". The court will not force TM to move back into SGA as that would be too intrusive, but it might grant either option 3 or 4. These are the most equitable solutions as very little intrusion is required, it promotes the public good, and while little is lost, much is gained.
Only if we lose the lawsuit, should SGA resort to option 6 and/or 7, as these will be the few opportunities left at that point in time. Rexall might leave or sue for breach, nothing can be done at his time. If it reaches such a critical situation, I suggest that it is better for you to subsidize Shop-and-Save so that it can sub-lease from TM. It would mean depressed profits for a while but it will keep the shopping center alive.
Question 1, Answer 2
BREACH OF CONTRACT WITH TM:
The best argument Shady Glen (SG) can make is that Thrifty Mart (TM) has violated an implied good faith duty in the contract to keep their store open. To find such an implied promise, a court would look to the intentions of the parties when forming the contract (per Lucy, Lady Duff-Gordon). TM may argue that the parol evidence rule will bar the court from considering contextual factors. and the merger clause in the lease is evidence in TM's favor. However, merger clauses are not the final word, but are merely. an indicator that the parties intended the contract to be integrated. With the 2nd Restatement (§§209-216) and the trend towards realism, SG could make a strong argument that the contract's setting is crucial to understanding if the implied duty exists.
If the court hears contextual evidence, TM's role as anchor in the formation of the Plaza should be featured. The court is not likely to know about commercial real estate development, so experts testimony on the usual role of an anchor store would help show hypothetical intent. TM helped plan the plaza layout. received first selection of location, and may have been given a rent break in return for agreeing to be anchor for the Plaza: such factors might even be seen as consideration for a separate agreement from the lease (which could avoid the parol evidence problem.) In any event SG should try to show the role of anchor as an ongoing one, important for the continuing success of the plaza, not just at its formation. The satellite stores could testify as to their reliance on the retail trade generated by the anchor (TM), which might be useful if the court uses an implied intent theory.
Another point in favor of SG is the form of the leases. which set up a base and variable rent. The parties negotiated these terms, and SG could argue the care they took was an indication that both assumed a certain amount of rent was to come from the variable rent clause. implying that TM would be open for business (evidence of actual intent).
TM negotiating for subtenants might also indicate that they recognized an implied duty to have a store in operation in that location. However, SG should not overemphasize this point. since TM might want a subtenant to cut their losses on the K and not have to continue paying the base rent.
TM's RESPONSES:
TM might try to argue that the contract should be void due to changed circumstances. ie: the development of the new shopping center. This line of reasoning should be fairly easy for AG to overcome. It is likely the development of a competing mail was a foreseeable event by either or both parties. especially in a growing town like West Arbor (census data). Plus, economic hardship is not usually considered a sufficient reason to get out of contractual duties under the impossibility doctrine.
TM could try an estoppel argument against SG's claim of breach, since SG accepted the base rent for four months, which could be taken as acceptance of such an arrangement. Two of those months TM was still open, so SG can argue it accepted that money before the actual breach. Since TM already opened their new store in March, before the first payment of base rent only, SG could argue that TM did not rely on SG's acceptance of the base rent for two subsequent months to make their move.
TM could also portray the base rent "agreement" for two months as a modification. However. courts are hesitant to enforce modifications where there are no extenuating circumstances, and the new shopping center was probably reasonably foreseeable. Equally likely to be unsuccessful would be the argument that SG waived the implied duty to stay open by accepting the base rent. since a waiver may not be a condition central to the contract, as is TM's implied duty to keep open.
Negotiations between Knuth and Frisby before TM made the final decision to move might also be considered modification. However. these negotiations work against TM. SG could argue that TM had a pre-existing duty to stay at West Arbor Plaza and TM's indication that only a substantial lowering of base rent could induce TM to stay could be seen as bad faith. It also hurts TM's argument of impossibility due to change in circumstances, because by offering to negotiate. they indicate that it would be indeed be possible for them to stay.
REMEDIES
If SG proves that TM's closing of their West Arbor store is a breach of contract, a remedy must be determined. Expectation damages, putting SG in the position they would have been in if TM had stayed, will be difficult to calculate since rent was based on sales of the stores, requiring a prediction of how the Plaza would have fared had TM stayed (and the Z Brothers center still opened). The loss of business of TM and the satellite stores who subsequently left would need to be predicted . More uncertain is whether SG would have had to rent to non-preferable businesses like the department of motor vehicles etc, had TM stayed. and therefore would have gained other business and profits.
A reliance argument for damages could he SG's expansion of the plaza. When the parties renegotiated TM's rent before the expansions they set a lower floor for the first four years, indicating SG was reasonably relying on TM being open and making more than the floor amount. However, there will still be difficulties establishing that SG wouldn't have expanded anyway, or how much more they stand to lose by TM's departure.
Since damages are uncertain. substituted performance will probably be SC's best option, either from SG's duty to mitigate damages or TM's duty to perform on the contract (ie: return to the Plaza or find an acceptable substitute). Ether way, Pharm-Aid will not suffice as a substitute. considering the provision in the first lease that the premises only be used for operation as a supermarket. It seems unlikely this provision was not included in the second lease, since TM uses form leases.
If the choice of substitution is left to TM, TM will probably choose the option less likely to compete with their new "superstore." as revealed by their earlier negotiations with the potential grocery store subtenants (when TM asked an unreasonably high price, according to the other two stores), when Frisby hinted to Knuth that TM did not want a competitor to sublease, and TM's preference for Pharm-Aid. The court may consider letting SG find the substitute tenant under mitigation rather than TM under specific performance, which coincides with the courts‘ aversion to specific performance, which often requires special knowledge and supervision by the court.
TM has a good argument in favor removing the shelves, since a provision for the fixtures was in the lease. SG might be able to argue that since it was a form contract and not one of the terms dickered for, SG did not actually assent to that clause. However, SG is a sophisticated business and should expect such clauses to be present. The remedy above might cover this; if SG has to offer the new tenant a break considering the lack of shelves, they could then recover the difference from the old rent from TM.
SG knowledge that Rexall might leave (negating the clause in their lease stipulating no other pharmacies) should not be a legal factor. since it doesn't affect the contract provision with TM. Besides, Rexall might be convinced to stay with the arrival of a substitute supermarket. Also given the likelihood of a supermarket substitute, SG would be wise not to agree to the delicatessen restaurant entering the plaza, since it would conflict with the standard leases of the other groceries.
IF TM NOT FOUND IN BREACH
It seems likely that the court will find that TM was in breach and substituted performance will be the most likely remedy, thus solving the satellite store problems related to TM's leaving. However, given that there is a chance that the ct will not decide in SG's favor, SG will have to face the various displeased satellite stores. In many ways SG will find itself in exact opposite position it was in with TM. Now the stores will be arguing an implied promise that the anchor store would be there, and SG will be pointing to the merger clauses in the leases that have them and arguing that the satellites' assumptions are parol evidence. SG might also try to distinguish those stores who are leaving for the newer mall who would have gone regardless of TM staying. However, it seems likely that SG will be faced with abandoning tenants. paying either base rent only (if they take TM's approach) or no rent at ail (if they argue that SG has breached an implied duty to provide an anchor) and SG stands to continue losing business and profits.
Question 1, Answer 3
The conflict between Shady Glen(SG) and Thrifty Mart(TM) is a textbook example of the unavoidable failure to foresee all possible outcomes of a relationship. While the increase in local population was predicted, SG failed to consider the possibility of a second TM store in the same area or TM's use of the lease as a method of blocking competition.
SG should portray TM as the party at fault, using an interpretation of the contract and the implied covenant of good faith to show TM to be in breach. They have a reasonable chance of receiving monetary damages and an excellent chance of securing a new supermarket tenant for the anchoring space. The following will focus first on SG's prospects with TM. then on their relationship with their other tenants.
Thrifty Mart
At this point, SG relationship with TM has deteriorated to the point where TM is no longer an desirable tenant. SG's goal should be primarily to get a competing supermarket into the space, and, to a lesser degree, to force TM to pay damages and leave its fixtures in place. It can do this by showing that the contract included an understanding that TM would operate a supermarket in the space and by showing that TM has repeatedly breached the implied covenant of good faith.
Parol Evidence
Did the contract as written include the understanding that a supermarket would be operated in the rented space? Obviously, yes. TM knew it was to be the "anchor," and was active in the planning of the center. Under normal circumstances, the court might find an implied promise not to leave the space empty, reasoning that if the issue had come up, SG would not have rented to an empty shell, and TM would still have agreed to rent under those conditions. However, the original contract contained a merger clause, eliminating SG's ability to enter evidence of the course of dealings or side understandings.
While courts do not view merger clauses as conclusive evidence of full integration, and while this was unnegotiated boilerplate. SG. as the owner of three shopping centers, is likely to be viewed as a sufficiently sophisticated party to be held to its bargain. Luckily, there is support for SG within the four corners of the contract.
Interpretation
The original lease stated that "The lease premises shall be used only for a supermarket.' It is up to the court to determine what that meant to the parties, using parol evidence if necessary. If the second contract contains a similar clause, SG can argue that the sentence not only bars other sorts of stores but also promises the existence of a supermarket. An empty store. devoid of goods. fixtures, and customers can hardly be called a supermarket. The court will investigate the beliefs of the parties and their representations to one another, as well as the trade definition for supermarket. If the course of dealings suggested that there would be a functioning store in that location. SG can advance an interpretation of ‘supermarket' which blocks empty shells. If TM is in breach of a material condition, in this case the duty to operate a supermarket, SG could argue for termination of the lease and damages, which would allow it to rent to another supermarket.
TM may argue that when SG cashed rent payments for an empty store, it waived any right to have an operational supermarket. SG can counter the act is not a waiver, and alternatively that TM has not relied (at least not until they take out the fixtures) and that any waiver is now revoked.
Good Faith, Fault
While interpretation is somewhat weak, SG has a strong case for breach of good faith. R2nd 205 contains similar language to the UCC, and states that ‘evasion of the spirit of the bargain' or ‘lack of diligence and slacking off may be examples of bad faith. The more SG can convince the court that TM is at fault, the more likely the court will look to the substance of the transaction to enforce justice.
SG should argue that the sales-based rent creates a covenant not to reduce sales unless economically necessary. From the signing of the contract, SG was dependent on TM's efforts to promote and continue sales, just as the Ballantine creditors were dependent on Falstaff s marketing and distribution of their products.
TM might counter that the move was economically necessary, but they have not shown any such evidence. Sales at the original TM location did not drop below the rent floor until two months after TM opened the Z-Bros. location. It is not clear that a Sun store at Z-Bros. would have caused similar drops in sales.
Given their general behavior. it is likely that TM made a conscious effort to transfer sales away from SG, and I would look for evidence of disproportionate promotions. maintenance, and the like, as well as deposing TM employees for evidence of such a plane. Sun and Shop-n-save apparently believe that they can profit at SG's center. and unless TM can show convincing evidence of previous or impending losses. the courts are unlikely to accept an economic necessity argument.
Frisby's demand for a drop in the base rent and refusal to consider changes in the variable rent also argues for bad faith. If TM were seriously concerned about drops in sales, a modification of the variable portion might offset losses, but if they were planning to leave the SG store closed to block competition, only a drop in the base rent would save them money. TM's subsequent refusal to negotiate argues further for this interpretation. Finally, their refusal to accept Sun or Shop-n-save hints that they are acting in bad faith and not because of economic necessity. Rather than saving money, TM is willing to accept a $45,000 loss to delay competition in West Arbor.
TM may argue that blocking competition at SG's expense and ruining an entire shopping center represents fair dealing among merchants in their trade. SG can argue that it does not, and will most likely convince the court.
TM may also argue that the merger clause blocks all other covenants, including that of good faith, but will probably lose. The implied covenant of good faith has been held to be a necessary ‘gap-filler' of all modern contracts. particularly in cases like this one, where one party (TM) is exposed to moral hazard by being able to control the price indicator of the contract. (In this case, sales at the SG location)
Remedies
If the court finds TM to be in breach of a contract to operate a supermarket at the SG location or of good faith, SG should argue for a termination of the contract, allowing it to rent to one of TM's competitors, and for damages. While the court could impose specific performance, TM is unlikely to make a devoted tenant, and any arrangement would be difficult to satisfactorily supervise.
If TM is in breach, damages should be calculated to put SG in the position of performance. This would include at least the fixtures or their cost and the incidental costs of mitigating with an alternate tenant.
Consequential costs might be more uncertain. It will be difficult to separate losses in sales due to TM's likely actions from losses that would have occured if Sun had moved into Z-Bros.. and to separate tenants who left because of TM's absence from tenants who would have left regardless. The difference in value between a shoe store and the Department of Motor Vehicles is similarly uncertain. However, if the court is sufficiently upset by TM's behavior. it might allow speculative testimony. such as calculations of trends or testimony of damaged tenants.
Other Tenants
Delicatessen
I would not advise SG to rent to the delicatessen. It could explore whether the trade usage of delicatessen included restaurants and whether TM's breach of good faith revoked its rights under the contract, but if the existence of a deli is likely to discourage other supermarkets from moving into the center, the rental would be unwise.
Rexall and Others
If Rexall wants to abandon its lease, SG might consider offering the additional space to whichever supermarket replaces TM in order to build a similarly large ‘superstore'
In general, however, SG's best choice is to negotiate with its suffering tenants. Many of them (particularly Rexall) have strong cases that the existence of an anchor supermarket was a collateral condition understood by both parties. Evec if SG held those tenants with integration clauses to their leases. they would probably leave at the end of their terms.
Rather than encourage animosity with its tenants, SG should inform them of the likelihood of a replacement market and offer partial rent waivers to those stores in greatest difficulty. particularly those without variable rent arrangements, subject to revocation at the arrival of a supermarket or SG's convenience. This will retain both SG's tenants and their good name.
Question 2, Answer 1
Cosmic faces contradictions at the core of its philosophy. It seeks a community of trust and fair dealing but does not want to permit people to protect those rights through legal enforcement. Barry and Jen want to develop trust yet also have the right to "sever" relationships at will. They promote individualism through incentives to sell and at the same time seek a community of fair dealing. While it will not be possible to reconcile these and other contradictions in Cosmic's vision, it is possible to minimize the friction through contract principles tailored to the kinds of business relationships Barry and Jen are likely to encounter.
Each relationship must be treated differently. The differences in approach must reflect the differences in how close the relationship with Cosmic will be with employees, suppliers, and customers. The closer Cosmic is to the people it deals with, the greater the force of non-legal sanctions. The more distant their relationships are, the more Cosmic will have to rely on legal and economic incentives to create a harmonious and productive relationship.
Relationship with Employees
We begin with the contractual relationship Cosmic should develop with its employees, the group most likely to agree with the company's goals and the group most affected by them. I would recommend that Cosmic work hard to recruit employees that are in tune with their philosophy. The best protection against legal disputes in employment are employees sympathetic to management. In an organization that endeavors to distinguish itself from others, there will be greater self-selection of employees. People will seek Cosmic because it jibes with its view of a beneficial employment relationship. These people will be less adversarial and committed to communal goals. Inasmuch as Cosmic can effectively attract these people it will be better off.
Employee sympathy to management is likely to be limited by the extent Cosmic utilizes its power to terminate relationships at will. In order to prevent a decline in morale and to limit claims brought under implied contracts, Cosmic should set out a clear set of guidelines that govern the employees. Providing for explicit intent in Cosmic's actions will allow the courts to fully interpret any potential ambiguities in the duty owed to the employees.
I would recommend that Cosmic publish, distribute, and carefully explain an employee handbook. Cosmic should inform its employees as policies change. The handbook would contain, among other things, the following provisions:PRINCPLES AND POLICIES GOVERNING EMPLOYMENT:
Preamble. Cosmic believes that good health is the product of the fulfillment of the human condition through a spirit of community based on trust and mutual respect. We are committed to this in everything we make and do. We invite all others who share our view to join us.
1) We begin from the belief that we come together voluntarily. Each employee, or other person with whom we have a relationship enters it by his or her own choice. He or she is free to leave the Cosmic community at any time.i) an employee must provide at least two calendar weeks notice. Management has the option to waive that requirement.
ii) management must provide the employee at least 2 calendar week notice. Employee has the option to waive this requirement.
2) EMPLOYEES WHO DO NOT FIND HIS OR HER WORK HERE FULFILLING ARE STRONGLY ENCOURAGED TO SEEK OTHER OPPORTUNITIES.i) Our common goal is harmony. We seek to join together in a way that minimizes dispute.
ii) We believe in fair dealing and cannot function effectively with those who do not.
iii) We will provide personnel assistance to employees who leave Cosmic for a period of one month following the termination of the employment relationship with the company.
3) We encourage any employee who has a difficulty with his or her employment to meet with a member of our grievance committee. The grievance committee is composed of a panel of management and non-supervisory employees elected by the personnel of the company.i. Each employee has the opportunity resolve his or her problem with the committee.
ii. The decisions of the committee is binding.
These provisions govern the employment relationship. They may not be waived by oral representation by any officer of the company.
The handbook attempts to meet the contrary goals within the employment relationship Barry and ]en: it emphasizes fairness and trust while providing Cosmic the freedom to end employment relationships easily. It attempts to close the gap between subjective understanding that could be inferred through Cosmic's business culture and Cosmic's objective goals. The preamble is designed to set a positive tone for the employment relationship. It is vague, so it will have relatively little legal effect; its intention is to bind employees emotionally to the company.
Section 1 emphasizes the voluntary nature of employment in order that employees do not rely heavily on the work experience such that can claim legal rights independent of the handbook. Cosmic does not want to imply a mutually binding employment relationship. The provision also sets forth elements of fair dealing by giving employees and the employer a symmetrical duty to terminate employment.
Section 2 clearly states that employees who are unhappy should leave. This is an attempt to encourage employees who may develop further problems to leave before they reach the courts. The otter to provide assistance is designed to demonstrate good faith and provide extra incentive for disgruntled employees to leave.
Section 3 is designed to build on the trust and community in the company by having non-supervisory employees and supervisory employees on the grievance board. By providing that they are elected furthers the goal of giving employees a meaningful chance to affect their lives and promotes Barry and Jen's desire to include employees in decision-making.
Finally, the italicized clause is an effort to minimize the effect oral representations can have on any rights employees may claim.
The practical effect of the handbook is largely will largely be seen in the reduction of employees who do not seek legal remedies. Again, it as an effort to use non-legal methods to prevent use of the legal system. The legal effect will be to offer reliable evidence as to the nature of the employer-employee relationship. As much as the employment relationship is spelled out, the more employees and courts will be able to rely on it. At the same time, however, the more the relationship is delimited, the less flexibility Cosmic will have to create fairness in individual situation.
Suppliers
I would ask Cosmic what kind of products it needs from suppliers. Does it need it for commodities that can be found in thick markets; or does it require unique materials that only a small number of sources will be able to provide?
As this is relationship would be among merchants for the sale of goods it would be covered under l-203 of the UCC which would impose a duty of good faith on the performance and enforcement of the contract. Since the desire for fairness is present, Cosmic's other major goal, to avoid the legal system, could be carried out in either of two ways. If the good were consistently available at a market price it could set up a series of option contracts under UCC 2-205 by agreement under signed writing. Cosmic could make the price equal to the wholesale market price plus a given profit level at the time of delivery. By making the price dependent on the market, it eliminates the incentive for the supplier to breach in the event of a market shift.
If the goods Cosmic needs are unique, or are vulnerable to large market shortages, it should set up a contract that provides for liquidated damages under UCC 2-718. Cosmic could negotiate for a reasonable damage level in the event of breach. This approach has its limitations. First, the level set as the damage award could induce one side to breach when liquidated damages exceed the value of the contract. Second, in the event of breach, Cosmic could face a legal battle over whether the breaching party acted in good faith. Nonetheless, the parties know the value of the contract the best and are in position to provide for damages that are reasonable under the circumstances.
In summary, Cosmic has conflicting goals that cannot reconciled only with legal methods. A desire to control the relationship conflicts with their desire for decentralization and fair dealing. Barry and Jen should employ both legal and non-legal means to fulfill their vision. There are bound to be compromises, but with the proper approach, Barry and Jen can go far in creating the kind of company they want.
Question 2, Answer 2
CLIENT INTERVIEW:
Some pressing questions need to be answered before I can advise Barry and Jen regarding their new business, Cosmic Crystal Products (CCP). First, I would ask how much control Barry and Jen want to retain over the operations of CCP and what size of company is envisioned. If they are comfortable with very little control and/or the business will be small, then the need for my services may be somewhat limited. I assume that Barry and Jen are not willing to leave everything up to chance, but I need to know how much risk they are .willing to take in order to achieve their ' "enlightened principles of harmonious management."
I also need to know what non-legal enforcement mechanisms are readily avaiiable in each type of business relationship. This will help me focus on the relationships which could potentially cause the most problems, and try to create non-legal (preferably) or legal enforcement mechanisms.
Lastly, and perhaps most importantly, I would ask exactly what my clients mean by "trust and fair dealing." This' is crucial because the court will almost always impose an obligation of good faith and fair dealing, but if my clients' definition is not consistent with that of the legal system, specific contractual obligations must be created.
EXPLANATION OF TODAY'S LEGAL REALITY:
After finding out basic information, I think I need to start by explaining to my clients that in some ways their aspirations are unrealistic. Even if formal business contracts are not signed, Barry and Jen will, more than likely, incur legal obligations. This is one of the things meant by the phrase, "the death of contracts." Today, the legal system looks at both form and substance. There are three primary ways in which a court may legally bind CCP, (Note that these doctrines are not mutually exclusive.) First, the legal system often implies a promise in fact or in law in order to produce a "just" result. Second, both the common law and the UCC (section 1-203 as well as many other specific provisions) impose the obligations of "good faith and fair dealing." Third, under the doctrine of promissory estoppel, CCP may be held to a "promise" which does not even amount to an offer, provided another party relied on the representation by action or forbearance. (Hoffman.) I want my clients to know, however, that the shift away from formal rules towards standards doesn't necessarily frustrate their goals, as we shall see.
There are understandable reasons for not wanting a legally binding contract. Detailed negotiations can get in the way of good relationships, some flexibility is lost, and the costs of negotiations can be high. Yet, in many situations the advantages of a contract outweigh the disadvantages. All reasonably foreseeable contingencies should be expressly provided for in a contract wherever possible. This will protect CCP's autonomy and insure that decisions are made according to CCP's principles. By allocating the risk beforehand, CCP will not be subject to the court's allocation of risk when a contingency arises and ideally, will not even have to deal with the legal system at all.
DRAFTING A SET OF PRINCIPLES AND PRACTICES:
CCP has expressed a desire to "make plain their organizational philosophy through a carefully drafted set of principles and practicesn to distribute to all those CCP will be dealing with. There are a few precautions, but it is generally a good idea to draft such a "handbook" and distribute it to sales agents and store employees, although not exactly for the reasons Barry and Jen appear to have in mind. A handbook of this type will undoubtedly impose an obligation on CCP to follow whatever guidelines it contains. (Pine River St. Bank; Thompson) I believe, however, that in order to foster the type of trust CCP desires, it is necessary to create assurances and self-imposed obligations. Sales agents and store employees are most likely to be receptive to CCP's philosophy if mutual rights and duties exist. Nonetheless, it is possible to try and circumvent legal liability by conspicuously placing a disclaimer like the following:
Nothing in this general explanation of CCP's philosophy and goals shall be construed to create a legal obligation on the part of CCP. The provisions herein merely reflect the ambitions of CCP and are for informational purposes only.
Such a disclaimer is an option, but I would not recommend it because it would probably defeat the handbook purpose, which is to foster trust.
The policies outlined should be specific enough to reassure ' its readers that they are real, but not so inflexible as to prevent CCP from quickly severing relations if it wishes. Perhaps, CCP could retain the right to terminate employment without prior notice, while still allowing the concerns of its sales agents and employees to be legitimately considered. A provision similar to the following may work:
Employment may be terminated without notice if an employee/sales agent fails to perform consistent with the principles outlined herein. The terminated party does have a right to a "hearing" before a neutral arbitrator from the firm of _______. If the arbitrator finds that termination was not made in good faith in accordance with CCP's principles, employment shall be reinstated with back pay.
The problem with such a provision is that the neutral arbitrator may not fully recognize or acknowledge the philosophy and business standards of CCP.
I should caution Barry and Jen that if they elect to distribute a handbook, there will be room for honest misunderstanding or misinterpretation no matter how careful the drafting is. For example, the statement "a portion of any profits earned will be donated to charitable causes," leaves open to dispute what "a portion" or a "charitable cause" is. Further, even if a handbook is not distributed, the presumption of at-will employment may be overcome by evidence of contrary intent based on the relationship between the parties. (Foley)
In addition, the proposal to base the pay of employees and sales agents on commission is a good one, provided that its set up like a "bonus". If there is too much reliance on commission, "unacceptable behavior" may be encouraged. Similarly, giving shares in CCP and allowing employees and sales agents to participate in the decision-making process will boost morale and loyalty, but CCP may become inefficient if control is too decentralized.
It is also advisable to set up exclusive dealing contracts with sales agents. This will give the sales agents greatly appreciated freedom, but will also require them to use best efforts in promoting CCP's products. (While such a contract may not be considered subject to UCC 2-306(2) because it isn't for "goods", the common law principle of Wood still applies.)
DISTRIBUTORS:
While it is highly unlikely that CCP will be able to set up exclusive dealing contracts with distributors, CCP should try to establish the same "type" of relationship. This includes giving distributors the opportunity to market as they wish, but subjecting them to a contract containing a "best efforts" clause. Profit sharing will also give distributors the added incentive to promote CCP products over a competitor's.
SUPPLIERS AND LANDLORDS:
Since there are generally no effective non-legal sanctions in relationships with suppliers and landlords, I recommend setting up formal contracts. A requirements contract with suppliers, which would be governed by UCC 2-306, should please CCP because it will impose mutual obligations on both parties to act according to industry standards of good faith and fair dealing. To insure that CCP's products are truly "green", CCP should also require its suppliers to certify the supplies are environmentally friendly and not tested on animals.
Standard lease agreements should be executed with all landlords. Failing to enter such a contract is too big of a risk. for CCP. (Presumably, too big of a risk for landlords too, and they will probably insist on a contract.) Negotiation costs are a worthwhile investment. I can think of no logical reason why CCP would not want an enforceable lease contract considering the fact that if there were any substantial change in conditions, CCP would probably be relieved of its duties anyway.
CUSTOMERS:
UCC 2-316(2) provides that "to exclude or modify the implied warranty of merchantability or any part of it, the language must mention merchantability and in case of a writing must be conspicuous." Hence, it is possible to attempt to disclaim the implied warranty of merchantability but I would not recommend it. A disclaimer would alienate customers and make them suspicious. If CCP makes a good faith effort to perform as Barry and Jen have indicated, this implied warranty should not cause any concern. Even if CCP does place a disclaimer on its products, it is probable that the court would find it unconscionable anyway. (Henningsen) CCP may actually want to marginally increase its obligations in an effort to create a trusting relationship. One suggestion is a money back guarantee for all customers who are unsatisfied. The terms of the guarantee should make it convenient for customers to exercise the option.
Question 2, Answer 3
Before advising Barry and Jen, I would like to know to what extent they want the company’s decisions to be decentralized and non-authoritarian. Do they want to reserve any rights specifically for the top management? Do they want the small shops and multilevel marketing program to have equal emphasis and opportunity in the company? How large of a company do they envision? Have they negotiated with potential suppliers? Do they want their handbooks for the sole purpose of boosting morale, or do they want this publication to create mutual contractual obligation? To whom do they intend to deliver the handbooks?
First, I would caution Barry and Jen as to the fact that although it is possible to create an organization in which trust and fair dealing are the initial criterion which govern endeavors, the formal sanctions of contract law are not in the end completely avoidable; it becomes more difficult to avoid them as the company grows. Both Barry and Jen have masters degrees and both have significant related work and experience in this field. They will be considered sophisticated parties and, hence, their company (Cosmic Cyrstal Products) will be held accountable for its contractual actions and obligations. Contemporary Contract law is governed by a duty of "good faith and fair dealing," and this is evidenced in both the Unified Commercial Code (1-203) and Restatement 2nd of Contracts (205). This is not inconsistent with Barry and Jen’s ideals, and the default rules will not completely overturn their purpose. However, the extent to which it will be possible to impose and additional "obligation" of trust in their business relations varies according to the party with whom they are dealing.
Company handbooks have in the past been held to become a material part of an employment contract although this is not the norm. Because of the my clients’ animosity towards the legal system, I assume that they would not want the handbook to create legal rights in those who read it. Cosmic could put a notorious disclaimer on the front of the handbook which expressly states that the book does not add to nor take away from any written employment contract. However, this may frustrate the main goals behind creating the handbooks which is to explain Cosmic’s philosophy and to foster morale and employee satisfaction. Employees might not take the philosophy seriously when the company is so careful to disclaim any contractual obligations it may acquire through the book.
Hence, I believe that Cosmic should include in the book a section that accurately describes its employment procedures (including termination). The section should emphasize the significance of the company’s non-adversarial atmosphere. Cosmic should incorporate a provision into the same section of the book that disclaims any impact the handbook might have on any employment contracts. Cosmic might also want the individual employment contracts to contain provisions which specifically acknowledge that company handbooks are not part of the employment agreement. These disclaimers may not be perfectly successful where the handbook is sufficiently misleading and the disclaimers might disturb the fragile environment of trust. I do not believe they would do so fatally in this context and the price might be worth the avoidance of future litigation.
One last restraint that I would advise Cosmic to put on its handbook is a notorious disclaimer that it is for company purposes only. Cosmic should deal with relations between suppliers and customers through other publications such as advertisements and brochures. Handbooks should be given only to employees and distributors to avoid implied warranty litigation (UCC 2-313(2)).
It seems to me that the two relationships that Cosmic needs to focus on are those between its employees and its distributors. These relationships should be controlled through written contracts. In the past, employment contracts have been terminable at will by either party. But today courts are subjecting the termination of employment contracts to increasing good faith restrictions; Cosmic should not start from the premise that the company will have an absolute right to at-will employment termination. A relationship based on trust cannot be developed in an atmosphere where an employee feels vulnerable to the arbitrary will of his employer. The company itself will need to make the initial steps towards engendering this environment of "trust." I would recommend that the company set up a graduated employee contract system where in the entry and lower positions of the company the employer will have more freedom to terminate an employment contract in less time. However, even at these lower levels the employees should be given the security of procedure that must be followed before termination. Thus demonstrating the employer’s trust in the employee. The procedure does not have to be long, but should offer a substantive barrier to unfair and arbitrary termination (ie: a single warning followed by arbitration or an appeals process to a senior employee). Quick termination may appear arbitrary and unfair and, consequently, may promote litigation.
As the employee demonstrates his continued loyalty to the basic principles of the company, he would be awarded by a new contract which would give him more security in his position (ie: a more in depth procedure for termination). The new contracts can be awarded on the basis of objective standards such as time with company and earnings for the company. The lengthened period before a contract can be terminated is not contrary to my clients’ wishes. As employees build time with the company, they increase their relationship specific investment as well as prove their loyalty. Therefore, the need for quick termination procedures decreases as an employee moves up in the management.
Next, the company’s relations with its distributors are extremely important (for purposes of this contract I am classifying distributors as those in the middle to lower levels of the multilevel market program). Distributors will be the group that has the most contact with the general public. Recognizing that it will be much harder for the company to monitor the actions and attitudes of its distributors as the multilevel marketing portion of the company expands, I would recommend that potential distributors be required to attend meetings which explicitly detail the purpose and philosophy of the company. Subsequently, Cosmic should require each distributor to sign an exclusive sales agreement with the company.
By attending the meeting, the distributor is made well aware of his duties and the expectations that the company has of him. By signing an agreement the distributor binds himself to put his best efforts forward to promote the products and ideals of the company (Wood v. Lucy, Lady Duff-Gordon and codified by UCC 2-306(b)). The distributor has enough freedom to achieve his "human potential" as expressly desired by Barry and Jen as he can sell the product in a variety of ways, and yet he is limited by his promise to maintain his best efforts as an exclusive agent. I would also recommend that the company implement the graduated job security procedure with its distributors. This will foster good will and trust and permit the distributors to be awarded for loyalty to the company’s ideals.
Cosmic will have less success in arranging similar relationships with the company’s suppliers and customers. Both of these relationships are expressly covered by the UCC. Cosmic will produce only "earth friendly" products and will want the same purity in its supplies. Such a provision can be expressly declared in a contract; however, such express warranties have often been overlooked when the court finds substantial performance in the guise of reasonable commercial behavior. Although it is true that one party may unilaterally set a quantity term in a contract for the sale of goods, it is also true that such a term will be governed by a standard of reasonableness and good faith (UCC 2-306(a)). Hence, even if Cosmic negotiates for the right to be able to set the quantity term in the contract, Cosmic will not be permitted to breach that contract with the supplier by not ordering any future supplies from that supplier on the grounds that the supplier is "adversarial" and focuses on "legal rights." These ideals will not be protected by law.
Likewise, Cosmic cannot restrict its customers to only those people who believe in trust and fair dealing. Cosmic will be advertised as a "green" product that is "not tested on animals." Advertisements are usually not construed to be binding contracts because there is no formal offer and acceptance. Nonetheless, I feel that it would be in Cosmic’s best interest to exercise caution in its advertisements in order to avoid contractual liability here. Each product that Cosmic sells will be covered by an implied warranty of merchantability (UCC 2-315). This liability is inescapable. Because Cosmic is routed in fair dealing and trust in their business, it may want to convey this attitude to its customers by offering a satisfaction warranty with each purchase, but this should be limited through the same medium that it is communicated to either the replacement of the product or the refund of the purchase price.