Contracts Exam Spring, 2000 (Professors Haugen & Heidenreich)

THE FURTHER ADVENTURES OF STEVE AND MARTY

You will remember Steve and Marty, who opened a house-painting business called S&M Restorations and ran into some legal problems in the first semester. The boys survived the tribulations that they experienced at the beginning of their business activities and went on to a brief, stressful career.

These are [some of] their stories.

The house painting business proved to be brisk, but not as lucrative as the boys had hoped. They decided to branch out into the commercial area, and began to seek work painting interiors in downtown office buildings. They hired Jane North as their agent to generate this kind of business for them. They authorized

Jane to approach owners or office-building managers on their behalf and sell their services. Jane, who was experienced in this field, had full authority to estimate the cost of painting a room or a suite of offices and to make binding contracts on behalf of S&M. [Her conduct is to be treated as the act of the boys for all purposes.]

Jane and S&M entered into a written agreement that included a full description of her duties and provided that the term of the contract would be two years. Jane was allowed to choose what hours to work, and she had full power to negotiate with prospective customers and to make binding contracts on behalf of S&M. The only section of the document relating to Jane’s compensation read as follows:

North will receive a commission of 25% of the gross fees generated through her contacts with building managers or owners. She will be paid this commission at such times as S&M receives payment from the customers. She will devote her best efforts at all times to obtaining business for S&M.

On November 1, 1999, the evening that Steve & Marty entered into this deal with Jane, the three had dinner at a local restaurant. As they discussed the proposed deal, Steve said, "Of course, if you really do well, we would pay something over the regular commission. For every hundred thousand dollars worth of work that you sell for us in any one year, we will pay you a five-thousand dollar bonus." Marty nodded vigorously and added, "We know that you'll do a great job for us." At this point they presented the document to Jane, who glanced over it and quickly signed, as did the boys.

Jane began work almost at once. The day after she signed the contract, in fact, Jane placed a phone call to an old friend who managed the Russell building and arranged on behalf of S&M the following deal: S&M would be given the job of painting the offices in the building as needed until the end of the year 2000. The building manager would give S&M a week's notice of the need for a suite of offices to be painted, explaining what

colors were needed and what sort of paint was desired. S&M would then do the job for a price that would be based on the number of square feet covered and the cost of materials. The manager assured Jane that at least one suite of offices per month would be painted.

Other work followed, sometimes not so easily. Jane had some difficulty negotiating with Ralph Peterson, the notoriously tight-fisted owner of the Peterson building, in order to get S&M a contract to paint the lobby of that edifice. (Ralph was such a tightwad, in fact, he didn’t even employ a building manager). Jane finally convinced Peterson that the boys would do a beautiful job for $6,000, and she and Peterson signed.

Meanwhile, Steve and Marty continued to paint the interiors and exteriors of private homes. They struck a deal with Bud, who owned a splendid home on Lake Lotsabux, a haven for the rich and famous, to paint the interior of Bud's home for a flat price of $9,000. They agreed to finish the job no later than February 1, 2000. As they discussed the deal, Bud told the boys, "It is really important that the work be finished by February first, as my daughter is being married on the fifteenth, and I don't want to have the house in a mess just before the big event."

During the first few months of 2000 the boys actually collected a total of $95,000 in gross fees generated by Jane's efforts. Unfortunately, however, not everything worked out to the boys' satisfaction. Although the Russell Building work went well for two months, during which time S&M painted several office suites, for which work they were promptly paid, at the end of January the manager called Jane and told her that the deal was off. "S&M does great work, but the owner's son-in-law needs work, so we are giving the painting contract to him," he said.

As to the Peterson building, the lobby refurbishing proved to be much more costly than Jane had originally estimated. Unbeknownst to either Ralph or Jane and the boys, the old wall covering in the lobby had been a poor, largely cosmetic job, and when the paint was removed, the boys discovered that the surface underneath needed considerable difficult and expensive work before they could apply their new paint. Unable to discuss this problem with Ralph, who was reportedly on a cruise, the boys went ahead with the work, ultimately sinking $10,000 into it, but when they were finished, it was beautiful.

When he returned, Ralph agreed that the work was fine, but he refused to pay even the original $6,000 price, never mind the $10,000 the boys now asked. He said they should have stopped work immediately when they discovered the problem, even though this would have left the lobby a shambles.

In fact, the truth was Ralph couldn’t pay the boys anything. He had been milking the building for years, and has now fled to a tropical island that has no extradition treaty with the U.S., where he basks in the sun and listens to the strain of soothing music emanating from softly plucked stringed instruments. Inasmuch as he is unavailable, and the building is heavily mortgaged and subject to many liens, it is almost certain that the boys will never get their money.

Although the boys started the job at Bud's home in plenty of time, after just a few days of work there, Steve was injured in an accident and became unable to work for several weeks. Thus, while Marty tried his best, he was unable to finish the work by the February 1 deadline. In fact, the place was only half done on the first, and Marty admitted that, because of a severe shortage of painters in the area*, he could hire no replacement for Steve and the work could not be completed before the end of February.

Bud at this point lost his composure. "That's it," he shouted. "Get out of here. My daughter's wedding was to be here in our home. Because of this mess we will have to postpone the wedding. I have paid a $5,000 non-refundable deposit to the caterers, and I will have a lot of costs in rescheduling the affair. Furthermore,

my daughter will be devastated; I shouldn't be surprised if she winds up in therapy again. I intend to hold you responsible. You'll hear from my lawyers!"

On April 30, 2000, Steve and Marty decided to call it quits. They told Jane that her services would no longer be needed and offered her 25% of the $95,000 that had been collected, there being no outstanding collectible bills at that point. Jane, who quickly lined up another, more lucrative job, is happy to be out of the contract

with S&M, but she believes that she is entitled to more money because of her work on the Peterson contract.

Questions

1. If S&M seek to recover from the owner of the Russell Building for breach of contract, what claims and defenses can each party reasonably be expected to raise? How should the case turn out?

2. If the boys were to have the opportunity to sue Ralph for the cost of their work on the Peterson building, what claims and defenses could each party reasonably be expected to raise? How much money, if any, could the boys recover?

3. If Jane consults you about how much she can recover from S&M, what will your advice be? Consider all

reasonable arguments that each side can be expected to make, explaining how successful you think that these

arguments will be.

4. If Bud sues for breach of contract, what claims and defenses can each party reasonably be expected to raise? Explain what elements of Bud's losses he should be able to recover if he recovers anything.

Contracts Exam Spring, 2000 Comments: (Professors Haugen & Heidenreich)

The results of this exam were a bit disappointing, perhaps very much so to some of you. The most common problems were a failure to see or discuss some of the issues, a failure to state in any sort of clear and thorough way the rules and principles that apply to the various questions, and a failure to reach a reasoned conclusion. In some cases the papers demonstrated rather serious problems with written expression. While it was not necessary that they be elegantly written, your exams should have been, at least, grammatically correct.

Russell Building Problem. The only real subject for discussion here was the statute of frauds. The contract appears to be oral. Because it can't be performed within one year of the date of its making, it should be unenforceable under the statute of frauds, unless there is some exception that will take the contract out of the statute. Although the parties have partially performed, this will not take the contract out of the statute. Partial performance does not serve as an exception to the one-year provision, except that if one side performs completely, which the boys have not done, the contract becomes enforceable, and if there has been part performance, the person performing would be entitled to be paid for the work he had done. Since the boys have already been paid for the work completed, they are SOL. A number of you mentioned the Code rule of some jurisdictions that permits enforcement of an oral agreement when the person against whom enforcement is sought admits in a judicial setting that a contract exists. There is, of course, no evidence that anything like that was done here. Others mentioned promissory estoppel (involving detrimental reliance on a promise) and equitable estoppel (involving such reliance on a misrepresentation of fact). Neither is applicable here, as there is no indication that the boys relied in any way on the contract.

Nearly everyone discussed this issue, though a few students failed to see it. Several students tried to make more of the question than is there. Some suggested that the contract could possibly have been performed within one year, but the guarantee that the boys would have at least one office suite per month to paint makes this impossible. In general, the best answers here were ones that identified the problem, described a bit about the purpose and situations in which the statute of frauds is applied, and then explained why none of the exceptions would be applicable here. Some of you went on to talk about remedies, in case the statute of frauds were overcome in some way. Although this was not necessary to do, nor was Question One the best place in the test for such discussion, that approach did not necessarily hurt, so long as you thoroughly discussed the statute of frauds problem, and did not overlook remedies later, in other parts of the test.

Peterson Problem. Here the boys and Jane have made a bad deal for a couple of reasons. First, of course, Ralph is a welsher. Even if, by some chance, they could get at him, they have made a contract for $6,000 on a job that cost them $10,000. It appears that they are not now even asking for any profit – just for the $10,000 that will cover their costs.

This problem raised the issue of mistake. Some of you argued that the boys were unilaterally mistaken about the condition of the walls, but the facts indicate that neither Ralph nor the boys knew what bad shape the walls were in. You should have discussed what sort of mistake you thought this was – mutual or unilateral. Who should bear the risk of this costly, unexpected problem? Is this case more like Sherwood v. Walker (the pregnant cow case) or Wood v. Boynton (the diamond in the rough case)? The boys as “professionals” perhaps should be held to have assumed the risk. On the other hand, perhaps no one could have known of the problem before actually getting started. In any case, what should the boys have done? Was it reasonable for them to have gone ahead and spent the extra time and money required? Should they have stopped working altogether, as Ralph asserts, or did they have good reason to go ahead, perhaps believing that they themselves would be in breach if they did not continue to do the work, when they could not contact Ralph? Should Ralph, who benefited from their work, have to pay for it, on some restitutionary basis, to prevent his unjust enrichment? Are the boys “mere volunteers” – that is, did they act “officiously” in performing the additional work? If this was a mutual mistake, the contract can be rescinded by either party, can’t it? What happens then? And what is the effect of Ralph’s breach (i.e. his refusal to pay anything at all) on all of this? Does it give the boys the right to seek restitution for the value of the benefit conferred – presumably the whole $10,000--rather than being limited to the $6,000 contract price, which would normally limit their recovery, now that they have fully performed?

While there were reasonable grounds to come to different conclusions about these matters, these were the questions that should have been raised. Many students failed to raise this mistake issue at all. Among those who did, some handled it well, while others didn't know what effect this might have on the contract. Some students argued that Ralph was guilty of fraud because he led the boys to believe that he would pay while knowing full well that he couldn't. While, under the facts, this is a reasonable argument, it is a very difficult thing to prove. Although there isn't a chance in the world that a person like Ralph can pay, if he had a belief that things would change, that his ship would come in, that, like Mr. Micawber, "something will turn up," then he hasn't committed fraud.

Jane Problem. Jane has two difficult hurdles in her path to recovery. The first problem is, can she recover the 25% commission for selling the work on the Peterson Building? The contract calls for the boys to pay her "at such times" as they receive payment from the customers. Thus, their receipt of the money might be a condition precedent to their obligation to pay Jane, and they would probably so argue. Inasmuch as they won't collect anything from Peterson, they will argue that they never became obligated to pay Jane because of the failure of this express condition--the payment by the customer. Courts, disliking a forfeiture, generally construe these clauses to be promises relating to the anticipated time for payment rather than conditions of payment, at least in the absence of a very specific clause that clearly places the risk on the person to be paid. Thus, Jane may well win this argument. Furthermore, Jane may argue, the language of the contract entitles her to a percentage of the "gross fees generated [not collected]" and this lends support to her claim that the parties meant to consider the obligation to pay to be absolute, not subject to any condition of payment by the owner.

The second question relates to the promise of a bonus. One aspect of the bonus issue relates again to the Peterson contract. Can Jane use the $6,000 contract price against the $100,000 requirement? She has sold $95,000 worth of work already. The Peterson contract would put her over the minimum. A more serious question relates to the parol evidence rule. This promise appears to contradict the language of the writing, and, as it was made before the execution of the writing, it would seem that the parol evidence rule would prevent this term from becoming part of the contract. The facts’ description of the document suggests that it is at least partially integrated. It is not clear whether it is fully integrated. If it is not, one might argue that the bonus provision does not contradict, but rather supplements the writing. (That is, one might argue that the bonus is an added element of compensation, and thus isn't inconsistent with the regular commission term. On the other hand, the writing appears to cover completely the subject of compensation; to allow the bonus term to become part of the contract would be inconsistent with the clear “25%” commission term in the writing.) If the writing is fully integrated, the term could not become part of the contract in any case. All these important aspects of any parol evidence problem should have been thoroughly discussed, and you should have clearly defined all the important terms.

Of course, Jane could also recover the difference between what she would have received had the contract been fully performed and what she receives on her new job. Proving what she would have received from her contract with the boys might be a bit difficult, but it doesn't matter much anyway, because her new job is "more lucrative" than the contract with the boys, so she seems to have suffered no damages by virtue of the breach.

A rather surprising number of students ignored the issue of the commission on the Peterson contract. This is where you should have explained and discussed conditions (Payment by the client, the boys would argue, is an express condition to our obligation to pay Jane.), explaining what a condition is, how it arises and how it works. It was a serious blunder to ignore this issue. Those who did deal with it often failed to explain what a condition is. A number of students conflated the bonus question with the commission question. They are independent, raised some very different issues, and should have been discussed separately.

Almost everybody saw the parol evidence question. Some handled the question quite well, though many did not lay out the parol evidence rule in any sort of coherent form. First year law students (and all other law students) should be able to rattle off a clear statement of the rule in their sleep. A troubling number of students really did not seem to understand the whole matter of parol evidence very well at all. A number of discussions were confused and more than a few were just plain wrong. Some students tried to say that the writing was ambiguous and that this evidence would clarify the writing. If there is any ambiguity (which seems to be a stretch) in the quoted or described language, nothing in the bonus term would clarify it.

Some students spent a lot of time on the problems Jane might have proving her damages for loss of future income from a new venture without a profit history. Since the facts indicate that Jane is delighted to be free of the contract, having landed a more lucrative job, this was probably not worth any discussion at all. Jane is not seeking any damages for future work. Only her compensation for work to date is in issue. Again, the important thing here was to recognize that there are two separate elements of recovery she is after – the 25% commission on the Peterson work, and the $5,000 bonus.

Bud Problem. When Bud sues, he may take the position that the boys have breached an implied condition of timely completion of the work. He has not expressly said that time is of the essence, or that the boys will only be paid if they finish on time, but he has made it clear that this is very important to him, so that the condition could be said to be “implied in fact” – with the same force and effect as an express condition. If this is correct, perhaps Bud can avoid paying the boys anything at all because his obligation would be discharged. He would also be able to recover damages, assuming the boys, in addition to their failure to satisfy the condition of timely completion, also have breached their contract promise to do the work completely and on time.

The boys might respond with a defense of impossibility or impracticability. They would have to argue that Steve's accident and the lack of replacement painters were contingencies, the non-occurrence of which was a basic assumption on which the contract was made, and that furthermore the boys did not assume the risk of this non-occurrence. In order for the non-occurrence of a contingency to be a basic assumption on which the contract was made, it must have been unforeseeable. This defense by the boys is unlikely to succeed, as accidents are, after all, a fact of modern life, and can hardly be said to be unforeseeable. On the other hand, the lack of replacement painters, apparently being due to some mysterious cause, might have been unforeseeable. If the boys were to be successful in this argument, their contractual obligation would be discharged, and they would not be in breach for failing to finish on time. The boys should of course receive payment for their work up until their firing; to allow Bud to avoid giving them credit for that work would be to unjustly enrich him and operate as a sort of forfeiture against the boys.

If Bud recovers, his damages should be assessed under the Hadley v. Baxendale rule. He should get, as general damages, the difference between what it costs him to hire someone else to complete the job and the amount that he would have paid to the boys to complete it, assuming the new painters can simply complete the job without repainting. If the new painters have to “undo” some of the boys’ work, rather than simply complete it, that extra cost will be offset against the restitution to the boys. In either case, what Bud gets from the boys here would be his direct damages--the amount that would naturally flow from the breach.

In addition, Bud should get consequential damages if the boys had reason to know at the time they made the contract that these losses were likely to follow from a breach. This is the all-important second part of the Hadley rule. Bud told them that his daughter was to be married, but from the facts it seems that he did not tell them that the ceremony was to be held in his home. He only said that he did not want the house to be a mess at the time of the wedding. If the boys had no reason to expect that this was to be a home wedding that would have to be postponed if the work were not done on time, they might argue that they should not be held liable for the payment to the caterer or the costs of rescheduling the ceremony. The important thing here was to recognize that these extra costs may be “special circumstances” that had to be “known and communicated” in order for the boys to be liable for them under the Hadley rule. In any case, there would be no recovery for Bud’s daughter's therapy, as this would be recovery for emotional distress, considered “unforeseeable” and therefore unavailable for a normal breach of contract, unless physical injury had also occurred, or the contract involved a special sort of situation in which the breach would naturally result in great emotional distress.

Some students did not do a very good job with the impossibility rule or with the Hadley rule. Many failed to state or explain the rules very well; some didn't seem to try. Some didn't seem to notice the issue of whether the boys would be liable for the consequential damages if they had no reason to know that the wedding would be at the home. Several people raised the question of Bud's dismissing the boys and suggested that he was guilty of failing to cooperate and thus had breached an implied condition. Inasmuch as the boys were already in breach when he dismissed them, it is hard to see how this could be the case, though if the failure to complete on time was not a breach of a condition and was not a material breach, perhaps he would have been obligated to allow them to finish.

A fair number of people refused to accept the facts; they said that maybe the boys could have completed the work in a few days, or at least by the time of the wedding. Some said that additional painters must be available. This, however, is contrary to the facts as given.

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* For some unaccountable reason, many erstwhile painters

had suddenly entered a local law school and were devoting full time to their studies; puzzled experts have tentatively attributed this phenomenon to some unidentified foreign substance in the local water supply.