CONTRACTS Final Exam §§ IA, 3A & 4

Professors Haugen & Heidenreich

SPRING, 2001

Facts and Questions:

Felicity, having graduated from a school of veterinary medicine, sought work at various animal clinics in St. Paul. On Thursday, January 13, 2000, after some conversation with Ralph, the owner and operator of Kitty Klinic, a clinic that catered to rich and neurotic cat owners, she agreed to begin to work as a Doctor of Veterinary Medicine for Ralph on the following Monday. They agreed to all details of the employment arrangement, and the conversation included this exchange:

Ralph: “Let’s try it for a year and see how it goes. If, by that time, you have established yourself and have brought in a good, steady clientele, I will give you a full, equal partnership. Meanwhile, I’ll pay you a salary of one thousand dollars per week, payable on Friday every other week.”

Felicity: “This is great, Ralph. I look forward to working with you.”

On Monday, the 17th, Felicity showed up for work clad in a white lab coat. Almost immediately she was a hit with the cat owners who brought their animals in for treatment. In fact, by June, the word of Felicity’s abilities having spread rapidly among cat owners, fully half of the Kitty Klinic’s business was directly attributable to Felicity’s reputation as a competent and caring vet. The clinic seemed to be thriving, making an average net profit, after payment of all salaries and expenses, of twenty thousand dollars per month.

After the clinic had closed for business on Friday, June 16th, Felicity said to Ralph, “Things seem to be going well. Is there any chance that I can get that partnership sooner than next year?” At this point Ralph stroked his moustache and stared into the corner of the room. “Well,” he muttered, “I said that I would think about it when the time came. I’m not made of money, you know. There are lots of expenses here that you don’t know about.” As the conversation continued, Felicity pressed Ralph to honor his commitment, and matters rapidly deteriorated. Finally Ralph shouted, “All right! This is it! You can go out and find another job. You’re through here--and I’m not paying you for the past two weeks, either.”

Felicity responded that she fully intended to hold Ralph to his promise of employment and an eventual partnership, and stalked out. Her efforts to persuade Ralph to pay her final two weeks salary were unavailing. Finally, on July 5, she wrote Ralph the following letter:

Dear Ralph: Remember that you promised me a full year’s work at a minimum and a full partnership at the end of that time. I have kept my part of the bargain, and I expect that you will keep yours. Even though you have fired me--wrongfully, by the way--I am entitled to compensation. You haven’t even paid me for my last two weeks of work, you cheap bastard! I have not been able to find work as a vet anywhere in the area. I refuse to go to Duluth, where I could get a job as a doctor in a clinic, and I won’t work as a groomer around here even though the salary isn’t bad. My lawyer tells me that you owe me big time, and I expect to collect.

Felicity

Ralph then responded on July 10 with the following:

Dear Felicity: You claim that you were wrongfully fired--your attitude is why you lost this job. Although I had hoped that you might work for a full year, you tried to get me to give you a partnership in the middle of the year and thus have foregone any right to work the balance of the year. I don’t understand why you won’t even work as a groomer, when you could make five hundred dollars per week easily. If you want to starve, be my guest. Anyway, the city has condemned the block on which my clinic has been located for many years. I have to be out by the end of the month, and I have been unable to find another building at any sort of reasonable rent. This, combined with the fact that I have learned that I have a debilitating and virulent form of cat-bite fever, has made it unrealistic for me to believe that I could continue in the business. I am forced to retire. Sue me if you want to, but it will be a waste of time.

Ralph Peterson, DVM

In spite of her best efforts, Felicity was unable to get a job locally as a veterinarian until the beginning of November, 2000, when she obtained a job at one thousand dollars per week with Charlotte de Loing, who operated a clinic in St. Paul.

On March 5, 2001, Bud brought his cat, Tiger, to the clinic. “Tiger is just not himself,” Bud explained. “He hasn’t been eating well, and he has become listless. He is only four years old. Can you find out what’s wrong with him?” Felicity agreed to examine Tiger and to advise Bud of the results on the following day. Before Bud left, Felicity placed before him a form that the de Loing clinic required each pet owner to sign. The form read as follows:

TREATMENT CONTRACT

Pet Owner [Owner] agrees that the de Loing Clinic [Clinic] will treat_____________[Pet] as follows___________________________. Owner promises to pay Clinic’s standard fee for treatment and any medication administered to Pet. Owner further agrees to hold Clinic harmless for any loss due to injury or damage to Pet, from any cause whatever, including treatment of Pet, whether caused by the negligence of any Clinic employee or otherwise.

_______________________

Owner

Bud regarded the form narrowly. “What’s this?” he scowled. “Oh, don’t worry about that,” Felicity responded casually. “It’s just something that our lawyer told us to use. All of our pet owners have to sign one. All of the vets around here use this kind of form. I guess that it means that you have to pay for the treatment, whether it works or not. But we stand behind our work, and we assume full responsibility for any harm that might come to your pet.” Following this assurance, Bud grudgingly signed the form and left to attend to other business.

When he returned later in the day, Bud learned to his distress that unfortunately, due to a mix-up in the clinic, Tiger had received a shot of medication intended for another animal. This had proved fatal to Tiger, who now lay cold and stiff.

Sadly, Bud gathered the deceased feline in his arms and drove directly to Kitty Heaven, a cemetery that provided final resting places, complete with headstones and perpetual care, for cats who had passed on to the big litter box in the sky. Upon consulting with Emmet Sym, the funeral director, Bud was confronted with a brochure that listed several choices of arrangements for the deceased pet. “Of course, I want the best for Tiger.” Bud choked back his tears. “We recommend the package known as the Perpetual Rest® arrangement, which includes embalming, a tasteful graveside ceremony, interment, a full-sized headstone and perpetual care of the plot,” murmured the avuncular Emmet. The brochure listed the price for this package as $1,000.

Bud, who had been hoping for something considerably less pricey, gulped, dried his tears, and inquired about other packages. “The Peaceful Rest® arrangement involves cremation, the scattering of the ashes on the surface of our pond here on the cemetery grounds, and a listing of the deceased pet’s name on the plaque on the front of our building,” said Emmet. “That would come to four hundred dollars.” He then went on to describe several other options, including Calm Repose®, Quiet Repose®, and Heavenly Peace®, all more expensive than the Peaceful Rest® option, but costing less than Perpetual Rest®.

“I’ll take that Rest deal,” Bud announced, standing to leave. Emmet, recalling that Bud had said at one point that he wanted the best for Tiger, quickly jotted “Perp. Rest” on his desk pad, and gave Bud a receipt for the required $100 down payment that Bud paid in cash.

Later in the day, after Bud had left, Emmet arranged for the full Perpetual Rest® package, and, when the burial had been completed, he sent Bud a bill for the balance of $900.

Questions

Be sure to answer the questions asked, discussing in each case all arguments that each party might reasonably be expected to make. Discuss all issues even though you believe that the solution of one is determinative.

1. If Felicity sues Ralph, who will win and why? If Felicity wins, how much should she recover?

2. If Bud sues Charlotte’s clinic for the loss of Tiger, who will win and why?

3. If Bud refuses to pay for the Perpetual Rest® package, insisting that he wanted the cheaper Peaceful Rest® arrangement, and Kitty Heaven sues him, who will win and why? How much, if anything, should Bud have to pay?

Comments:

General. Most students did not do as well on this exam as they had done at the end of the first semester. This was due in part to the failure of a number of students to understand and discuss the issues, and in part to poor writing. The poorly written exams often reflected students’ difficulty with both grammar and sentence structure and, in many cases, with clarity of organization and expression. In many cases, content and writing problems went together.

The first question was the longest and most difficult; the third was the

easiest. The comments below note some of the more common problems

that students had, and what should have been discussed in each question.

First Question. It is important to understand that there are three separate elements to the recovery that Felicity is seeking; that is, there really are three separate losses that should be carefully considered, one by one, for a well-ordered and thorough answer to this first question. Felicity makes these claims:

(1) She is out $2,000 for the last two weeks she worked for Ralph.

(2) She had a contract for one year’s work, of which there are 6 months left, for which she should be paid, inasmuch as she was fired, in breach of the agreement.

(3) She has lost the partnership opportunity, which she understood would be hers at the end of the year, if she satisfied the conditions of Ralph’s offer.

Many students failed to consider one or more of these claims, or, more often, ran them together without explaining the differences between them and the all-important limitations and problems that Felicity would encounter with each. Much of this first question had to do with identifying and discussing the various defenses that Ralph would raise to each of these claims. It is always important to state clearly what the context is for each issue. Many students launched into a discussion of various principles or rules of law (“The statute of frauds applies here.”) without explaining at the outset what Felicity is seeking and what Ralph is claiming by way of defense. Some of you spent time talking about the tort action of wrongful termination of employment – completely irrelevant in this contracts exam.

What were Ralph’s defenses to Felicity’s claim of breach of contract?

He would first, of course, raise the Statute of Frauds. This is a contract that by its terms can not be fully performed within one year of the date of its making. Thus, the Statute of Frauds requires that if this agreement is to be enforceable, there must be a writing sufficient to indicate that a contract was made and signed by the party against whom enforcement is sought. This deal was entirely oral and must be evidenced by a sufficient writing. There are two pieces of paper here that might do the job--the two letters written after the rift. The writing, in order to satisfy the statute, need not be created at any specific time, nor must it take any specific form. It need not be complete. It must, however, contain the basic elements of the deal.

Felicity will urge that the two letters be read together in order to satisfy the statute. Some courts will allow two such documents to be put together to satisfy the statute, while others will do so only if there is a specific reference in the signed document to the other one containing the basic details of the contract. Felicity will argue that her letter says that Ralph had promised her a full year’s employment and a partnership, and that, while Ralph’s letter does not refer directly to hers, it obviously deals with the same subject matter, and it does not deny the existence of a contract. One might argue that even taking both writings together, there is not enough to satisfy the statute because there are few details in the writings, which at best refer only to a period of a year and say nothing about any of the other terms. The letter signed by Ralph is vague about the contract. It says that he “had hoped” that Felicity “might” work for a full year, but he doesn’t acknowledge that they had any sort of contract other than perhaps an employment at will arrangement. He does refer to her having foregone “any right to work for the balance of the year,” which may be enough to establish that they in fact had agreed that she would work for one year.

If Felicity does persuade the court to read the two letters together, she probably will have satisfied the statute and will be able to proceed at trial to prove the contract and try to enforce it as to claims (2) and (3) above. If the court concludes that the writings do not satisfy the statute, however, Felicity will be out of luck as to claims (2) and (3) above, and she will be left with only a claim for her salary for the final two weeks that she worked and for which she has not been paid. Her prior work is not, as many students suggested, a “partial performance” that will take this entire contract out of the statute of frauds and make it enforceable. The “partial performance” exception is available only in limited situations, and only when a transfer of land is contemplated. Rather, Felicity’s final two weeks work is a benefit that she has conferred on Ralph, for which she is entitled to be paid. Her claim will be for quantum meruit--the reasonable value of the work that she has done. This recovery will be based on a theory of restitution, whose aim is the prevention of unjust enrichment. It is available to her without question in this case, irrespective of any conclusion you may have reached about the validity of the contract she had with Ralph.

Of course, if Felicity wins the Statute of Frauds argument, she will be in a position to argue for damages based on (2) and (3) above. Many of you gave up entirely on any attempt at an argument that might defeat the Statute of Frauds here. A surprising number of students failed to mention the letters at all; they concluded that the Statute of Frauds would preclude enforcement of the contract without considering whether the writings would satisfy the statute. A few concluded through some convoluted reasoning that the contract could be performed within one year of the date of its making, and left it at that. This was not a legitimate conclusion from the facts.

There were of course other problems with Felicity’s claim for her salary for the rest of the year and for the partnership. Ralph may defend on the basis of impossibility or impracticability due to (a) the condemnation of the clinic building, and lack of other suitable facilities, or (b) his deteriorating health or (c) both taken together. A party’s failure to perform is excused and the contract is discharged as to both parties if performance as agreed becomes impossible (or even extremely difficult), provided that the event that creates the impossibility was something unusual, not in the reasonable contemplation of the parties when they made the contract--an event, the non-occurrence of which was a basic assumption on which the contract was made. One might argue either way about whether events such as these are sufficiently common that Ralph should have foreseen the possibility that they might occur. If the condemnation and Ralph’s illness were reasonably foreseeable, Ralph will remain liable; if not, both parties should be discharged. This would mean that Felicity would collect no damages for Ralph’s failure to allow her to continue beyond the time that the events causing the impossibility occurred, and nothing for Ralph’s failure to give her a partnership.

Many students failed to lay out the relevant rules in a coherent way. The student who fails to state the applicable rule in some reasonable and accurate form will suffer even if he or she obviously understands the issue. Many students expressed the rules so casually and glibly that the statements were incorrect.

There are several issues surrounding the question, how much should Felicity recover? If she wins the impossibility argument, she should recover her entire salary for the balance of the year up to the point that she got the job at Charlotte’s clinic. This would be one thousand dollars per week from the middle of June until the beginning of November. Once she got the job that paid her as much as she would have got from Ralph, she would no longer be entitled to the salary that he would have paid her, as she will not have suffered any damages beyond that point. If Felicity loses the impossibility argument, she would be limited to the salary she would have received up to the point at which Ralph had to close his doors.

Ralph will argue that the doctrine of mitigation or avoidability of damages requires that Felicity’s recovery be reduced by what she could have earned either by going to Duluth or at least by the amount that she could have earned locally as a groomer during the period of unemployment. The rule says that if the plaintiff could have got work that is roughly comparable to the old job, is at the same level, is not dangerous or demeaning (some courts say “different and inferior”), and does not require the plaintiff to incur great expense or inconvenience, the amount that the plaintiff would have earned, had she taken that work, must be deducted from the recovery. Here, Felicity would contend that the groomer work is not comparable to vet’s work, perhaps that for a vet to be a groomer is demeaning, and that the Duluth job is too far away to be convenient; she should not be required to move or to commute long distances. She will probably win this argument.

Here again, many writers made little or no effort to state the rule of mitigation, even as they attempted to apply it. A few even failed to use that term, or even to talk about “avoidability” of damages, as our editors do. While magic words are not necessary, and while catch phrases won’t substitute for discussion and explanation, students should use the common terminology and be able to explain its meaning and how the principles work.

So then, if Felicity can get past the Statute of Frauds, she should at least recover her entire salary for the period from the time that she was fired until she got the other vet’s job, plus the salary to which she was entitled for her final two weeks of work. You should have worked through all these possibilities, even if you had concluded that the Statute of Frauds would preclude her recovery.

Felicity’s final claim involves the right to the partnership. The partnership was contingent on her establishing a “good, steady clientele” This would be a condition precedent to Ralph’s obligation to give her a “full, equal partnership.” A condition precedent is an event that must take place in order to give rise to an obligation to perform. Because this is a condition precedent, Felicity, who is the plaintiff, must prove that the condition has been fulfilled. This should not be difficult for her, as the facts tell us that she has already developed a good clientele. Ralph may be correct in arguing that the condition also required her to work for a year, although the language is not completely clear. If he claims that she has not fulfilled the condition because of her failure to work for a year, he should lose the argument, because fulfillment of a condition is excused if the failure was caused by the person asserting the failure. There is in every contract an “implied condition,” as some courts describe it, that a party will not hinder the other’s performance. A few people, demonstrating a lack of understanding of the rules, got tangled up in the basic discussion of conditions, making it much harder than it was here.

Felicity will have to prove her damages to a reasonable certainty, and she will not be able to recover for a loss that is speculative. She may have a problem showing the value of the partnership, as it is hard to predict what future earnings would have been, and how long the arrangement would have lasted. While “causal” speculativeness seems not to be a problem, as she likely would have earned the partnership and it would have made some profit for some period of time, “assessment” speculativeness may be an insurmountable problem for her here. Ralph promised to “give” Felicity a partnership, but the length of time, that is, the term of the partnership, is uncertain. If she can get some expert economic evidence showing what a reasonable projection of profits would be for a reasonable period, she might be able to recover that amount. How you resolved this question was less important than that you saw that speculativeness, an important limitation on the expectancy award in contract law, was an issue here in establishing Felicity’s damages for loss of the promised partnership. Again, of course, all of this assumes that she wins the impossibility argument--which appears questionable.

Some students ignored the value of the partnership entirely in their discussion. Some ignored the claim altogether. Some argued that Felicity should recover half of the profits for the period that she had worked, on a restitution theory, since she increased Ralph’s profits during the time she worked for him, and thus conferred a benefit. This was a superficially appealing argument, given Ralph’s breach of their agreement, though there seems to be no real basis for it. Certainly, Ralph was not “unjustly enriched,” as he paid Felicity what she had agreed to accept for all her work, except for the last two weeks.

Second Question. The second question raised two essential issues: parol evidence and unconscionability. Again, it was important to be clear about the claims here. Bud would sue the clinic for breach of contract, (or perhaps negligence, though you should not have discussed the possible tort action here.) The clinic would no doubt plead in its defense the exculpatory clause. The signed, printed form says that the pet owner will not hold the clinic liable for the pet’s loss, even if that loss is caused by the clinic’s negligence. Bud will argue that despite that language, Felicity assured him that the clinic would “stand behind” its work and “assume full responsibility” for loss resulting from harm to the pet. This is a statement made prior to the execution of the document that directly contradicts the terms of the writing. The clinic will argue that the parol evidence rule precludes such a statement from becoming part of the contract. The parol evidence rule prevents a prior agreement or a contemporaneous oral agreement from becoming part of the contract if that agreement contradicts the terms of a writing that is at least partially integrated. While it was important to explain the differences between partially and completely integrated agreements, it was also important to note that the contradiction rule applies whether the writing is fully or partially integrated. This written agreement almost surely is at least partially integrated here, and that is enough. The statement that Felicity made is directly contradictory and will be excluded. The clinic seems to have a strong argument.

Some students didn’t state the parol evidence rule very clearly; a few didn’t state it at all. Some people spent a lot of time talking about the four corners rule and the “look at everything” approach to determining whether the writing is integrated and whether the integration is complete or partial, but extensive discussion of that as an issue here was unnecessary, as the document is pretty obviously at least partially integrated under either theory. Some students did take pains to explain the difference between a completely and a partially integrated document, but then failed to point out that it would not matter here, because a direct contradiction may not be admitted to vary either type of integration.

There really were no exceptions to the parol evidence rule that were reasonably raised by this problem, except perhaps fraud or misrepresentation, though the facts did not really support either one. It would likely be difficult to prove that Felicity purposely lied with the intent to persuade Bud to rely and to sign away his rights. A few students raised the issue but did not lay out the elements of fraud; some got confused about what kind of lie Felicity might have been telling. While there was nothing wrong with raising these exceptions as possibilities, the essential issue here for you to discuss was the parol evidence question. A few students missed that entirely, in their effort to make Felicity’s parol promise enforceable for Bud.

Bud will then argue that the exculpatory clause is unconscionable. He will urge that both procedural and substantive unconscionability are present here. This seems to be a contract of adhesion. Felicity told him that all pet owners must sign; furthermore, she said that all of the local vets use such a form, which suggests that Bud had little if any bargaining power, and that if he went elsewhere he would have been faced with the same clause. While the clause is not concealed in fine print, it is not crystal clear. The substantive unconscionability argument may be a bit more difficult to carry off. The application of the exculpatory clause seems harsh here, but is it so unfair and one-sided as to “shock the conscience” of the court? While some courts might consider a clause insulating the vet from the effects of her own negligence to be per se unconscionable, or unenforceable as being against public policy, some may not. Some students failed to raise this issue at all, and some did a rather slap-dash job of it. Some did not consider the substantive and procedural aspects of unconscionability.

For some unexplainable reason, a number of you thought that undue influence might be an issue. Some concluded that it was present and others thought it was important to raise as an issue but concluded that it was not present. It is mysterious to us that anyone would even mention it here, as there is absolutely nothing in the facts to suggest its presence. A few people suggested that Bud might have lacked capacity to contract due to his grief over the illness of his pet; this was not worth mentioning either.

Third Question. This is a mutual mistake question. It involves the sort of misunderstanding that is found in Raffles v. Wichelhaus, in that each party seemed to be thinking of a different thing when the deal was made. If this is a mutual mistake, the apparent contract never really was formed at all, as there was no true mutual assent, that is, mutual agreement to the same thing at the same time. Thus, neither party would have any obligation arising from the ostensible contract.

If this is the case, what should Bud’s responsibility be? If he did not have to pay anything at all, he would be unjustly enriched, since he did get a rather lavish burial package for his cat. Perhaps he should have to pay the cost of the cheaper service that he thought he was ordering, on the theory that Emmet should have been the one to clarify the question of which “Rest” package Bud really wanted for Tiger. The other approach would be to apply a theory of restitution and require Bud to pay quantum meruit for the benefit that he received. This presumably would be the reasonable value (not necessarily the market price) of the more expensive service. This would have the advantage of making the parties share the loss resulting from the mistake to a certain extent. Each party is somewhat at fault--Bud for not being more specific, and Emmet for not asking for clarity. A couple of students made the thoughtful suggestion of a compromise in the service; Bud could pay for the lesser package and forgo the perpetual care aspect of the more expensive deal.

One might argue that one party or the other should bear the risk of the mistake here, and some students did make such an argument, which was appropriate. Some suggested that this was a unilateral mistake, but the facts don’t seem to bear this out. Most people saw the issue and discussed it reasonably well, but some didn’t explain the effect of a determination that there had been a mutual mistake or misunderstanding at the formation stage of the agreement. Again, for some inexplicable reason, some of you argued that Bud was acting under some sort of disability – undue influence or incapacity due to his grief. Think about it. If that were true here, certainly most of the contracts people make for funeral arrangements for their human relatives would be voidable, when in fact, they rarely are.