WILLIAM MITCHELL COLLEGE OF LAW

WILLIAM MITCHELL COLLEGE OF LAW

CONTRACTS SECS 2B AND 3

SPRING, 1998

Professor Heidenreich

General Instructions

This is a closed-book examination. You may not consult any material of any kind during this exam. The exam focuses on the work that we have done in the second semester. Although there are several questions in the exam, they are not necessarily of equal weight. You must decide how much time to devote to each question. The exam will be graded as a whole. Be sure in answering each question that you consider all reasonable possibilities raised by the facts. Raise and resolve every such issue, discussing both sides, even though you believe that the resolution of one issue should solve the problems raised. If you believe that the facts are ambiguous or incomplete, you may make any reasonable assumptions consistent with the given facts, but you must state your assumptions as such and explain why they are necessary. If you see an issue that you have previously discussed, you need not discuss it a second time, but you may refer to your previous discussion. There are no Uniform Commercial Code issues as such in this exam, but of course the Code rules are often virtually the same as the common law rules. The grade on this exam will count for 60% of your final grade in the course, the other 40% having been generated by the grade in your first-semester exam.

THIS IS A THREE HOUR EXAM

General Facts

Arnold owned a small health club called Belly-Fitness ("The BF Club"). The club, located in the Midway area of St. Paul, drew nearly all of its patrons from the neighborhood, though some people employed nearby joined the club in order to be able to work out during their lunch hours. He employed several men and women who served in various capacities at the club. The BF Club was situated in a building owned by Priscilla Pratt. Arnold, who had been renting the building for some time, decided that he would like to buy the property. Accordingly he began to discuss the possibility with Priscilla. After some negotiation, they agreed during a January 15, 1998, luncheon meeting that Arnold would buy the property and Priscilla would sell it for a price of $150,000 cash. Arnold immediately wrote a check for $25,000 as a down payment. He wrote, "Down Pmt. Purch. Club Prop." on the memo line of the check and handed it to Priscilla. They also agreed that the closing would take place on June15, 1998, and that Arnold would pay the balance of the purchase price at that time. Having reached an understanding on these matters and all of the other details of the sale, they shook hands and parted.

In June of 1996, Arnold had hired Yvette, a recent graduate with a degree in physical education from a local university. At the time her only practical experience had been as a part-time receptionist in another health club. When she was hired, Yvette signed a form contract that Arnold presented to her. "This is my usual employment contract," said Arnold. "All of the employees have signed similar agreements. It says that you will work for a minimum of two years, and that I will give you the necessary support, encouragement and training to enable you to become a first-class personal trainer. There are some other usual provisions about salary, fringe benefits and some other matters. Take it home and have a lawyer look it over if you want. I should tell you, though, that nothing in here is negotiable. Do you have any questions?"

Yvette quickly glanced at the paper, shrugged, said, "O.K.," and signed, as did Arnold. Each party kept a copy of the paper. Yvette began working the next day, and she proved to be an excellent employee. Within a matter of six months, she had become a superb personal trainer, much in demand by the BF Club’s patrons.

On June 2, 1997, Sarah entered the club for the first time. Pursuant to the club’s policy, she received a one-month "trial membership" for the price of $25.00. This enabled her to try out the club’s facilities and to get to work with various trainers there. At the end of the trial membership, she told Arnold that she would sign a one-year contract with the club only if she could be sure of having Yvette as her personal trainer throughout the entire year. Arnold responded, "No problem, Sarah. Yvette is going to be with us for a long time. I know that she likes you too, and I am sure that she will be as delighted to have you for a client as I am." Upon hearing this, Sarah said, "In that case, I will do it." She then signed the document that is reproduced on the following page.

BF CLUB USE OF FACILITIES AND PERSONAL TRAINER AGREEMENT

Sarah Steele ("Member") agrees to become a member of BF Club ("Club") for a one-year period, beginning immediately. Member will pay upon the execution of this contract the sum of $5,000, receipt of which is hereby acknowledged by Club. Membership entitles Member to use any of Club’s facilities during Club’s usual hours. Club will be open for use at least from 5:00 A.M. to Midnight on every day of the year except Christmas. Member is also entitled to three (3) one-hour sessions per week with one of Club’s personal trainers of Member’s choice. Additional sessions can be arranged for an additional fee of $100 each. Club will provide, in addition to the usual training equipment, secure locker facilities, ample towels, soap, etc.

The following terms apply to this contract. Member has read and agrees to the following terms.

Use of specific equipment at any specific time can not be guaranteed. Each Member is expected to use all equipment in the proper fashion and for reasonable periods of time.

Member agrees that if Member is injured in any way at any time for any reason, member will not assert a claim for any type of injury, theft, loss or damage against Club, but will indemnify and hold harmless Club for any such loss or damage.

Although Club will do its best to provide the personal trainer of Member’s choice, it can not guarantee the availability of any particular trainer.

_____________________________ _______________________

Member For Club

June 30, 1997

Date

On January 5, 1998, Yvette appeared in Arnold’s office with some disquieting news. "Arnold," she said, "I am afraid that I will have to leave you. The Iron Woman Club downtown has made me an offer I can’t refuse. I plan to start there next week." At this point, Arnold said, "Just a minute, Yvette. Don’t you remember signing the employment contract when you started here?"

"Oh, sure, Arnie," she responded, "but I didn’t read it very carefully at the time, and I have lost my copy." Arnold reached into a file on his desk and pulled from it a paper, which he then thrust into Yvette’s hands. "Look at paragraph six," he said, "and then get back to work." Yvette studied the paper thoughtfully, for the first time realizing that the document that she had signed included this language:

Employee promises and agrees that upon termination of employment for any reason, s/he will not work in any capacity for any health club or similar business enterprise in the Twin Cities, whether such enterprise be a profit-making or non-profit organization, for a period of twenty-four months following the termination.

"So you see, Yvette, you must finish your two-year contract, at which point we can talk about the next contract—unless you plan to retire. In any case, I will sue to prevent you from working at any other club for the next two years if you leave here for any reason."

"The hell with you," Yvette flared. "I’m out of here right now—and I will be at Iron Woman next week."

True to her word, Yvette left and did not return. A few days later a newspaper ad for Iron Woman featured Yvette’s picture and the heading, "Yvette is Now at Iron Woman."

On the same day that the Iron Woman ad appeared, Sarah stormed into Arnold’s sanctuary, waving a copy of the Iron Woman ad. "What’s going on here?" she demanded. "Is this true?" Arnold acknowledged that Yvette had jumped ship, but he assured Sarah that all of the other personal trainers were at least as well qualified as Yvette; he promised to make any other trainer that she wished available to her. "I don’t want ‘any other trainer’," she snapped. "I want Yvette. If I can’t have her, I want my money back."

Additional Facts and Questions

Assume that Priscilla changed her mind about the sale of the property. She had not cashed Arnold’s check, and on February 18, 1998, she returned the check with a note that said, "Arnie—I have decided that the deal isn’t such a good idea for me, and I am canceling. Here is your check. I hope that we can continue our good landlord-tenant relationship." The note was signed, "Fondly, Priscilla." Arnold has come to you seeking advice about his rights. In particular, he would like to compel Priscilla to sell to him if that is possible. Tell him what his legal position is, explaining the arguments that Priscilla could reasonably be expected to make, and the arguments that you could make for Arnold in his behalf.

Arnold also wants to know what rights he might have against Yvette. "What an ungrateful wretch that woman is—after all I did for her. Who does she think made it possible for her to be a great personal trainer, anyway?" he fumes. Explain to him the approaches that he might reasonably try, evaluating each in light of the responses that Yvette could reasonably be expected to make. Tell him what he should do.

Arnold also shows you a summons and complaint. He has been sued by Sarah Steele, who has sought a refund of the entire $5,000 that she paid for her club membership. Her grounds are that (a) she was promised that Yvette would be her personal trainer and Yvette is no longer available, and (b) On four separate days since Sarah joined, the club was closed for no apparent reason. In answer to your question, Arnold says that he had been called out of town to be with his sick mother on the occasions when the club was closed, and had been unable to obtain a replacement manager, the employee who had been his manager having recently quit. If this case goes to trial, who will win and why? Explain and resolve all issues that each party can reasonably be expected to raise.

COMMENTS

General Comments

Many students failed to follow the advice that has been given over and over again: state the rule that you are applying and explain how it relates to the facts of the problem. Many students would say something like, "Arnold will raise the parol evidence rule," and go on to say that some evidence would or would not be admissible, without ever specifically laying out the parol evidence rule or explaining how it works.

Students often failed to raise an issue or addressed only part of an issue. Some clearly did not understand some of the principles that they were trying to apply. Sometimes the student used careless language or imprecise statements that were incorrect as written, even though the student may have known the correct rule.

A fair number did not really answer the question asked. The first two questions asked the student to explain the client’s legal position and, in the second question, to give some advice. The third question asked who would win the lawsuit and why. Some people simply raised issues and talked about them without giving the advice or saying who would likely win.

Specific Comments

This exam was designed to raise the following issues.

Question One

What are Arnold’s rights? Can he compel Priscilla to transfer the property to him? This is a straightforward statute of frauds question. The contract for the transfer of an interest in real property appears to be oral. The statute of frauds says that such contracts, as well as certain others, are not enforceable unless they are evidenced by a writing. Many students said that the contract must be in writing, which is not correct. Informal documents or memoranda may constitute a sufficient writing for these purposes. The writing must have enough information to show that a contract has been made; it must include a statement of at least the basic terms of the contract; and it must be signed by the party against whom enforcement is sought—in this case, Priscilla. The only paper that she has signed (the note accompanying the check that she returned to Arnold) is pretty vague. That is, it doesn’t contain any of the terms of the property contract; it could relate to almost anything. On the other hand, it does refer to the returned check, which bears the notation, "Down Pmt. Purch. Club Prop."

The statute has always been interpreted to allow the use of two or more pieces of paper to satisfy its requirements so long as they can be tied together in some way. Some courts require a specific internal reference in one document to the other, while others do not require a specific cross reference. Priscilla’s letter, which seems to recognize that there was a contract and refers to the check, together with the check with its notation about the club property, might do the trick, though neither paper contains the purchase price or certain other significant elements of the contract.

Arnold also might argue that this situation falls into the partial performance exception: a buyer who shows that he has made a payment, is in possession of the property, and has made valuable improvements to the property normally can enforce the contract and obtain specific performance notwithstanding lack of a writing. Most courts require two out of these three elements, but usually not all three. Arnold is in possession and has given Priscilla a check as part payment. The weak spots in Arnold’s position are that Priscilla has not cashed the check, but in fact she has returned it (though the fact that Arnold gave her the check as a down payment and she took it might well be interpreted to mean that he has made payment) and the possession that Arnold will point to might be explained because he has been a tenant for some time. The unequivocal reference rule requires that the elements of partial performance be such that they can only be reasonably explained by the existence of a contract for sale of the property to the buyer.

Some students suggested that Priscilla’s note would meet statute of frauds requirements because it is an admission that a contract exists. This is a rule from the Uniform Commercial Code that some courts have adopted as general statute of frauds law, but it only works if the admission is made in a judicial proceeding. Thus it would not apply here in any case.

Arnold appears to have a reasonable chance, but not much more, if he were to try to compel Priscilla to perform. His chances of winning a lawsuit for specific performance don’t look better than 50/50. He probably should be advised accordingly, as he would be lucky to find a judge generous enough to find that the statute has been satisfied or that the partial performance exception applies.

Some students discussed the possibility that the writings would be sufficient or the possible application of the partial performance exception, but not both. Some people discussed and rejected the possibility that the check alone would suffice but ignored the note from Priscilla. Some people didn’t seem to recognize that the signature that is required is that of the party to be charged and that the signature of the person seeking to enforce the contract is not necessary.

Question Two

Arnold may sue Yvette for breach of her two-year contract, and perhaps get damages measured by the difference between the cost of hiring another employee of her caliber and the amount that he would have paid her. He might also get consequential damages, but these may well be outside the purview of the Hadley v. Baxendale rule; after all, when Yvette was hired she was inexperienced, and it would be hard to show that the parties contemplated significant consequential damages would flow from her breach of contract.

Thus, Arnold’s chance of recovering something, but not a great deal, in damages seems good, inasmuch as the contract appears otherwise to be enforceable. Yvette might try to argue that the entire contract is unenforceable because it is unconscionable. Many people explored this possibility, and some concluded that she would be successful. This seems unlikely, as there is little to support a claim of procedural unconscionability other than the fact that this seems to be a contract of adhesion—a "take it or leave it" deal. There was no pressure or hard sell as far as we can tell. Furthermore, because the terms of the contract as we know them seem O.K., there seems to be no substantive unconscionability. It is true that the non-compete clause might well be subject to attack, but it is hard to find even that clause so oppressive that no reasonable person would take such a deal in the absence of some unfair tactics.

Some students suggested that there might have been fraud, duress or undue influence. Even the most imaginative discussion could not make much of a case for any of these out of the facts that we have. Most of that discussion was a waste of time. The closest that anyone could come to a reasonable argument about fraud was to suggest that Arnold had a duty to point out the non-compete clause specifically and that his failure to do so, especially after he mentioned some other clauses specifically, constituted fraudulent concealment. It is hard to imagine a court buying that argument unless there are facts that we don’t know about.

Arnold’s real interest, though, is in enforcing the non-compete clause. Should he sue to seek an injunction that would prevent Yvette from working in the Twin Cities? Yvette will argue that this clause is unenforceable as being contrary to public policy. Contracts in restraint of trade were traditionally held unenforceable because they harm the public by stifling competition and make it difficult for the person subject to the limitation to earn a living. Modern courts are, however, willing to enforce non-compete clauses in employment contracts if they serve a legitimate employer interest, are not unduly restrictive of the employee’s right to earn a living, and are not injurious to the public.

The court tests clauses that seem on their face to be reasonable by determining whether they are unreasonably restrictive in length of time, geographical scope or type of work that the employee is forbidden to take. While courts are often willing to edit ("blue-pencil") such a clause in a contract involving the sale of a business and enforce the clause as modified, most courts take the position that in an employment contract if the clause is not reasonable as drafted it will not be enforced at all. This is to discourage employers from using an overly broad clause as an in terrorem device. The court hesitates to deny the employee a chance to earn a living in her chosen field, and it will look closely at the question whether the employer is justified in imposing the limits that are established in the contract.

In this case, the employer might argue that he has a legitimate interest in protecting his investment in the training and development of an employee who arrived with few skills and essentially learned on the job, and in minimizing the loss of his customers when Yvette leaves. Yet, Yvette has worked for a year and a half, about a year of which was following the six-month "learning period"; Arnold probably has already recouped his teaching investment. Two years seems like a long time for an employee to be out of work in her field; probably Arnold does not need such a long period of time to keep people from following Yvette like rats after the Pied Piper.

The geographical limit seems somewhat large, especially as Arnold draws his clientele basically from the Midway area, and Yvette is going to work in a neighborhood somewhat removed from this one. Still, the newspaper ad suggests that Yvette has drawing power that could take clients away from Arnold.

The scope of the limitation seems rather broad, also. Yvette could not work cleaning the pool or picking up towels at the YWCA without violating this clause as written. A court may very well refuse to enforce this clause on these grounds. Many students said that a court would look at these factors, but simply evaluated the reasonableness of the clause in an "is not—is too" kind of argument rather than tying the discussion to the facts of this case.

The best advice to Arnold may be to forget the non-compete clause and to decide whether he has suffered a large enough financial loss by Yvette’s early resignation to make it worth pursuing the breach of contract claim, keeping in mind that it might be hard to show that when Yvette was hired the parties had reason to expect that if she breached clients would quit the BF Club.

Question Three

If Sarah’s case goes to trial, she will try to show that she is relieved of her obligation to pay and should recover her entire fee because Arnold has breached the contract in two ways: he has failed to make Yvette available as a personal trainer, and he has closed the club on some days when the contract provides that it will be open.

The first issue is the more serious one. Sarah will allege that Yvette’s availability was a condition to her obligation to pay, and that because that condition has failed, she is relieved of her duty. A condition is an event, not certain to occur, that must occur in order to give rise to a party’s obligation to perform. The failure of a condition discharges a party in whose favor it operates from her obligations under the contract. A number of students recognized that a condition problem was involved here, but did not define what a condition is or explain explicitly the potential consequences of a holding that a condition had been breached.

Arnold may raise the parol evidence rule as a defense. The rule says essentially that an agreement that was entered into prior to or contemporaneous with the execution of a writing meant to be the final expression of the terms that appear in the writing can not be a part of the contract if it would contradict the terms of the writing. Arnold will argue that the alleged promise of Yvette’s availability would contradict the third numbered term in the written document and thus could not be part of the contract.

Here again, many people failed to lay out the principles of the parol evidence rule. Some spent a lot of time discussing whether the writing is totally or partially integrated. Because it appears complete on its face, most courts would probably consider it to be wholly integrated, but that is not really important here, because the critical term is not a consistent additional term (which could come in if the writing were partially integrated, but could not come in if it were fully integrated), but clearly a contradictory one.

One might argue that the term in the writing is ambiguous because the writing says in one place that the member will be entitled to three sessions per week with a personal trainer "of Member’s choice," while the small print in paragraph three says that the Club "can not guarantee availability of any particular trainer." If the term were to be considered ambiguous, parol evidence would be admissible whether the writing is wholly or partially integrated. Few students saw this possibility.

A number argued that the promise could come into evidence as an exception to the parol evidence rule because the availability of Yvette was a condition precedent to the formation of the contract. This, of course, could not be. Certainly, Sarah would not enter into the contract without Arnold’s assurance that Yvette would be available for the entire term, but having received that assurance, she did in fact enter into the contract, and paid the entire fee up front. Arnold broke his promise, albeit not purposely. He clearly would be liable for breach of contract.

If the breach is only a breach of a covenant or promise, Sarah would not be discharged of her obligation, but would be able to recover damages, whatever those might be. Perhaps her damages would amount to little or nothing if in fact other excellent personal trainers were available. On the other hand, if this is a breach of a condition, she might, in theory, recover her entire fee payment. This is almost surely not going to happen, however, as she has in fact had the benefit of six months of service; to give her this free would amount to a severe penalty—a forfeiture—for Arnold and a windfall for Sarah. Still, if she is successful in her condition argument, she will probably be allowed to terminate her contract and recover a prorated portion of her fee.

Arnold, however, seems likely to succeed in his efforts to keep this out of the contract. He has a pretty strong parol evidence argument. Yvette might try to make a showing of fraud or challenge the numbered terms as unconscionable. There is no real likelihood of success with the fraud argument unless there are facts about which we know nothing. In spite of the arguments that many students raised, there is nothing to show that Arnold was acting in bad faith or was being dishonest when he told Sarah that Yvette would be available for the entire year. True, this is a frail and transitory existence, and death could come, like a thief in the night, for Yvette, as indeed it must for us all, but there is no reason to believe that Arnold did not believe that Yvette would be able to serve for the entire year, even though her contract term might expire slightly before the end of the term of Sarah’s membership contract. Fraud requires a showing of an intentional lie, or at least a reckless disregard for the truth.

Similarly, unconscionability seems like barren soil. True, the term in dispute is in small print, but otherwise there is little to support such an argument. There is nothing else suggesting procedural unconscionability, and the term in question seems reasonable, given our inability to predict the behavior of another person. Some students suggested that the exculpatory clause might make the contract unconscionable, but that term is not in question. Everything else seems reasonable as far as we know. Again here some people wasted time talking about undue influence or duress.

As to the issue of the four days on which the club was closed, if the term in the contract that was violated is a condition, Sarah should get her money back. On the other hand, if it is a promise or covenant, she should not be relieved of her obligation to pay, though she should be entitled to such damages as she can prove for the breach. Given the fact that courts tend to interpret terms as promises rather than conditions so as to avoid the harsh results of a forfeiture, it seems highly unlikely that this relatively minor problem would be considered a breach of a condition. The breach is almost surely a non-material breach. Sarah should get whatever damages that she can show flowed from the unannounced closings, but that is unlikely to amount to much.

A number of students raised the possibility that Arnold might argue that the condition of Yvette’s availability should be excused or that the breach arising from the closings should be excused on grounds of impossibility or impracticability. The argument probably won’t work for Arnold in either case, as the frustrating events are clearly foreseeable. Most courts would hold that neither Yvette’s untimely departure nor the illness of Arnold’s parent would be a contingency, the non-occurrence of which was a basic assumption on which the contract was made.

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Grade Spread

Sec 2B Sec 3 Total

A 2 3 5

A- 5 3 8

B+ 1 4 5

B 3 4 7

B- 6 3 9

C+ 8 5 13

C 10 4 14

C- 5 10 15

D+ 3 1 4

D 3 3

D- 2 2

F 4 4 8

N= 47 46 93

Med: Low C+ Mid C Bare C+

Mean 2.25 2.14 2.20

Mode C C- C-
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