CONTRACTS §4
SPRING, 1997
FINAL EXAMINATION
THREE HOURS
General Instructions
This is a closed-book exam. You may use no material and you may consult no one during the
exam. Be sure to answer the questions that are asked and to explain your answers. Discuss all
issues reasonably raised by the facts even though you believe that the resolution of one issue
solves the problem, but don't make up issues that don't exist. If you believe that the facts are
incomplete or ambiguous, you may assume additional facts consistent with the given facts, but
explain your assumption and why you believe that it is important.
This exam will be graded as a whole. Although there are three questions, they are not necessarily
of equal difficulty. You must determine how much time to spend on each.
There are no Uniform Commercial Code issues in this exam, but as you know, some of the
common law rules and principles that we have studied are similar to those found in the Code.
This is a three-hour exam
General Facts
Professor Hughes Grant, an up-and-coming young legal scholar who had taught at Trover Law
School as an untenured assistant professor for three years, was a nationally recognized expert in
the law of cesspools. "If you want to know about cesspools, go to Grant; he's the source," had
become a virtual cliché in legal circles. The Lower Case Law School, situated in the thriving
community of Lower Case, Indiana, in an effort to improve its national ranking by the profligate
spending of funds promised to it by Carol Calhoun, a successful alumna, attempted to woo Grant
to its faculty. This entire recruiting effort took place over a period of several weeks in telephone
conversations and personal meetings between Grant and Grace Glower, the Dean at Lower Case.
Finally, at a luncheon meeting on April 1, 1996, the parties agreed on all necessary details and
terms of employment such as salary, teaching responsibilities, fringe benefits, administrative
duties, etc. At that time, this further conversation also took place:
Grace: "We expect to receive a big gift from our alumna, Carol Calhoun; this gift will enable us
to pay your salary as well as to do some other important things. The money should be coming in
shortly, so we want you to join us at the beginning of the fall, 1996 semester. We start on the
first of September, as you know. You will teach on a trial basis for the academic year. Assuming
that everything works out as we hope during the '96-'97 academic year, we will then give you a
tenure spot, which will guarantee you a job for life."
Hughes: "That sounds good, Grace. I'll take it. I will start with you folks on September 1."
Grace: "It will be great to have you with us, Hughes. Let's drink to our patron--Ms. Carol
Calhoun!"
Unknown to Grace, however, even as she raised the convivial glass, a cloud was forming on the
horizon: Carol Calhoun was beginning to have second thoughts. Eventually she wrote this letter
to Grace:
July 1, 1996
Dear Dean Glower,
In a moment of weakness after my recent cancer-scare, I finally succumbed to your incessant
blandishments and agreed to give Lower Case three million dollars. Frankly, I was worn out and
somewhat weakened by the medical treatment, and both my physical condition and my emotional
resistance were, as you know, at a low point. I shouldn't have been so hasty in making this
promise. I never would have done so had I been thinking clearly.
Although at that time I had the greatest respect for you (Indeed, but for your advice and
guidance, I would never have made the promise at all.), now that I am able to take control of my
life, I see that I was rash, and I must now revoke my promise.
Furthermore, some months ago I learned to my dismay that in spite of the fact that you
persuaded me to make the gift in part by promising me that you would name the newly built
classroom facility in my honor, you made identical promises to several other donors. This leads
me to believe that you were not honest with me and that you never intended to put my name on
the building.
All of this leads me to withdraw my support for you and for Lower Case Law School.
More in sorrow than anger,
Carol Calhoun
Additional Facts and Questions
1. On July 2, 1996, Dean Glower consults you about the law school's position with reference to
the Calhoun gift. She admits that everything that Ms. Calhoun stated in her letter is essentially
accurate, and she goes on to say that if this gift is not forthcoming, she will be unable to hire
Professor Grant unless she breaks the contract described below in Question 2. Advise her about
the likelihood of the Lower Case Law School's being able to enforce Ms. Calhoun's promise.
Discuss all reasonable defenses that Ms. Calhoun might assert. Assume that there is consideration
that would, but for these defenses, make the promise enforceable.
2. Dean Glower goes on to explain that if the law school doesn't get this gift it could pay the
salary promised to Professor Grant only if it breaks its contract with Professor Titus Abulzas, an
expert in bankruptcy who has retired from another law school, and whom it has hired to teach
during the 1996-97 academic year. She says that Professor Abulzas is in great demand, but that
most law schools would be unlikely to pay more than $80,000 for his services. She produces the
following letter, which constitutes the entire written agreement between the law school and
Professor Abulzas.
LOWER CASE LAW SCHOOL
"A High Class Legal Education
at a Bargain Price"
100 West Langdell Drive
Lower Case, Indiana
29966
Ralph W. Peterson, Grace Glower,
President Dean
January 10, 1996
Dear Professor Abulzas:
This confirms our agreement that you will teach the bankruptcy and debtor-creditor courses
here at Lower Case during the 1996-97 academic year as distinguished professor of bankruptcy
law. Your salary for the academic year will be $100,000.
You will receive the usual fringe benefits that have been explained to you, and you will be
provided with the normal staff support, office space, etc. that we have discussed.
If this arrangement is satisfactory to you, please sign below and retain a copy of this contract.
Lower Case Law School Accepted:
____________________ ____________________
Dean, Lower Case Law School Titus Abulzas
Dean Glower also confides that she and Professor Abulzas have purposely understated the salary
in this letter in order to avoid problems with the rest of the faculty, who are being paid much less
than the real amount of Abulzas's salary, which is in fact to be $120,000. Furthermore, Dean
Glower has promised to provide, at the law school's expense, a luxury apartment for Abulzas for
the entire academic year and to pay his moving expenses from New Mexico, where he now lives,
to Indiana.
"What if I dump Abulzas?" she asks. "How much trouble will that be for us?" Advise the Dean
about the likely legal consequences of such a move and the amount of any loss that the law school
might suffer. Consider all reasonable claims that Professor Abulzas is likely to raise and all legal
defenses that the law school may reasonably consider raising. Assume, however, that the
agreement is sufficiently definite to be a contract.
3. Assume that Dean Glower is seriously considering whether to renege on her agreement with Professor Grant. She asks for your advice about the propriety and legal consequences of such an action. Advise her, considering all reasonable legal defenses that the law school might consider raising, the likelihood that any of these will succeed, and the propriety of asserting these defenses.
COMMENTS
General Comments
This exam should have been rather easy, and for some students it was. Unfortunately, for a few it
proved to be more than they could manage. These students tended to miss important issues or to
discuss in a relatively superficial way the issues presented. In general, however, students suffered
from a failure to explain the elements of the various claims or defenses that might be asserted and,
in some cases, an apparent lack of a clear understanding of some of the fundamental problems
presented. Some of the style problems were disconcerting. I attach an extract from The
Transitive Vampire that addresses the antecedent-pronoun agreement problem that seems to
plague students.
First Question
The basic problem here is one of assent. The law school, were it to seek to enforce Ms. Calhoun's
promise, would likely be met with three arguments: Ms. Calhoun may claim (1) that she lacked
the capacity to enter into a contract (probably not a very strong defense); (2) that she was the
victim of undue influence (perhaps a bit better); and (3) that she was the victim of fraud.
The lack of capacity claim would have to be based on her emotional state at the time she made the
promise. The student should have mentioned the two tests for lack of capacity: the cognitive test
and the volitional test, and explained that the argument is unlikely to succeed under either theory.
There is nothing in the facts to suggest that Ms. Calhoun did not understand the nature and
consequences of her acts (the cognitive test) or that she was unable to do other than agree to the
contribution (the volitional test). Mere inanition or ennui would not be enough.
The undue influence argument is related to the lack of capacity claim but is slightly different.
Some students seemed to blend these or confuse them with one another. Calhoun would have to
show that there was a great disparity in the emotional relationships, that she trusted the dean but
that the dean abused that trust by taking unfair advantage of the imbalance in willpower. Usually
these situations involve a confidential relationship, but this is not an absolute requirement. Some
of the things that Calhoun says, particularly in the second paragraph of her letter (which, the dean
admits, are all relatively accurate), suggest that Calhoun relied on the dean and allowed the dean
to overcome her reservations. Perhaps, considering her illness and resulting lack of willpower,
about which the dean was aware, she has a reasonable defense.
The fraud defense requires that Calhoun show that the dean made a misstatement about a material
fact; that the dean knew that the statement was incorrect (or that she made the statement in
reckless disregard of the truth); that the dean made the statement in order that Calhoun would rely
on it; that Calhoun did rely on it; and that Calhoun suffered a loss as a result. The false statement
was the promise to name the new building after Calhoun (The dean, in admitting that the Calhoun
letter is basically true seems to admit that she never intended to do so.); it appears to have been
material because Calhoun says that she relied, at least in part, on the promise; and the other
requirements are clearly met. Some people argued that the promise didn't relate to a material fact;
this does seem to be the weakest part of Calhoun's argument. Some also suggested that there is
not enough evidence to show that the dean lied--perhaps she meant to put several names on the
building--but the admission seems to cut against this. In any case, the promise was to "name the .
. . facility in my honor," which doesn't sound like a promise simply to put Calhoun's name on a list
of donors.
Some students suggested that this is a condition problem, but the facts don't give very much
support to this approach. While perhaps the naming of the building was the consideration for the
promise, nothing that we have says that it was a condition. This might be dealt with as a material
breach question: the law school might argue that at worst its failure to name the building for
Calhoun constituted a non-material breach for which the school should be liable in damages.
Nevertheless, if fraud is involved, the contract is voidable. Fraud is premised on the proposition
that the dean made the promise without the intention of keeping it. If Calhoun can prove this, the
contract is voidable irrespective of other arguments.
A few people suggested that maybe Calhoun waited too long, so that she has now affirmed the
contract by failing to disaffirm within a reasonable time after learning of the fraud or regaining the
ability to make decisions on her own. This could be the case, though the facts don't give much
support for it. The best argument in this vein is that Calhoun learned "some months ago" of the
dean's perfidy.
A few people tried to make this into a duress situation. This is barren soil. There is no
suggestion of an improper threat, whether of an illegal act or anything else. While modern courts
do not insist on a threat of physical harm, nothing in the facts suggests any threat at all. A couple
of students suggested unconscionability, but again, the facts are thin. Procedural
unconscionability seems to be a pretty far-fetched argument as there is no lack of meaningful
choice or overwhelming disparity of bargaining power. Substantive unconscionability may be
difficult to prove also because even though three million is a lot of money, we don't know how
many millions Calhoun might have.
Second Question
This question raises two major related concerns: the application of the parol evidence rule, and
the amount of damages that Abulzas might recover. The law school's potential damages exposure
will depend to some extent on the resolution of the parol evidence questions. The ill-advised
raising of the statute of frauds at this point would be otiose.
Abulzas, though superannuated, is in great demand in the law school community. This means that
he is likely to be able to obtain a comparable job at $80,000 per year and thus to mitigate his
damages. The doctrine of mitigation says that if the victim of a breach of an employment contract
is able to take comparable employment--that is, work that is not dangerous, demeaning or such
that it requires the person to make an unreasonable move to another location, etc.--the amount
that the person earns or, if he chooses not to take the opportunity, would have earned, is not
recoverable in damages.
Therefore, the law school's exposure will probably be measured by the difference between the
salary that it would have paid and $80,000 plus the value of the luxury apartment (if the school
for which Abulzas works does not provide similar quarters; if the new school provides a hovel,
the difference in value between the hovel and the luxury apartment would be the appropriate
measure of damages for this element.) plus the cost of a move to the new school if that is not
covered in the new contract. This would satisfy Abulzas's expectation interest by putting him in
the position in which he would have been had Lower Case kept its promises. He should wind up,
at no cost to him, at his new place of employment, living in a "luxury apartment," and he should
have in his pocket the amount that Lower Case would have paid him. A couple of people
speculated that Abulzas's reputation might be damaged by a breach or that it might be too late for
him to get a job for the coming year. These are possibilities, but the facts don't tell us that.
Are the promises to pay $120,000 and to provide the luxury apartment and the moving expenses
part of the contract? The parol evidence rule says that if the parties' agreement is memorialized in
a writing that is meant to be the parties' final expression of their agreement as to the terms that
appear in the writing even though not all terms of the agreement may appear in the writing, (that
is, the writing is partially integrated), agreements entered into prior to the execution of the
writing, or oral agreements entered into contemporaneously with the execution of the writing
("parol" or "extrinsic" evidence) can not be part of the contract if they would contradict what is in
the writing. Parol agreements that merely supplement the writing, however, can, in these cases,
become part of the contract.
Some courts only bar agreements that contradict a specific term in the writing, while others focus
on the overall tenor of the writing and bar any parol agreement that runs contrary to that overall
tenor. These latter courts tend to ask whether the writing deals with a topic at all; if the writing
does address a topic, this kind of court may bar any other purported agreement on that topic.
If, in addition to this, the parties have meant the writing to be a complete and exclusive statement
of the terms of their agreement (that is, the writing is fully integrated), even non-conflicting
additional parol terms are barred. While often a "merger clause" or integration clause in the
writing will provide evidence of the parties' intent, such a clause is not necessary to make the
writing fully integrated and most courts do not consider the presence of such a clause binding if
other evidence demonstrates that the parties did not intend to put the entire agreement on the
paper. Some students seemed to feel that the merger clause is what makes the writing fully
integrated.
Irrespective of whether the writing is partially or fully integrated, the court will always entertain
evidence to clarify or explain ambiguous terms--those that are reasonably capable of more than
one interpretation.
This writing looks like a partially integrated one. That is, some of the terms seem to be finally
stated, but some others clearly are not included. (There are "usual fringe benefits that have been
explained to you," and "we have discussed" staff support, etc.) The salary term, $120,000, would
almost surely be considered to "contradict" the written term, $100,000. In the absence of fraud (a
showing the Glower somehow was trying to cheat Abulzas), nearly every court would bar
evidence of the oral agreement. Thus, the measure of damages for the lost salary that Lower
Case would be exposed to would be $100,000 reduced by whatever Abulzas could earn at
another similar job--probably $80,000.
If the writing were considered partially integrated, the other promises might be part of the
contract on the theory that they don't contradict anything in the writing. If, on the other hand, a
court looked more narrowly at the question and concluded that, the parties having addressed the
subject of fringe benefits, they would almost surely have included these additional promises if such
promises were indeed made, it might bar the parol evidence. It is likely, however, that even in
these courts, Abulzas might prevail on the theory that the "have been explained to you," and "we
have discussed" language at least makes the writing ambiguous and that the proffered parol
evidence should be admitted to show what was explained and discussed. Most courts would
probably allow the information about the apartment and moving expenses to come in.
Some students got confused about just what the parol evidence rule does and how it works.
Some either forgot about the doctrine of mitigation or didn't explain it very well. A few ignored
the moving expenses and luxury apartment issues.
Third Question
The major issues here were the statute of frauds, the possible defense of failure of a condition, impracticability, and the propriety of raising the defenses. Some students ignored completely the "propriety" aspect of the question, and simply explained how they would advise the dean to breach an otherwise perfectly valid but technically unenforceable contract without explaining how they justify that conduct. This was disappointing.
The statute of frauds problem that is raised here is the enforceability, in the absence of any
writing, of an agreement that can not be performed according to its terms within one year of the
date of the making of the contract. Some students misunderstood the one-year rule, believing--incorrectly--that the one year related to the period of time that it would take to perform. This
contract almost surely falls within the statute because the contract was made on April first, and
can not possibly be completely performed before April first of the following year because it
requires Grant to work through the academic year which would not be ended until at the very
earliest some time in May.
There seems to be no easy response to the statute of frauds defense unless Grant has, in reliance
on the promise, changed his position in such a way that he could use promissory estoppel to
circumvent the rule. We don't have enough information to enable us to determine whether this
might be the case, but it is possible that Grant has quit Trover and would find it too late to get
another position in spite of his notoriety.
The other defense relates to the discussion about Grant's salary being paid from the Calhoun gift.
The argument would be that there was an implied condition (probably a condition precedent, for
what that might be worth) that the contribution be made in order that Lower Case's obligation to
pay Grant's salary be triggered. There seems to be no express condition, but Dean Glower does
say that the gift "will enable us" to pay Grant's salary and the two drink the health of the
benefactor. The law of conditions is such that if the condition fails to be fulfilled, the party in
whose favor it is to operate is not required to perform--that duty is discharged by the failure of
the condition.
Courts, however, dislike conditions that result in severe consequences--a forfeiture--to the other
side. Here, Grant, who is a popular fellow (at least in the cesspool world), might not suffer
seriously unless he has cut the cord with Trover (which is likely) and has nowhere else to go
(which is less likely). Nevertheless, courts usually interpret these terms about where the money is
coming from to be expressions of the source or timing of the payment rather than conditions of
performance. Some students talked about the difference between a condition and a promise.
While this seems not to be a condition, neither does it seem to be a promise. Why, after all,
would Grant care about the source of the funds as long as he gets paid? It seems that there has
been merely a statement about the expected source of the funds rather than the implication of a
condition.
The related, but slightly different defense, would be impracticability. Some, but not very many,
students recognized this as a potential defense, though it seems unlikely to succeed. Lower Case
would have to show that a contingency (the failure of the Calhoun gift) has occurred, the
nonoccurrence of which was a basic assumption on which the contract was made, and that
performance of the contract has thus become impracticable (not necessarily impossible, but very
difficult), all without fault of either party. Courts, in dealing with this defense, often look at
whether the occurrence of the contingency was foreseeable. If it was foreseeable, these courts
normally hold that its nonoccurrence was not a basic assumption on which the contract was made,
but that the party making the absolute promise to perform has assumed the risk of the occurrence
of the contingency. Furthermore, when the contract simply becomes expensive to perform, most
courts would not conclude that performance has become impracticable.
Although these latter defenses are probably slightly weaker than the statute of frauds defense, the
lawyer is probably more justified in raising them than in raising the statute of frauds defense when
there is no question that the contract was indeed made.
The possibility of the life-time contract, if "everything works out," caused some students a problem. They got confused about the application of the one-year statute of frauds rules in situations in which the contract calls for employment for life. There is no question about this contract being a life-time contract at this point. Grant would have to work for a year before the other arrangement would be triggered. One might properly raise the question whether Grant could recover anything for the loss of the
chance to qualify for the tenure spot. No one did.
Grade Spread
A 3
A- 0
B+ 3
B 3
B- 5
C+ 5
C 7
C- 8
D+ 0
D 1
D- 0
F 5
n=40
Median= High C
Mean=Apprx 2.0