A. At a family reunion Grand-niece and Great-uncle have a conversation. During that conversation Grand-niece mentions that she needs to buy a car, and Great-uncle says he has one for sale. Three weeks later Grand-niece comes to Great-uncle's house to discuss buying the car.

The car is approximately 12 years old and the odometer shows approximately (and accurately) 70,000 miles. In describing the car Great-uncle says only that the car has run fine for him and that he knows of no problems. Grand-niece decides to buy the car and writes and hands Great-uncle a check for $1,800. As Grand-niece begins to drive away in the car, she rolls down the window and asks Great-uncle, "You're sure this is a good car?"

Great-uncle responds, "It's a great car. Besides, if there were any problems with it I'd hear from your dad." (The "dad" is, of course, Great-uncle's nephew.)

Three weeks later, through no fault of Grand-niece, the car's engine fails. The car cannot be driven without extensive repairs that will cost more than the $1800 purchase price. Assuming that Great-uncle was telling the truth when he said that he had had no problems with the car and that he was aware of no problems with the car, does Grand-niece have any claims for breach of warranty? Explain. Do not concern yourself with remedies. Do not concern yourself with the Statute of Frauds.
 

Model Answer: A sale of a car is a sale of "goods," UCC § 2-105(1) (defining goods" as "all things . . . movable"). Therefore, UCC, Article 2 applies. UCC § 2-102 (providing that "this Article applies to transactions in goods").

According to Article 2, Grand-niece has no express warranty claims. Great-uncle's statements that "the car has run fine for him and that he knows of no problems" are assumed to be accurate, so they cannot give rise to a claim of breach. Great-uncle's statement that "it's a great car [and] if there were any problems with it I'd hear from your dad" are at most commendations or expressions of the seller's opinion--i.e., puffing. They cannot give rise to an express warranty. UCC § 2-313(2). Moreover, those statements occurred after Grand-niece had decided to purchase the car. Indeed, Grand-niece had already made the agreed payment and taken possession of the car. Those statements therefore were not "part of the basis of the bargain." UCC § 2-313(1).⁽¹⁾

Grand-niece will likewise fail with any claim of implied warranty. The warranty of merchantability only applies to sales in which the seller is a "merchant with respect to goods of [the] kind" involved in the sale. UCC § 2-314(1). There is no indication that Great-uncle either "deals in [cars] or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the . . . goods involved in the transaction." UCC § 2-104(1). There can be no warranty of fitness for a particular purpose, because Grand-niece's purpose in buying the car is no different than the ordinary purpose for which someone buys a car. UCC § 2-315, cmt. 2.

Noteworthy Mistakes: failing to apply Article 2; applying provisions from Article 2 without explaining why Article 2 governs; stating thatArticle 2 governs but giving an incomplete explanation (e.g., stating that cars are goods but neither citing nor paraphrasing the applicable statute; stating Article 2 applies to goods, citing the applicable statute but not stating or applying the definition to the goods involved); discussing how Great-uncle's pre-sale statements might create an express warranty without considering the assumed accuracy of those statements; missing the puffing issue; missing the post-transaction issue; asserting a breach of the implied warranty of merchantability without considering the requirement that the seller be a merchant in goods of the kind; asserting a warranty of fitness for a particular purpose (and thus failing to recognize that Grand-niece's purpose was merely ordinary); arguing that Great-uncle breached his duty of good faith (and thus discussing a theory not germane to the stated question about warranties).
 

B. Charlene, a 17-year-old senior in high school, goes to the local music store and buys six compact discs, each a recording of classical music. When she returns home, she opens and plays each of the CDs. She then tells her parents of her purchases. They, unreconstructed products of the '60s, fly into a rage. They denounce classical music as a reflection of "patriarchal and imperialist hegemony." They order their daughter to return the CDs to the store and "get your money back from those purveyors of capitalist filth."
 

Charlene attempts to point out to her parents that their orders smack of hegemonistic thinking as well, but to no avail. Does Charlene have the legal right to return the CDs? If so, does she have the right to a full refund? Explain.
 
 

Model Answer: Charlene certainly has the right to return the CDs. Whether she has a right to a full refund depends on which rule the court chooses to use.

CDs are "goods" and therefore UCC, Article 2 applies. (See the analysis in the answer to Question A, above.) However, this question turns on Charlene's status as a minor, and Article 2 has no relevant provisions. Therefore, the common law governs. UCC § 1-103 (stating that common "law relative to capacity to contract" supplements the UCC unless "displaced by the particular provisions of this Act").

Under the common law, a minor lacks the capacity to make a fully binding contract except in unusual circumstances (e.g., necessaries). Rest. 2d. § 14. The purchase contract is therefore voidable, and Charlene may return the CDs.

Many years ago, most, if not all, courts would have allowed Charlene a full refund. Under the more modern approach, the seller can deduct "reasonable compensation for the use of, depreciation, and willful or negligent damage to the article purchased." Casebook, p. 589. This right exists only if the seller took no unfair advantage of the minor.⁽²⁾

Nothing in the facts suggests that the store took advantage of Charlene, so under the modern approach Charlene will not receive a full refund. Admittedly, neither the "use" nor "damage" prongs of the modern rule will trouble her. She committed no willful or negligent damage, and she obtained at most minimal benefit from her one-time use of the CDs. However under the "depreciation" prong, the store should be able to retain a substantial amount of the purchase price. Once the package is opened, the CDS are no longer "new" and will have to be sold at a discount.

Noteworthy Mistakes: missing the minor/incapacity issue completely; neglecting to explain why the common law applies to a sale of goods; stating the modern rule but failing to apply it (i.e., failing to note that once-used CDs are no longer saleable as "new").
 
 

C. Read the news story attached to the examination as Appendix A. Was Ventura obliged to mention O'Hearn's name on The Tonight Show? Now that Ventura has mentioned O'Hearn's name on that show, is O'Hearn obliged to pay Ventura $10? Explain.
 
 

Model Answer: Ventura was not obligated to mention O'Hearn's name on The Tonight Show. Once Ventura did so, however, O'Hearn became obligated to pay the $10.

These conclusions follow inexorably from the proper characterization of O'Hearn's offer to Ventura. O'Hearn offered a promise of future performance in return for a specified act. He sought the act, not a return promise. Therefore, O'Hearn made an offer to form a unilateral contract.

As a mere offeree, Ventura was in no way bound. Prior to his mentioning O'Hearn's name, there was no contract in existence. However, when Ventura mentioned O'Hearn's name, Ventura simultaneously accepted the offer, Rest. 2d § 50(2), formed a contract and completed his obligations under that contract. O'Hearn then became bound to perform his promise.⁽³⁾

Noteworthy Mistakes: failing to discuss whether Ventura was bound; stating that Ventura was bound but not explaining why.
 

D. Homeowner has an old well on her property, which has not worked for at least two decades. She hires McCarthy Well Service (McCarthy) to put the well into working condition. Homeowner and McCarthy both sign a written agreement, which specifies the work to be done and states that the writing "constitutes the complete, final and exclusive expression of all understandings between Homeowner and McCarthy and replaces any earlier understandings and representations, whether written or oral." The written agreement promises that McCarthy will put the well "in operating condition" and that "the water drawn from the well will be potable, i.e. fit for human consumption."
 

McCarthy does put the well into operating condition, but the water has an offensive smell. However, several tests of the water demonstrate conclusively that the water is perfectly safe to drink.
 

Homeowner brings a claim for breach of contract against McCarthy, and seeks to introduce the following evidence:
 

1. representations made by McCarthy's sales representative, prior to the signing of the contract, that the water would be "sweet and pure";
 

2. testimony from two other well service companies who work in the same vicinity, to the effect that they would not consider foul-smelling water to be "potable"; and
 

3. testimony from two other customers of McCarthy, each of whom had had well service provided under the same form contract and each of whom would testify that their well water is both safe to drink and sweet smelling.
 

Should the court admit this evidence? Explain.
 

Model Answer: The admissibility of the evidence turns on the application of the parol evidence rule. Since the contract involves services rather than goods, the common law applies.

Under the Rest.2d, the threshold question is whether the parties intended the writing to be at least partially integrated. Rest.2d § 210(3). The question provides scant facts on this issue. The writing states itself that it is intended as a fully integrated agreement. In some jurisdictions, that fact alone would be dispositive. Other jurisdictions would consider other evidence, including parol evidence, to make the determination. In any event, there are no other relevant facts, so the writing's statement of intent controls.⁽⁴⁾

With the writing thus viewed as completely integrated, only two possibilities exist for admitting parol evidence--to explain an ambiguous provision or to establish a usage of trade. As for ambiguity, the key phrase is obviously "potable, i.e. fit for human consumption." Jurisdictions disagree as to whether parol evidence is admissible to establish ambiguity, but that issue need not be resolved in this instance. The phrase is ambiguous on its face, at least with reference to whether the phrase rules out offensive smells. With regard to the parol evidence rule, all three items of evidence are admissible on this point. Rest. 2d. § 214(c).

Absent a finding of ambiguity, the representations made by McCarthy's sales representative would be barred as either contradicting an integrated agreement, Rest. 2d § 215, or adding to a completely integrated agreement. Rest. 2d § 216.

Absent a finding of ambiguity, testimony from the two other well service companies will be admissible to show a usage of trade. The Rest.2d allows usage of trade evidence to explain even a completely integrated agreement. See Rest.2d §§ 213 -- 216 (stating the main preclusive effects of the parol evidence rule and omitting any reference to usage of trade) and § 222(3) (providing that a usage of trade "gives meaning to . . . [the] agreement" and making no reference to the parol evidence rule).

A usage of trade "is a usage having such regularity of observance . . . as to justify an expectation that it will be observed with respect to a particular agreement." Rest. 2d § 222 (1). The evidence from the two other well service companies certainly fits under this rubric.

The testimony from two other customers of McCarthy presents a more difficult question. That testimony is not "course of dealing" evidence, because the relevant course of dealing would be between McCarthy and Homeowner. Rest. 2d § 223(1). Arguably, the other customer experience might be admitted to help establish the usage of trade.

In sum, all three items are admissible if the court finds the "potable" provision to be ambiguous. Otherwise, the "sweet and pure" representation is barred, the other company evidence is admissible as establishing a usage of trade, and the other customer evidence is arguably admissible for usage of trade purposes as well.

Noteworthy Mistakes: failing to discuss the extent of integration or to note why that determination is important; missing the ambiguity issue; asserting baldly that all evidence would be admissible to explain the agreement, without recognizing that that approach would eviscerate the parol evidence rule; missing the usage of trade issue; asserting the usage of trade issue but failing to define usage of trade; asserting that the other customer evidence should be admissible as course of dealing.
 

E. Corporation #1 has a 20-year lease for office space. The lease was made two years ago, when market conditions were very favorable to lessees. The market has changed, and comparable space now leases for a much higher rate. Corporation #1's lease strictly prohibits Corporation #1 from assigning or transferring its rights under the lease to anyone, without the express, written and advance consent of the landlord.⁽⁵⁾ The lease expressly gives the landlord the right to "grant or withhold consent to an assignment or transfer in the landlord's sole discretion."
 

Corporation #1 is the wholly-owned subsidiary of Corporation #2. That means that all of the stock (ownership interests) of Corporation #1 are owned by Corporation #2. As a result, although in form Corporation #1 is a separate legal person, distinct from Corporation #2, as a matter of practicality Corporation #2 controls every significant aspect of Corporation #1's business.
 

For business reasons not relevant here, Corporation #2 decides that it wants to "swallow up" Corporation #1--i.e., transfer to Corporation #2 all of Corporation #1's rights and obligations and extinguish Corporation #1 as a separate legal person. Corporation #2 accomplishes this objective through a vehicle of corporate law known as a "merger." As a result of the merger, Corporation #2 comes to own--in addition to whatever it previously owned--all the assets of Corporation #1, including Corporation #1's rights under the lease.
 

When the landlord learns of the merger, it points out to Corporation #2 that the lease's assignment/transfer provision expressly includes mergers among the transfers requiring advanced approval. The landlord refuses to approve the transfer and informs Corporation #2 that it must immediately vacate the premises. The landlord does not claim that it is acting out of any fear that Corporation #2 will be less able than Corporation #1 to live up to the lease obligations. Indeed, such a claim would be fanciful, since Corporation #2 is everything Corporation #1 was and more. Instead, the landlord simply states that under the terms of the bargain as reflected in the lease the landlord has the absolute discretion to prevent a transfer of any sort and that the landlord desires to use that bargained-for right to take advantage of the changed market conditions.
 

Is the landlord within its rights? Explain.
 

Model Answer: The lease expressly gives the landlord discretion to preclude transfers and expressly defines mergers as within restriction. Whether "the landlord [is] within its rights" therefore depends on whether the landlord's exercise of discretion would breach its duty of good faith.

Every contract imposes upon each party an obligation of good faith and fair dealing in the exercise of contractual rights. A lease of real property is not a sale of goods, so this good faith obligation arises from the common law. Jurisdictions differ as to whether the common law obligation involves merely a subjective test or, in addition, an objective test.

If only the subjective test applies, the landlord is within its rights. The subjective test bars a party from acting merely to injure the other party but, beyond that, requires only that the acting party have the honest belief that it has the right to do what it does. The landlord certainly meets that test. The contractual language grants it sole discretion, and the landlord believes that language reflects a bargain allocating to the landlord the benefits of any significant improvements in the market.

The objective test would be more difficult for the landlord to meet. Under that test the acting party's conduct is judged against the standard of a reasonable person in a comparable situation. The question is not whether such a hypothetical reasonable person would necessarily act in the same way but rather whether that hypothetical person would view as reasonable the acting party's conduct.

Under that test, the question is a close one. Given a contract between two commercial parties, it is certainly plausible to view the anti-transfer provision precisely the way the landlord does. At the same time, however, the merger poses no increased risk to the landlord and will make no practical change whatsoever in the way the lessee performs its obligations under the lease. The landlord might therefore be plausibly seen as seeking in bad faith to grab a windfall. Absent any indication that the merger increases the landlord's risk and absent any contractual language expressly giving the landlord the right to take a windfall from changed market conditions, the landlord probably fails the objective test.

Noteworthy Mistakes: missing the good faith issue entirely; asserting the good faith issue but using UCC definitions to analyze the issue; asserting the good faith issue but failing to mention the subjective and objective parts of the concept; asserting the good faith issue but failing to apply the rule to the facts; arguing unconscionability in the absence of any indication of procedural unconscionability; arguing unconscionability and applying the doctrine to the landlord's exercise of discretion rather than to the lease provision granting that discretion; applying the statute of frauds to try to benefit the Corporation when the facts strongly suggest a written lease and, in any event, the statute of frauds is a shield rather than a sword (i.e., if the statute of frauds avoids the lease, then the Corporation has no right to the leased space).
 

F. Dean Harry Haynsworth approaches a rich alumnus, soliciting a large donation to the College. The alumnus is willing to pledge a donation of $50,000, to be paid in $25,000 installments beginning in a year. However, the alumnus wants an assurance that the College will do something substantial to create what the alumnus calls "better ideological balance on the full-time faculty."
 

With commendable honesty, Dean Haynsworth responds that principles of academic freedom would prevent the College from making any such promise. He suggests, as an alternative, that the College promise to distribute to the full-time faculty a letter from the alumnus, not to exceed five pages, explaining the alumnus' concerns about ideological imbalance.
 

The alumnus responds, "You're not offering me very much for my money are you? You can't even guarantee that those self-important [expletive deleted] will even read what I write."
 

Dean Haynsworth acknowledges that managing a faculty is like "herding cats" and that the College can give no assurance that faculty members will either read or heed the alumnus' letter.
 

Assume that the alumnus finally says, "What the heck. I probably would have given the money anyway. But I accept your minuscule undertaking." The alumnus and the Dean then shake hands, with the alumnus saying, "You'll have the first $25,000 14 months from now and the rest 6 months after that."
 

Is the alumnus' pledge enforceable? Explain.
 
 

Model Answer: The alumnus and the College have made a contract, and the pledge is supported by consideration. However, the pledge may be unenforceable under the statute of frauds.

The alumnus' concluding comment and the handshake manifest an agreement. Rest. 2d § 22(1) (describing the ordinary mode of offer and acceptance). The alumnus has accepted the Dean's counteroffer (no assurance but instead the distribution of a letter).

Consideration runs to both parties. For the College, the consideration is obvious. As to the alumnus -- the College has promised very little in return for the pledge, but the doctrine of consideration does not weigh the amount of consideration. A mere peppercorn will suffice, if the promisor has sought or bargained for that peppercorn. In this instance, the College's promise to disseminate a letter to its faculty is precisely what the alumnus bargained for and was indeed "given by the [College] in exchange for [the alumnus'] promise" to make a donation.

The alumnus may be able to avoid the contract, however, by invoking the statute of frauds. The first installment is not due for 14 months, and the second is not due until six months later. Arguably, the contract "is not to be performed within one year from the making thereof," Rest. 2d § 110(e), and is unenforceable absent a sufficient writing signed by the alumnus. There is no such writing.

It could be argued, however, that nothing prevents the contract from being performed within one year. That is, nothing prevents the alumnus from making the payments earlier than the stated deadlines. That argument might well persuade a court skeptical about the statute of frauds.

Noteworthy Mistakes: missing the consideration issue; missing the statute of frauds issue; applying promissory estoppel on the consideration issue without considering the absence of reliance; using Rest. 2d § 90 (promissory estoppel) to deal with the statute of frauds issue rather than Rest. 2d § 139; invoking Rest. 2d § 139 to deal with the statute of frauds issue and not addressing the absence of reliance.⁽⁶⁾

1. It was possible to argue to the contrary, citing UCC § 2-313, cmt. 7. Answers that did so received full credit on this timing issue. The important thing was to recognize and address the issue.

2. Because the facts show no indication of unfair advantage, it was not necessary to detail the various aspects of the "unfair advantage" rule. It was not wrong to provide that detail -- just unnecessary.

3. Many answers discussed the presence of consideration. It was not wrong to do so, but it was unnecessary. Consideration was not at issue.

4. It was certainly possible to argue that the writing was only a partially integrated agreement. Answers that took that point of view had just as much chance to receive full credit as answers that considered the writing to be a fully integrated agreement.

5. In the second semester we will study the law relating to the assignment of contract rights and the delegation of contract duties. Do not concern yourself for the present with the nuances of that law. For present purposes, it is sufficient that you understand that when a lessee assigns its rights under a lease, it purports to transfer to the "assignee" the right to enjoy the benefits of the lease - principally the right to occupy the space.

6. One very sophisticated answer (i) recognized the statute of frauds issue, (ii) considered Rest. 2d § 139 as a possible solution, (iii) rejected that section as requiring reliance, (iv) considered § 90(2) as a possible solution and (v) concluded that the failure of § 139 to reference § 90(2) means that §90(2)'s "no reliance" rule does not apply when promissory estoppel is invoked to counter the statute of frauds. This analysis is very plausible, especially since § 90(2) refers to a "charitable subscription," and that phrase suggests a written commitment to donate.