CONTRACTS FINAL EXAMINATION Santa Barbara/Ventura Colleges of Law Spring 2013 Instructor Craig Smith QUESTION 1

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1 CONTRACTS FINAL EXAMINATION Santa Barbara/Ventura Colleges of Law Spring 2013 Instructor Craig Smith QUESTION 1 Peter and Paula had purchased a home by taking out a loan secured by a mortgage on the home. They fell behind on their loan payments to Delta Credit Bank. They restructured their debt in an agreement, which was duly signed and executed, which confirmed the outstanding loan with a total delinquency of $750,000. In the new agreement, Delta promised it would take no enforcement action for three months if Peter and Paula made specified payments. As additional collateral, Peter and Paula pledged eight separate parcels of real property. The written agreement contained the following clause: "This written agreement consisting of 12 pages contains the entire agreement of the parties. There are no other agreements written or oral concerning the subject matter of this written agreement." Peter and Paula did not make the required payments. Three months later, Delta recorded a notice of default and sued to foreclose on the home. Peter and Paula responded to the lawsuit and alleged that Delta's vice president, Nat Nabob, met with them two weeks before the agreement was signed, and told them that Delta would not take any action to foreclose for two years in exchange for additional collateral consisting of two ranches. Peter and Paula further claimed that when they signed the agreement Nat assured them its term was two years and the ranches were the only additional security. As noted, the written contract actually contemplated only three months of forbearance by Delta, and identified eight parcels as additional collateral. Peter and Paula did not read the agreement, but simply signed it at the locations tabbed for signature. At the trial on the lawsuit can Peter and Paula introduce evidence of the statements that Nat made to them two weeks before the agreement in question was signed?

2 QUESTION 2 On February 15, 2012, Acme, Inc. issued to Stooge, Inc., its purchase order No for certain computer cores to be delivered at the rate of 5 million cores per week. The purchase order was duly signed by an authorized representative of Acme. The purchase order from Acme included on its face the following statement: "Instructions on Face and Reverse side apply to this order." On the reverse side of the purchase order are preprinted about 20 terms and conditions and the page is titled "Purchase Order-Terms and Conditions." These terms and conditions included a statement "this order expressly limits acceptance to the terms" of the order. On February 18 Stooge mailed Acme a "quotation" referring to Acme's purchase order No stating the quantity, price and delivery rate. The quotation stated that it was submitted to Acme subject to Stooge's terms and conditions that are printed on the reverse side of the quotation. The quotations was duly signed by an authorized representative of Stooge. Acme received Stooge's quotation. In response Acme timely mailed Stooge a letter, duly signed by a representative of Acme, accepting the quoted price. Stooge's quotation stated that Stooge's conditions applied including the statement that the purchase order could not be canceled." Acme received delivery on order No and on May 8, 2012, Acme informed Stooge that no further shipments on this order were to be made and to put a hold on the order. Acme did not mention any defects, but said that they were experiencing component supply problems. In fact, Acme needed fewer cores and had an inexpensive supply of other cores. It was not until about four months later that Acme informed Stooge that they would not be using any low drive cores, and Acme did not mention that the cores were defective. In a phone call on October 28, 2012, there was no mention of defects and the parties discussed a termination claim. On October 28, 2012, Stooge sent a letter entitled, "Subject: Termination claim and requested payment." On November 4, 2012, Acme refused by letter to make payment and stated nothing about defects. Acme stated that Acme's terms and conditions applied to the purchase order and that paragraph 7, of the purchase order dated February 15, 2012, states that, "Buyer reserves the right to cancel this purchase order." As of May 2012, Acme was Stooge's only customer for this type of computer core and, as a practical matter, no other market was available to Stooge. Stooge sued Acme for damages for breach of contract. 1. What terms should apply to the contract? 2. Assume that Acme is found in breach. What should Stooge be entitled to by way of damages?

3 QUESTION 3 Lego Construction, Inc. entered into a valid written contract with Water Galore, Inc. to construct a waste water treatment plant. According to the written terms of the contract, the construction of the plant was subject to Water Galore obtaining approval of its environmental impact report (EIR) regarding construction of the plant. Water Galore entered into a separate valid written contract with Enviro Associates, a consulting firm, to prepare the EIR that was to be submitted to the governmental authorities for approval. Enviro was very busy with many other projects and as a result failed to submit an EIR on behalf of Water Galore in a timely manner. The consequence of this was that the treatment plant could not be built and the project had to be abandoned. Lego had been counting on getting this job and as a result of the plant project not going forward it now has serious cash flow problems. 1. Does Lego have a claim of breach of contract against Water Galore? Discuss fully. 2. Does Lego have a claim of breach of contract against Enviro? Discuss fully? 3. Assume that Lego and Water Galore settle their lawsuit by Water Galore agreeing to transfer to Lego any claim or cause of action for breach of contract it had against Enviro, to Lego? Would such a transfer give Lego any rights against Enviro? Discuss fully.

4 SAMPLE ANSWER TO QUESTION 1 The issue is whether extrinsic evidence of statements made in the negotiation stage can be introduced when the parties signed a written contract that contained a merger clause. The Parol Evidence Rule states that when the parties have reduced their agreement to final written form, which they intend to be the complete statement of their agreement, extrinsic evidence of prior or contemporaneous agreements is inadmissible to vary or contradict the terms of the written agreement. In this case, the written agreement that Peter and Paula entered into with Delta contained a clause stating that the 12-page agreement was the complete agreement. This is known as an integration or merger clause and although not dispositive on the question is a strong indication that the parties intended that the written agreement be their full and complete agreement. The purpose of the Parol Evidence Rule is to insure that when the parties go to the trouble to reduce their agreement to writing and that the writing is the complete agreement, then the written agreement shall be the agreement of the parties. The fact that Peter and Paula signed the agreement without reading it first will not help them in most cases as the duty to read rule says that one who signs a written agreement without first reading it is bound by the terms of that agreement. The only possible relevant exception to the Parol Evidence Rule and duty to read rule is for fraud. Evidence of fraud is not barred by the Parol Evidence Rule and will negate the duty to read rule. Most courts have differentiated between fraud in the inducement, statements made to persuade a party to enter into a contract, and fraud in the factum, statements that are at variance with those that are set forth in the written agreement. Most courts hold that evidence of the former may be introduced while evidence of the latter may not. Here, the statements made by Nat would fall into the latter category as they directly contradict the terms of the written contract that Peter and Paula entered into. If they had simply read the contract, they would have seen the terms were in conflict with what Nat represented to them. Because this is, at best, evidence of fraud in the factum, extrinsic evidence of Nat's statements will be barred.

5 SAMPLE ANSWER TO QUESTION 2 The issue is whether a contract was formed on Acme's terms or Stooge's terms when the writings of the parties contained conflicting terms. The general rule is that a purported acceptance which contains terms that differ from those of the offer operates as a rejection and counteroffer. This is known as the mirror image rule. An exception to the mirror image rule is found in UCC which applies to the sale of goods. It states that a definite and seasonable expression of acceptance operates as such even though it contains additional or different terms. Hence, the UCC has done away with the mirror image rule. This contract is governed by the UCC as it is for goods (things which are moveable at the time of identification to the contract for sale) so governs. In this case both parties are merchants (because the circumstances indicate that they deal regularly in goods of the kind) so rather than be merely proposals for addition to the contract, the additional terms will become part of the contract unless, (1) the original offer limited acceptance to the original terms; (2) the additional terms materially alter the contract; or (3) timely objection is made to the additional terms. Here, the terms of the documents that were exchanged clearly conflict. Acme's purchase order stated that it could only be accepted on its original terms. Stooge purported responded to the purchase order by offering a quotation which was subject to its own terms. Because Stooge responded by acting shipping goods a contract was formed on Acme's terms unless any of those terms were invalid. The issue is now whether the cancellation term was illusory, because it gave Acme the right to cancel at any time. An illusory promise is one that is conditioned upon the whim of the promisor and therefore is not valid consideration. The unfettered right to cancel the contract would render the promise to buy illusory as the decision to buy would be at the whim of Acme, hence that term would not be enforceable. Acme would be in breach. As for the measure of damages, when the buyer breaches a contract for the sale of goods the seller is entitled to damages as measured by the difference between the contract price and the market price. (UCC 2-708) If the seller resells the goods then the seller s damages are the difference between the contract price and the price obtained for the goods at a good faith sale. (UCC 2-706) If there is no market for the goods and they can't be disposed of in the ordinary course of the seller's business, then the seller may be able to get the contract price for the goods under UCC Because Acme was Stooge's only customer for this type of computer core and, as a practical matter, no other market was available to Stooge, Stooge is entitled to recover the price of the goods.

6 SAMPLE ANSWER TO QUESTION 3 The issue is whether Lego has a claim against Water Galore when the latter's obligation to perform was conditional on obtaining approval of its EIR. A condition is an act or event not certain to occur which affects a duty of performance. Promises are either absolute or conditional. Water Galore did not promise to go through with construction of the plant no matter what. Rather they only promised to proceed with the plant construction if their EIR was approved. That did not occur hence, their duty to build the plant was never triggered. As a result, they will not be liable for breach. The issue is whether Lego has a claim against Enviro when they were not in privity of contract with Enviro. The general rule is that one must be in privity of contract (be one of the parties to the contract) in order to have enforceable rights against another. However, in some cases strangers to a contract may have enforceable rights by virtue of a contract made by two others if they can show that recognition of a right to performance in the third party is appropriate to effectuate the intent of the contracting parties and the promisee owes a debt or obligation to the third party and the promisor's performance will satisfy that debt or obligation or the circumstances show that the promisee wanted to confer the promised performance on the third party in the form of a gift and the promisor reasonably understood that intention. If the third party satisfies that test they qualify as an intended beneficiary and intended beneficiaries have enforceable rights. Here, it doesn't appear that Water Galore wanted to make a gift to Lego but did they owe them a debt or obligation? The presumption is that parties contract for their own benefit and not that of another. Water Galore didn't owe Lego a waste water treatment plant. If it owed anyone that, it was its customers. Since Lego cannot qualify as an intended beneficiary they are at best an incidental beneficiary. Incidental beneficiaries do not have enforceable rights. Hence, they will lose any claim they bring against Enviro. The final issue is whether Water Galore can assign any claim it has for damages to Lego. An assignment is a transfer of rights. The general rule is that contract rights are freely assignable. A chose in action is assignable. The potential claim for breach of contract, is an intangible right or "chose in action" and can be the subject of a valid assignment. Although rights expected to arise in the future cannot be assigned this is a presently existing right albeit one that is unliquidated in terms of liability and amount. Hence it can be transferred or assigned.