Final Examination in Law 205 (Model Answers) Contracts I-04. Professor Radin

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1 Final Examination in Law 205 (Model Answers) Contracts I-04 Professor Radin Note: The following are unedited student answers from two different examination papers. Part I 1) Since Alan s contract with Barbara is for services, the UCC does not apply, and thus neither does the provisions of the battle of the forms for us to examine what exactly constituted the final agreement between the parties. The Statute of Frauds also does not apply to this exchange, since it did not involve goods valued at >$500 nor did it involve a service that would take more than 1 year to complete. But first, perhaps, we should see whether there was an agreement in the first place. To find this, we must have an offer, an acceptance, and consideration and we must look for these using the reasonable person standard of objective intent. First, Alan s initial to B. seems to be an invitation to an offer, since there are few specifics mentioned (only the type of service needed and a completion date but not the necessary price or quantity terms). Barbara s back to A. could be construed as the offer, because it contained a rate term of $50, but it, too, might be interpreted as continuing negotiations, since it invited Alan to telephone to set up a time (and thus would simply be a quote ). In the common law, offer and assent must agree with one another, as per the mirror image rule. However, we do not seem to find such a situation here. So it is a 1

2 distinct possibility that a court could find that no contract ever was formed between A and B. It might be to A s benefit, though, to find that not only was a contract formed, but that it included B s express warranty (that A will be satisfied with her services) as well as the implied warranty of good faith. Again, since the sale of goods is not involved here and instead it is the sale of services involved (and thus no UCC application), the implied warranties of merchantability or fitness for a particular purpose are inapplicable. Since we want to be able to recover expectation damages, we need to recover on the contract, and thus must find one. To find this contract, A. could argue that the phone conversation constituted the offer and acceptance, and that the of Confirmation was simply a memo partially representing the oral agreement, and the money specified for payment would be the consideration. B. would want to argue, in this case, that her last constituted the offer. The court may find an implied-in-fact contract simply due to Alan s actions, which could be construed as acceptance/assent, since he did proceed to use Barbara s services. However, it is unclear, without any signature or other indication of Alan s receipt and acknowledgement of Barbara s Confirmation , that B. could show that he ever even read it, and although the mailbox rule generally applies to sending acceptances, it could be reasoned by analogy here that posting of an offer is a dubious way to ensure that both parties are informed and consenting bargainers. Indeed, the law in this area is still developing, and it is unclear whether a court would uphold Barbara s as a valid offer or whether it would assume that A. had knowledge of it and by his 2

3 actions, manifested assent thereto. Either way, the common law would use the last shot rule to see what the last document evidencing their contractual relationship contained and this seems to be the message from Barbara entitled Confirmation of Appointment. In interpreting this document, though, a court would work within the constraints of the Parol Evidence rule to determine if they could admit the express warranty given orally by B. in the earlier conversation with A.. The question is whether the constitutes a writing intended by the parties to be a final evidence of their agreement. It is arguably a writing, but a court might likely find that it was not intended by A. to be a final evidence of their agreement. If the court does find that the PER applies to this writing, the admissibility of the prior phone conversation is greatly endangered. Oral evidence prior to integration of a written agreement is almost never admissible, even under the modern Corbin test. A Willstonian court would certainly bar it s inclusion, since there is a plain integration clause on the face of the and a reasonable person in A. s position would have included evidence of the prior agreement in the document. However, any ambiguities may be construed contra proferendum, and since the document does not exclude all warranties, but only that he would pass a driving test, A. might be able to argue that it did not exclude the possibility of a guarantee of satisfaction, and thus his express warranty is simply supplemental and not contradictory to the . A. may also argue that the express warranty was a condition precedent agreement, to which the PER does not apply or that it was a collateral agreement but a court might find this argument unpersuasive 3

4 and that a satisfaction-guaranteed warranty would involve the very essence of a K and would not then be collateral. If indeed the court finds a contract and, best case scenario for Alan, an enforceable express warranty of satisfaction with the services, he may be entitled to expectation damages, which would give him the benefit of the bargain and put him in as good a place as he d have been if the K had been performed as contemplated by the parties. Thus, a court would have to determine what Alan would had to pay to become proficient at driving (how many hours? X rate of $150/hr at Deluxe). Then we subtract the fair market value of the instruction he d already received from B at the time of her breach (when he became unsatisfied with her services). We would add any incidental or consequential expenses, but these are tricky. The court would have to determine that the damage to the car/garage/wine occurred as a result of B s breach of her satisfaction warranty in order to award such damages to A. This seems to be a longshot argument, since the contained a waiver of liabilities, as well as the fact that B will argue these damages were not foreseeable. It might not be in A s best interest to argue that a contract was never formed. In this case, Alan would not be entitled to expectation damages, which is probably what we ll want to argue for in order to be able to go for the extensive damages he is seeking. If the court finds no K existed, in unwinding the deal they may simply let losses lie, and even under a theory of restitution damages, award B the reasonable value of her instruction to A, if any value could be argued. 4

5 In the case that no K is found, A. could argue for reliance damages using a theory of promissory estoppel, in that he relied to his detriment on B. s promise that he would be satisfied with her instruction. The question is 1) is this a valid promise? The court will likely answer yes, although this statement (which could also be an express warranty under K) could be construed as simple sales puffery, as in warranty analysis. If it is a promise, could B have reasonably foreseen A s detrimental reliance on it? A could argue that the fact that she knew it was imperative that he learn to drive before Dec. 31 st and his concerned question about her experience as a driving instructor goes toward the fact that she should have known he would rely on her promise. It could be argued that Alan did rely to his (great) detriment on her promise: he avoided seeking other methods of instruction and he suffered economic loss as a result of her unsatisfactory teaching. In unraveling the contract, the court would try to put the parties back in the position they d have been in had the promisee never relied on the promise. Perhaps, here, they would award A. the reasonable cost of the lessons he took with Deluxe D. School. But since reliance damages, too, are limited by causation and foreseeability (among other limitations, but these two are the applicable ones here), it would be hard for A. to recover the cost of the damage incurred during the garage crash incident unless he could show both that it was his reliance on the promise that caused this (which is arguably dubious) and that it was reasonably foreseeable to B. that her unsatisfactory teaching would lead to such results. More likely than not, most courts would be reluctant to award these damages to A. since he was the one driving when they 5

6 occurred and it is not entirely clear that such damages occurred as a result of the B. s instruction (or lack thereof). One final consideration is whether it is even worth it to sue B. for exorbitant damages attorney s fees are high, and unless she is insured for her instruction activity (which she is likely not, since she is not employed by a school, and is probably not even licensed), she may very well be insolvent for damages the extent of which Alan is seeking. 2) When A. sues B., she will almost certainly counter-claim for his lack of payment for her instruction, and may even try to recover for her ambulance/hospital bills. As discussed above, on a theory of unjust enrichment/restitution, a court may award her the reasonable value of her instruction to Alan (what he would have had to pay for equivalent instruction). If they find a contract (again discussed above) she may be able to counterclaim on the contract for the expectation damages of her actual K price of the lesson she gave. It is unlikely that a court would award her medical damage expenses, since, as the instructor, she impliedly assumes the risk of teaching a dangerous activity to inexperienced drivers. Also, Alan (as the client/consumer) never made any warranties, express or implied, that he would be liable to B. for any damages/injuries she sustains in the course of their dealings. 3) If Alan wants to stop Charlie from backing out of his promise, he must show that there was a valid agreement (or, alternatively, that Alan relied to his detriment on C s promise). Offer and acceptance seem fairly clear here (A s 6

7 assent being implied through part performance, since we don t know if he affirmatively said anything to indicate his acceptance), although it could be quite problematic that they re not in writing. The Statute of Frauds may require a writing here, since the value of the goods is greater than $500 (the Porsche, of course), as well as the fact that C. promises to discharge a debt for A. If a writing is required, there certainly is none to speak of, so it looks like Alan is in trouble. But, there is an exception to the Statutory bar in that the plaintiff has performed (at least partly) or that he relied on the promise. Alan could argue both points (his attempt to learn to drive was partial performance and reliance on the promise all at once). But consideration, as in all gift cases, is the sticky question. This is somewhat like the Hamer v. Sidway situation, in that Alan, in relying on his uncle s promise, is submitting himself to a detriment (paying for driving instruction and foregoing other opportunities, arguably, while learning to drive), even though such detriment may arguably benefit him, too. Charlie could argue, though, that he is not receiving a material benefit from Alan s action. So this seems to be a unilateral contract similar to the, if you walk across the Brooklyn bridge, I ll pay you X. Under the bargained-for exchange analysis, A s future performance of something in reliance on C s promise is enough to constitute consideration. And the modern view of unilateral contracts is that they cannot be revoked once performance is begun. So if there is a contract, then the question is whether A. satisfied the terms (learning to drive by December 31). Perhaps Charlie s explanation that he meant that learning to drive is proved through getting a driver s license. However, this 7

8 was never explicitly stated, and the interpretive question is whether a reasonable person in A s position would have known that this is what was meant by learn to drive. A court could find either way, but it seems more likely to me that A has a good case that his certificate of driving competence might qualify under the objective standard to meet C s demand. If this is the case, then A could be awarded expectation damages putting him in the position he d have been in if the K were performed. This is fairly simple since the agreement (if valid) provided that A get to keep the Porsche and that C pay off A s school loans. These damages would not be limited, since they were simply the provisions of the contract thus foreseeable. Even if a court does not find consideration here, and thus not contract, a gratuitous promise may be enforced using promissory estoppel. Was C s promise a clear and definite promise probably. Could C have reasonably expected A to rely to his detriment on the promise? Again, this is a fairly clear yes, since it wasn t in jest. Did Alan, in fact, rely to his detriment on his uncle s promise. It seems that he did, in undertaking the driving lessons. And it could also be argued that enforcement here is the only way to avoid injustice, since uncles shouldn t be allowed to back out of promises after causing nephews to undergo weird conditions to fulfill them. So if promissory estoppel is invoked and accepted by the court to enforce the original promise, then A would get to keep the car and have his loans paid off. However, if PE was simply used to get to a reliance set of damages, then A would probably only be awarded his expenses incurred in reliance on the promise. Thus, his school loans wouldn t be paid off, since he didn t undertake the debt in reliance on the promise, but his 8

9 driving lessons would be a foreseeable cost incurred in the course of his reliance. The Porsche/garage/wine damages would not be foreseeable expenses in this regard, though. 4) Alan doesn t have a very strong case against Deluxe. There is an integration clause in Deluxe s standard-form K, which Alan signed, and it states a waiver as to whether client will pass driving tests as well as waivers of all liabilities. He could argue that the contract, as a standard form K, should not be enforceable as to the boilerplate clause which disclaimed a guarantee to pass the licensing examination, because he explicitly objected to this in saying that he would only pay on the condition. Now the Parol Evidence rule comes into play to see whether his comment before signing can be considered along with Delores s comment that he was sure to pass (another case of either puffery or express warranty). The PER would apply, since this writing is arguably the final expression of the parties agreement. But different courts (as discussed above) admit P.evidence with varying degrees of strictness. The integration clause would cause a Willistonian to refuse to look beyond the four corners. But a modern court would likely take the Corbin view that extrinsic evidence should be considered to determine the intent of the parties to include a matter or that a writing constitute a final statement. Since his oral comment contradicts the term within the writing, he doesn t have a very strong case, since oral evidence before the K is signed is often only admissible to supplement the agreement or explain it. Thus, Alan would probably lose on whether or not he owes Deluxe for the lessons at all. 9

10 He has a better case arguing that, although he must pay (or perhaps some other party, if he prevails elsewhere, must indemnify him) for the instruction, that the $150/hr. price is unconscionable due to an absence of meaningful choice on his part to shop around for reasonably-priced instruction. Also, he could argue that the contract s terms are unreasonably favorable to the party offering the standardized K (in the waivers, price terms, etc.). He could argue that there was a gross inequality of bargaining power, since he was under time pressure and he felt he had no choice. Deluxe would have a good rebuttal here, though, in that they didn t use (apparently) any pressuring or deceptive sales practices or that their standard rate is $150/hr and that they did not create the situation in which Alan was under pressure to accept terms he did not like. Here the court would have to find whether $150/hr was a reasonable rate for comparable driving-school instruction. Perhaps B s $50/hr rate was simply commensurate to her possibly unlicensed and arguably crummy teaching. If the judge does find that $150/hr is excessive, she may substitute at her option, a reasonable rate, and thus cause Alan to pay only what he would have, had Deluxe not taken advantage of his situation (if the court so finds they did but the facts as we have them do not suggest that they really did). Part II Question 3 Comment (d) to 90 of the Restatement (Second) of Contracts states that a promise is binding under this section. This section refers to the section of the Restatement that deals with promissory estoppel (PE), though never calling it by that name. The decision made in comment (d) is certainly not without its 10

11 critics, and with good cause. It deals with an area of human dealings that some would like either forced completely into traditional K law or forced completely out of it. There are good reasons to both support and reject the Restatement view of this issue. The situations that tend to involve the possibility of PE generally fall into two categories. There are those situations where two parties, while dealing with each other in a commercial situation, fail to get everything in K form. When this happens, and one party goes ahead with action or forbearance on the word of the other party, PE comes in if things don t go smoothly. In these cases, what we have are situations that should be handled by classical contract law, but they can t be because there s no real K. The Restatement dubs such a promise a contract simply to get it into the traditional dispute resolution system and apply to it the traditional rules of K law. The other situation occurs when two individuals, while not acting in a commercial setting, have a problem based on a promise one made to the other. These is not a traditional area of contract law (as seen by the courts initial hesitation when it came to applying PE), but the court system had to find some way to deal with these disputes, so the forced it to fit traditional contract guidelines so that judges could rule on the wearing their contract hats. What emerged from these two general situations is a practice that, though (arguably) necessary for judicial expediency, isn t really true to the spirit of contract law. I ll start by looking at the issue of mishaps in the commercial setting a situation that courts have been dealing with for centuries. The practice of declaring a contract by little more than judicial fiat is nothing new to the legal 11

12 system. Though some such created contracts are based on the facts of the situation ( implied-in-fact ), some are pure judicial fabrications that are required by justice ( implied-in-law ). What this shows is that even when a traditional, classical interpretation of the law wouldn t get the judge what he thought justice mandated, he could still bend things enough to continue using those rules. What PE has done is codify that practice. Cases such as Allegheny College (Cardozo finds consideration) demonstrate these problems. Courts see that a wrong has been done, and they want to address it. The problem is finding a legal tenet on which to hang their hat. PE allows that by declaring a promise a K, so that almost any such dispute can be brought under the umbrella of K law. In one sense, it is a wonderful judicial invention, for it allows justice to prevail where otherwise it would not. This is not, however, the only way to look at it. The flip side to this coin is that PE really goes against the classical view of K law. When we have a K, any ambiguities are interpreted against the author of the K, since he could have corrected it. He thereby has an incentive to do a good job when writing the K. In the UCC arena, there is an ongoing debate as to whether the default off-the-rack rules should be such that if you omit something you re your K, you re penalized for it, so that you have an incentive to draft a complete K. In fact, most of K law is centered around forcing the parties to be diligent about getting everything in writing, so that these problems don t arise as much, and if they do, the courts can more easily handle them. PE, however, severely undermines this goal of K law. Under PE, it doesn t matter if you have a contract or not. All you have to do is prove that there is a promise, and then the courts will wave their magic gavel and, poof!, it s a contract! Then it becomes a 12

13 battle of what exactly was said or meant or understood, and so the courts really aren t doing themselves any favors. The big advantage to having no PE is that the parties will be much more careful about what they do when they don t have any signed, dated, and notarized documents (in triplicate, of course). In this sense, the PE, especially comment (d), severely undermines the classical goals of K law. Look at Pop s Cones, for example. If they had just gotten it in writing that they could give up their lease, the whole mess wouldn t have happened (and if they refused to give it in writing, then Pop s Cones would have known that the deal wasn t as sure a thing as it was being lead to believe). So while it might serve to further some vague notion of justice, it introduces enough slipshod behavior, and contradictory evidence as to what really happened, that maybe justice, and certainly the court system, would be a lot more secure in its absence. The other end of the spectrum is the case of two people and a promise. These are unfortunate cases that the court system, again, would rather not get involved in. Nevertheless, the legal system is often called in, and the courts need a way to deal with them thus we have PE. The crux of this issue is that individuals rarely want to bring legalities into their personal dealings. I would imagine that Uncle Charlie would have been rather taken aback if Alan had responded to his uncle s generous offer with a would you sign something to that effect? If Bob promises to pick up dinner on his way home, and so Jane doesn t make dinner for herself, can she sue Bob if he forgets? After all, she reasonably relied on his promise to her detriment. Should Jane have gotten a lawyer to draw up some paperwork and had him fax it on over to Bob for his signature? Of course not, but that s essentially what the courts are saying when they apply PE 13

14 to these cases. Courts recognize that we can t always (in fact, can almost never) have a lawyer present for all promises, even if they re big ones, but they need to classify them somehow in order to deal fairly (and systematically) with them when something goes awry. The way they ve chosen to do that is through K law, and in order to get these promises into K law they use PE, comment (d). The big problem that comes in is that many promises made by individual are not strictly commercial in nature, and so it is often difficult to decide what justice means in a certain case. The court in Mills v. Wyman observed that requiring the defendant to pay, even though morally obliged to do so, is too close to saying that what a man ought to do, generally he ought to be made to do, whether he promise or refuse. Nevertheless, the courts still require that the promise bear some resemblance to a contract (they require at least some reliance on the promise and that justice requires its enforcement). Hamer recognized that forbearance of a legal right is sufficient for reliance, whereas Daughtery held that a pure promise of money, with absolutely nothing required in return, is too far from a classical K for it to be enforceable. Basically, what has happened is that K law, of all areas of law, bears the most resemblance to the issues involved in promises, and so courts need a mechanism to force such cases into contract law. The more underlying question is whether K law, though similar, is appropriate. Personal interactions are not supposed to be a legal issue in the way that PE makes promises between individuals a legal issue. It gets too far into issues of morality and honor and other highly subjective areas that courts have traditionally shied away from. Commercial interactions are easier, since a 14

15 reasonable objective standard is easier to develop for business deals than for promises between friends or family. But if a grandfather promises to pay his grandson s college expenses, and then changes his mind when the grandson has no way of paying the expenses he then incurred, is that just? Should we force grandpa to cough it up, or do we say, tough luck, kid? You could argue either way, and therein lies the problem. Essentially, making a contract out of a promise is a compromise for the courts. It lets them do what s right when traditionally they wouldn t be able to. The catch is that in making this concession to justice, PE steps on the toes of both contract law and personal interaction. By letting parties litigate issues that are supposed to be contractual, the parties are allowed to slack off more than classical contract theory would allow. By letting relatives sue over broken promises, you strain familial relations, you force a legal framework onto a situation where it doesn t really belong, and you turn morality and word-of-honor into a legally enforceable issue, though it s always been one of character. Is court-ordered morality morality at all? While comment (d) does allow many issues to be settled via the legal system that would otherwise be off-limits to it, it weakens some of the basic pillars of not only the legal system and its goals and beliefs, but also basic human interaction and perception. It allows more suits, more laziness, and, sadly, more discord and mistrust. It is perhaps a necessary evil, but it is one that might be more evil than necessary. 15