CH-11-13 Conduct Invalidating Assent – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 11 to 13 Chapter 11 CONDUCT INVALIDATING ASSENT ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Anita and Barry were negotiating, and Anita's attorney prepared a long and carefully drawn contract, which was given to Barry for examination. Five days later and prior to its execution, Barry's eyes became so infected that it was impossible for him to read. Ten days thereafter and during the continuance of the illness, Anita called upon Barry and urged him to sign the contract, telling him that time was running out. Barry signed the contract despite the fact he was unable to read it. In a subsequent action by Anita, Barry claimed that the contract was not binding upon him because it was impossible for him to read and he did not know what it contained prior to his signing it. Should Barry be held to the contract? Answer: Fraud. Yes, decision in favor of Anita and against Barry. Barry's defense that the contract was not binding upon him because he had not and could not have read it prior to signing it is not valid. Here, there was no misrepresentation of the contents of the contract Barry was requested to sign. There is nothing approaching fraud upon the part of Anita. Upon the facts stated, Barry's inability to read the contract because of impaired vision does not afford him a defense where his signature to the contract was voluntary, and was not induced by fraud or misrepresentation. Moreover, Barry could not prove a defense based upon duress since Anita did not physically compel nor force Barry by threats to manifest assent to the proposal. Barry could easily have had someone read the contract to him, or have it reviewed by his attorney. 2. (a) Johnson tells Davis that he paid $150,000 for his farm in 2013, and that he believes it is worth twice that at the present time. Relying upon these statements, Davis buys the farm from Johnson for $225,000. Johnson did pay $150,000 for the farm in 2013, but its value has increased only slightly, and it is presently not worth $300,000. On discovering this, Davis offers to reconvey the farm to Johnson and sues for the return of his $225,000. Result? (b) Modify the facts in (a) by assuming that Johnson had paid $100,000 for the property in 2013. What result? Answer: Fraud: Materiality. (a) Decision for Johnson; Davis is not entitled to the return of his $225,000 as long as Johnson actually believed his farm was worth approximately $300,000. Johnson’s statement with respect to the value of the farm was merely the expression of an opinion and not the statement of a material fact upon which Davis had a right to rely. There is no indication of an appraisal or other expert opinion upon which Johnson’s opinion is based. (b) Decision for Davis. Johnson’s statement to Davis that he paid $150,000 for the farm was an untrue statement of a material fact, upon which Davis had a right to and did rely. 3. On September 1, Adams in Portland, Oregon, wrote a letter to Brown in New York City, offering to sell to Brown one thousand tons of chromite at $48 per ton, to be shipped by S.S. Malabar sailing from Portland, Oregon, to New York City via the Panama Canal. Upon receiving the letter on September 5, Brown immediately mailed to Adams a letter stating that she accepted the offer. There were two ships by the name of S.S. Malabar sailing from Portland to New York City via the Panama Canal, one sailing in October and the other sailing in December. At the time of mailing her letter of acceptance Brown knew of both sailings and further knew that Adams knew only of the December sailing. Is there a contract? If so, to which S.S. Malabar does it relate? Answer: Mistake. There is a contract, and it relates to the S.S. Malabar sailing in December. In the classic Peerless case (Raffles v. Wichelhaus, 2 Hurlstone and Coltman Reports 906) there were two ships sailing from Bombay, both named "Peerless." The defendant knew only of the "Peerless" sailing in October and the plaintiff knew only of the "Peerless" sailing in December. There was no meeting of the minds and hence, no contract. Here, since Brown knew of both sailings and further knew that Adams did not know of the October sailing, she, Brown, will not be heard to say that she intended the chromite to be shipped on the S.S. Malabar sailing in October. Adams and Brown manifested a mutual intent to a sale of chromite to be shipped on the S.S. Malabar sailing in December. Restatement, 2nd, Sect. 20. 4. Adler owes Panessi, a police captain, $5,000. Adler threatens that unless Panessi discharges him from the debt, Adler will disclose the fact that Panessi has on several occasions become highly intoxicated and has been seen in the company of certain disreputable persons. Panessi, induced by fear that such a disclosure would cost him his position or in any event lead to social disgrace, gives Adler a release but subsequently sues to set it aside and recover on his claim. Will Adler be able to enforce the release? Answer: Duress. No. The Restatement, sSecond, Contracts, Section 175, defines duress as a manifestation “induced by an improper threat by the other party that leaves the victim no reasonable alternative; the contract is voidable by the victim.” Moreover, a “threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat.” Restatement, Second, Section 176(2). The facts presented in the problem state a clear-cut case of duress by the use of improper threats. 5. Harris owned a farm that was worth about $600 per acre. By false representations of fact, Harris induced Pringle to buy the farm at $1,500 per acre. Shortly after taking possession of the farm, Pringle discovered oil under the land. Harris, on learning this, sues to have the sale set aside on the ground that it was voidable because of fraud. Result? Answer: Fraud in the Inducement. Decision in favor of Pringle. Because Pringle was fraudulently induced to buy the farm, Pringle had the right to disaffirm the transaction. All of the elements are present, including justifiable reliance on the statements made by Harris. The contract was voidable by Pringle only, not by Harris. Presumably Pringle will be content with the bargain even though induced by fraud to make the purchase. The right of avoidance rests entirely with Pringle and he may, if he so desires, abide by the contract. It should be noted, however, that Pringle would not prevail in a suit brought in tort since Pringle did not suffer an injury. 6. On February 2, Phillips induced Miller to purchase from her fifty shares of stock in the XYZ Corporation for $10,000, representing that the actual book value of each share was $200. A certificate for fifty shares was delivered to Miller. On February 16, Miller discovered that the book value on February 2 was only $50 per share. Will Miller be successful in a lawsuit against Phillips? Why? Answer: Fraud in the Inducement. Yes, Miller will prevail against Phillips. The statement that the actual book value of the shares of stock in XYZ Corporation was $200 per share was a statement of material fact made to induce Miller to purchase the stock and which did, in fact, succeed in persuading Miller to buy the shares. The transaction meets the requirements of fraud in the inducement: (1) The representation related to a material fact; (2) It was knowingly false; (3) It was made with the intention that it be acted upon by the person to whom made; (4) It was justifiably relied upon; and (5) The false representation was the proximate cause of the injury or damage. 7. Doris mistakenly accused Peter's son, Steven, of negligently burning down her barn. Peter believed that his son was guilty of the wrong and that he, Peter, was personally liable for the damage, since Steven was only fifteen years old. Upon demand made by Doris, Peter paid Doris $25,000 for the damage to her barn. After making this payment, Peter learned that his son had not caused the burning of Doris’ barn and was in no way responsible for its burning. Peter then sued Doris to recover the $25,000 he had paid her. Will he be successful? Answer: Mistake. Yes, judgment for Peter for $25,000 against Doris. The payment was made under a mutual mistake of material fact. Both Peter and Doris mistakenly believed that Doris’ barn had been negligently burned by Peter’s son, Steven, while as a matter of fact Steven did not cause the burning of Doris’ barn and was in no way responsible for its burning. A payment made under a mutual mistake of fact is recoverable under the doctrine of quasi-contract. 8. Jones, a farmer, found an odd-looking stone in his fields. He went to Smith, the town jeweler, and asked him what he thought it was. Smith said he did not know but thought it might be a ruby. Jones asked Smith what he would pay for it, and Smith said $200, whereupon Jones sold it to Smith for $200. The stone turned out to be an uncut diamond worth $3,000. Jones brought an action against Smith to recover the stone. On trial, it was proved that Smith actually did not know the stone was a diamond when he bought it, but he thought it might be a ruby. Can Jones void the sale? Explain. Answer: Mistake: Nature of Subject Matter. No, Jones cannot void the sale. Mutual ignorance upon the part of Jones and Smith of the value of the subject matter did not prevent the formation of a valid contract. They both understood that the two hundred dollars was to be exchanged for the stone. There was no mistake as to the subject matter of the agreement. There was neither fraud nor misrepresentation. 9. Decedent Joan Jones, a bedridden, lonely woman of eighty-six years, owned outright Greenacre, her ancestral estate. Ficky, her physician and friend, visited her weekly and was held in the highest regard by Joan. Joan was extremely fearful of suffering and depended upon Ficky to ease her anxiety and pain. Several months before her death, she deeded Greenacre to Ficky for $10,000. The fair market value of Greenacre at this time was $250,000. Joan was survived by two children and six grandchildren. Joan's children challenged the validity of the deed. Should the deed be declared invalid due to Ficky’s undue influence? Explain. Answer: Undue Influence. Yes, decision for Decedent’s children. Restatement,2nd, Contracts, §177(1) defines undue influence as the “unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that the person will not act in a manner inconsistent with his welfare.” A contract induced by undue influence is voidable. Here the doctor had a fiduciary responsibility and that since the price was far below fair market value that the doctor acted improperly. Nevertheless, this presumption is rebuttable. 10. Dorothy and John Huffschneider listed their house and lot for sale with C. B. Property. The asking price was $165,000, and the owners told C. B. that the size of the property was 6.8 acres. Dean Olson, a salesman for C. B., advertised the property in local newspapers as consisting of six acres. James and Jean Holcomb signed a contract to purchase the property through Olson after first inspecting the property with Olson and being assured by Olson that the property was at least 6.6 acres. The Holcombs never asked for or received a copy of the survey. In actuality, the lot was only 4.6 acres. The Holcombs now seek to rescind the contract. Decision? Answer: Fraud in the Inducement. Decision for James and Jean Holcomb. When Olson falsely represented that the property was at least 6.6 acres a fraud was committed. As the sales agent Olson had an obligation to disclose all material information to the purchasers as well as to respond truthfully to all inquiries. The agent had access to the survey and could have easily verified the actual acreage. His conduct can be characterized at a minimum as "recklessly indifferent" if not outright as an intended deception, so long as Dorothy and John Huffschneider did not provide C.B. Property with a fraudulent survey of the property. 11. In February, Gardner, a schoolteacher with no experience in running a tavern, entered into a contract to purchase for $40,000 the Punjab Tavern from Meiling. The contract was contingent upon Gardner's obtaining a five-year lease for the tavern's premises and a liquor license from the State. Prior to the formation of the contract, Meiling had made no representations to Gardner concerning the gross income of the tavern. Approximately three months after the contract was signed, Gardner and Meiling met with an inspector from the Oregon Liquor Control Commission (OLCC) to discuss transfer of the liquor license. Meiling reported to the agent, in Gardner's presence, that the tavern's gross income figures for February, March, and April were $5,710, $4,918, and $5,009, respectively. The OLCC granted the required license, the transaction was closed, and Gardner took possession on June 10. After discovering that the tavern's income was very low and that the tavern had very few female patrons, Gardner contacted Meiling's bookkeeping service and learned that the actual gross income for those three months had been approximately $1,400 to $2,000. Will a court grant Gardner rescission of the contract? Explain. Answer: Fraudulent Misrepresentation/Justifiable Reliance. No. To sustain a case of fraudulent misrepresentation, the injured party must prove that he actually relied upon the false representation, causing him to enter into the bargain. Meiling's only representations concerning the Tavern's gross income were made months after the contract was formed. Since these misrepresentations came after the binding agreement of February, they could not have been relied upon by Gardner in making the agreement. Therefore, rescission of the contract is not permitted. Gardner v. Meiling, 280 Or. 665, 572 P.2d 1012 (1977). 12. Christine Boyd was designated as the beneficiary of a life insurance policy issued by Aetna Life Insurance Company on the life of Christine's husband, Jimmie Boyd. The policy insured against Jimmie's permanent total disability and also provided for a death benefit to be paid on Jimmie's death. Several years after the policy was issued, Jimmie and Christine separated. Jimmie began to travel extensively, and Christine therefore was unable to keep track of his whereabouts or his state of health. Jimmie, however, continued to pay the premiums on the policy until Christine tried to cash in the policy to alleviate her financial distress. A loan previously had been made on the policy, however, leaving its cash surrender value, and thus the amount that Christine received, at only $4.19. Shortly thereafter, Christine learned that Jimmie had been permanently and totally disabled before the surrender of the policy. Aetna also was unaware of Jimmie's condition, and Christine requested that the surrendered policy be reinstated and that the disability payments be made. Jimmie died soon thereafter, and Christine then requested that Aetna pay the death benefit. Decision? Answer: Mutual Mistake of Fact. Decision for Mrs. Boyd. As a matter of equity, the surrender agreement had to be rescinded. Had Mrs. Boyd known the true facts at the time she surrendered the policy, she certainly would not have done so. Since her mistaken belief that her husband was not disabled was a material mistake of fact, her rescission was not effective. In the opinion of the court, "The supposed elements of doubt as to the health of Mr. Boyd never entered into the contemplation of either party, nor did it form any part of the consideration for the cancellation and surrender of the policy. Since the policy was in full force and effect at the time of total permanent disability," the defendant insurance company is liable. Boyd v. Aetna Life Insurance Co., 310 Ill. App. 547, 35 N.E. 2d 99 (1941). 13. Plaintiff, Gibson, entered into negotiation with W. S. May, president of Home Folks Mobile Home Plaza, Inc., to buy Home Plaza Corporation. Plaintiff visited the mobile home park on several occasions, at which time he noted the occupancy, visually inspected the sewer and water systems, and asked May numerous questions concerning the condition of the business. Plaintiff, however, never requested to see the books, nor did May try to conceal them. May admits making the following representations to the plaintiff: (1) the water and sewer systems were in good condition and no major short-term expenditures would be needed; (2) the park realized a 40 percent profit on natural gas sold to tenants; and (3) usual park vacancy was 5 percent. Additionally, May gave plaintiff the park's accountant-prepared income statement, which showed a net income of $38,220 for the past eight months. Based on these figures, plaintiff projected an annual net profit of $57,331.20. Upon being asked whether this figure accurately represented income of the business for the past three years, May stated by letter that indeed it did. Plaintiff purchased the park for $275,000. Shortly thereafter, plaintiff spent $5,384 repairing the well and septic systems. By the time plaintiff sold the park three years later, he had expended $7,531 on the wells and $8,125 on the septic systems. Furthermore, in the first year, park occupancy was nowhere near 95 percent. Even after raising rent and the charges for natural gas, plaintiff still operated at a deficit. Plaintiff sued defendant, alleging that May, on behalf of defendant, made false and fraudulent statements on which plaintiff relied when he purchased the park. Decision? Answer: Fraud: Justifiable Reliance. Defendant's motion for summary judgment denied. The essential elements of fraud are: "(1) false representation made by the defendant; (2) scienter; (3) an intention to induce the plaintiff to act or refrain from acting in reliance by the plaintiff; (4) justifiable reliance by the plaintiff; (5) damage to the plaintiff." Home Plaza claims that Gibson was not justified in relying upon the false representations of May because Gibson failed to exercise ordinary diligence and prudence before acting on the alleged misrepresentations. A lack of diligence may be apparent as a matter of law when the defrauded party blindly and carelessly relies upon the representations of another or had notice of the allegedly misrepresented fact and proceeded anyway. However, the law of Georgia "does not require a defrauded party to exhaust all means at his disposal to ascertain the truth of representations before acting thereon." Gibson visited the park several times and communicated extensively with May, Gibson tried to verify a number of items, among them the eight-month income statement and the projection of annual income. This behavior is not blind reliance as a matter of law. Gibson had a right to rely upon the truth of May's statements without seeking verification from other sources, since the statements related to matters apparently within May’s knowledge. 14. Columbia University brought suit against Jacobsen on two notes signed by him and his parents, representing the balance of tuition he owed the University. Jacobsen counterclaimed for money damages due to Columbia's deceit or fraudulent misrepresentation. Jacobsen argues that Columbia fraudulently misrepresented that it would teach wisdom, truth, character, enlightenment, and similar virtues and qualities. He specifically cites as support the Columbia motto: “in lumine tuo videbimus lumen” (“In your light we shall see light”); the inscription over the college chapel: “Wisdom dwelleth in the heart of him that hath understanding”; and various excerpts from its brochures, catalogues, and a convocation address made by the University's president. Jacobsen, a senior who was not graduated because of poor scholastic standing, claims that the University's failure to meet its promises made through these quotations constituted fraudulent misrepresentation or deceit. Decision? Answer: Fraud: False Representation. Judgment for Columbia University. The necessary elements of an action for deceit are: (1) a false representation; (2) knowledge or belief on the part of the person making the representation that it is false; (3) an intention that the other party act thereon; (4) reasonable reliance by such party in so doing; and (5) resultant damage to him. Here, the quotations in the University's brochures and catalogues, inscriptions over its buildings, and speech by its president merely indicated Columbia's objectives, desires, and hopes together with factual statements as to the nature of some of the courses included in its curricula. There is nothing in these statements to establish that Columbia represented that it would teach wisdom. Jacobsen's interpretation of them as a representation, express or implied, that it could or would teach wisdom and the like is entirely subjective and irrational. Wisdom is not a subject that can be taught and no reasonable person would accept such a claim made by any man or institution. Therefore, there is no false representation upon which to base an action in deceit. 15. Frank Berryessa stole funds from his employer, the Eccles Hotel Company. His father, W. S. Berryessa (Berryessa), learned of his son's trouble and, thinking the amount involved was about $2,000, gave the hotel a promissory note for $2,186 to cover the shortage. In return, the hotel agreed not to publicize the incident or notify the bonding company. (A bonding company is an insurer that is paid a premium for agreeing to reimburse an employer for thefts by an employee.) Before this note became due, however, the hotel discovered that Frank had actually misappropriated $6,865. The hotel then notified its bonding company, Great American Indemnity Company, to collect the entire loss. W. S. Berryessa claims that the agent for Great American told him that unless he paid them $2,000 in cash and signed a note for the remaining $4,865, Frank would be prosecuted (which note would replace the initial note). Berryessa agreed, signed the note, and gave the agent a cashier's check for $1,500 and a personal check for $500. He requested that the agent not cash the personal check for about a month. Subsequently, Great American sued Berryessa on the note. He defends against the note on the grounds of duress and counterclaims for the return of the $1,500 and the cancellation of the uncashed $500 check. Who should prevail? Explain. Answer: Improper Threats. In an action on the note, Berryessa (Frank was not sued) resisted liability upon the grounds of duress and lack of consideration. He counterclaimed for the return of the $1,500 and the cancellation of the uncashed check for $500. The court held (1) that the note having been given to suppress a criminal prosecution was against public policy and not enforceable between the parties because of duress of illegal consideration; (2) that there was not duress as to the uncashed check for $500 and the payment of $1,500 cash which were substituted for the $2,186 note that had been given by defendant to the hotel employer without any duress or threat of prosecution. 16. Jane Francois married Victor H. Francois. At the time of the marriage, Victor was a fifty-year-old bachelor living with his elderly mother, and Jane was a thirty-year-old, twice-divorced mother of two. Victor had a relatively secure financial portfolio; Jane, on the other hand, brought no money or property to the marriage. The marriage deteriorated quickly over the next couple of years, with disputes centered on financial matters. During this period, Jane systematically gained a joint interest in and took control of most of Victor's assets. Three years after they were married, Jane contracted Harold Monoson, an attorney, to draw up divorce papers. Victor was unaware of Jane's decision until he was taken to Monoson's office, where Monoson presented for Victor's signature a “Property Settlement and Separation Agreement.” Monoson told Victor that he would need an attorney, but Jane vetoed Victor's choice. Monoson then asked another lawyer, Gregory Ball, to come into the office. Ball read the agreement and strenuously advised Victor not to sign it because it would commit him to financial suicide. The agreement transferred most of Victor's remaining assets to Jane. Victor, however, signed it because Jane and Monoson persuaded him that it was the only way that his marriage could be saved. In October of the following year, Jane informed Victor that she had sold most of his former property and that she was leaving him permanently. Can Victor have the agreement set aside as a result of undue influence? Answer: Undue Influence. Yes, decision for Victor. The essence of undue influence is the subversion of another's free will in order to obtain assent to an agreement. The degree of persuasion that is necessary to constitute undue influence varies from case to case. The proper inquiry is not just whether persuasion induced the transaction but whether the result was produced by the domination of the will of the victim by the person exerting undue influence. Hence, the particular transaction must be scrutinized to determine if the agreement was truly the product of a free and independent mind. The fairness of the agreement must be shown by clear and convincing evidence. Because the agreement was clearly unfair, and the agreement was contrary to Victor's own best interests, it is clear that Victor would not have signed the agreement but for undue influence. Francois v. Francois, 599 F.2d 1286 (1979). 17. Iverson owned Iverson Motor Company, an enterprise engaged in the repair as well as the sale of Oldsmobile, Rambler, and International Harvester Scout automobiles. Forty percent of the business's sales volume and net earnings came from the Oldsmobile franchise. Whipp contracted to buy Iverson Motors, which Iverson said included the Oldsmobile franchise. After the sale, however, General Motors refused to transfer the franchise to Whipp. Whipp then returned the property to Iverson and brought this action seeking rescission of the contract. Should the contract be rescinded? Explain. Answer: Nonfraudulent Misrepresentation. Yes. Historically, an action for fraud required that the injured party show that the misrepresentation upon which it detrimentally relied was made with the speaker's knowledge of its falsity or with reckless disregard for the falsity of the statement. Today, however, a cause of action may be based on an innocent misrepresentation. Here, Iverson represented that the Oldsmobile franchise was transferable, when, in fact it was not. That misrepresentation, even though innocently made, makes the entire agreement voidable. Whipp v. Iverson, 34 Wis.2d 166, 168 N.W. 2d 201 (1969). 18. On February 10, Mrs. Sunderhaus purchased a diamond ring from Perel & Lowenstein for $6,990. She was told by the company's salesman that the ring was worth its purchase price, and she also received at that time a written guarantee from the company attesting to the diamond's value, style, and trade-in value. When Mrs. Sunderhaus went to trade the ring for another, however, she was told by two jewelers that the ring was valued at $3,000 and $3,500, respectively. Mrs. Sunderhaus knew little about the value of diamonds and claims to have relied on the oral representation of the Perel & Lowenstein's salesman and the written representation as to the ring's value. She seeks rescission of the contract or damages in the amount of the sales price over the ring's value. Decision? Answer: Fraud/Misrepresentation of Fact/Opinion of Expert as to Value. Decision for Mrs. Sunderhaus. Although in general a statement of opinion as to value is not considered to be a statement of fact, the opinion here was given by a jeweler who was an "expert" upon whose advice Mrs. Sunderhaus relied. Whenever a party states a matter, which might otherwise be only an opinion, and does not state it as the mere expression of his own opinion, but affirms it as an existing fact material to the transaction, so that the other party may reasonably treat it as a fact, and rely and act upon it as such, then the statement clearly becomes an affirmation of fact within the meaning of general rule, and may be fraudulent misrepresentation. The layman must of necessity rely upon the integrity of the jeweler in purchasing a diamond or other precious stone. Mrs. Sunderhaus was in no position to make her own determination as to the weight and value of the stones. She relied upon the jeweler's statement of value and had a right to rely upon the statement of value. The written guarantee of the ring's value, style and trade-in value is a statement of fact for purposes of fraud. Sunderhaus v. Perel & Lowenstein, 215 Tenn. 619, 388 S.W. 2d 140 (1965). 19. Division West Chinchilla Ranch advertised on television that a five-figure income could be earned by raising chinchillas with an investment of only $3.75 per animal per year and only thirty minutes of maintenance per day. The minimum investment was $2,150 for one male and six female chinchillas. Division West represented to plaintiffs that chinchilla ranching would be easy and that no experience was required to make ranching profitable. Plaintiffs, who had no experience raising chinchillas, each invested $2,150 or more to purchase Division's chinchillas and supplies. After three years without earning a profit, plaintiffs sue Division for fraud. Do these facts sustain an action for fraud in the inducement? Answer: Fraud. Yes, judgment for plaintiffs. Division knew that plaintiffs had no experience in chinchilla ranching and it was unlikely that they would make a profit without experience and skill. The parties in this case were not bargaining with equal knowledge. Division exploited its superior position by exploiting the plaintiffs–this constitutes fraud. Fisher v. Division West Chinchilla Ranch, 310 F. Supp. 424 (D. Minn. 1970). 20. William Schmalz entered into an employment contract with Hardy Salt Company. The contract granted Schmalz six months' severance pay for involuntary termination but none for voluntary separation or termination for cause. Schmalz was asked to resign from his employment. He was informed that if he did not resign, he would be fired for alleged misconduct. When Schmalz turned in his letter of resignation, he signed a release prohibiting him from suing his former employer as a consequence of his employment. Schmalz consulted an attorney before signing the release and upon signing it received $4,583.00 (one month's salary) in consideration. Schmalz now sues his former employer for the severance pay, claiming that he signed the release under duress. Is Schmalz correct in his assertion? Answer: Duress. No. A person with business experience who understands the nature of what he is signing and who has sought the advice of counsel may not claim duress. The claim of duress is reserved for those who truly have been deprived of their free will. In this case, Schmalz signed the release with the full knowledge of its implications, accepted the salary payment, and did not repudiate until much later. These factors constitute a ratification of the release. Schmalz v. Hardy Salt Company., 739 S.W. 2d 765 (Mo. App. 1987). 21. Treasure Salvors and the State of Florida entered into a series of four annual contracts governing the salvage of the Nuestra Senora de Atocha. The Atocha is a Spanish galleon that sank in 1622, carrying a treasure now worth well over $250 million. Both parties had contracted under the impression that the seabed on which the Atocha lay was land owned by Florida. Treasure Salvors agreed to relinquish 25 percent of the items recovered in return for the right to salvage on State lands. In accordance with these contracts, Treasure Salvors delivered to Florida its share of the salvaged artifacts. Subsequently, the US Supreme Court held that the part of the continental shelf on which the Atocha was resting had never been owned by Florida. Treasure Salvors then brought suit to rescind the contracts and to recover the artifacts it had delivered to the State of Florida. Should Treasure Salvors prevail? Answer: Mutual Mistake of Fact. Yes, judgment for Treasure Salvors. Both parties based their contracts upon the erroneous assumption that the state of Florida owned the land in question. But for this belief neither party would have entered into the agreements. The contracts are therefore voidable under the doctrine of mutual mistake of fact. Accordingly, Treasure Salvors may rescind the contracts and recover the artifacts delivered to the state of Florida. State of Florida, Dept. of State v. Treasure Salvors, Inc., 621 F.2d 1340 (5th Cir. 1980). 22. International Underwater Contractors, Inc. (IUC), entered into a written contract with New England Telephone and Telegraph Company (NET) to assemble and install certain conduits under the Mystic River for a lump sum price of $149,680. Delays caused by NET forced IUC's work to be performed in the winter months instead of during the summer as originally bid, and as a result a major change had to be made in the system from that specified in the contract. NET repeatedly assured IUC that it would pay the cost if IUC would complete the work. The change cost IUC an additional $811,810.73; nevertheless, it signed a release settling the claim for a total sum of $575,000. IUC, which at the time was in financial trouble, now seeks to recover the balance due, arguing that the signed release is not binding because it was signed under economic duress. Is IUC correct? Answer: Duress. Yes, judgment for IUC. A release signed under duress is not binding. To prove that there was duress, IUC must show that (1) one side involuntarily accepted the terms of another; (2) the circumstances permitted no other alternative; and (3) the circumstances were the result of coercive acts of the other party. Just taking advantage of another’s financial difficulty is not duress; the party claiming duress must show that its financial difficulty was contributed to or caused by the one accused of coercion. Here, NET insisted on the change in the contract and repeatedly assured IUC that it would pay the substantial additional cost, if IUC would complete the work. Furthermore, NET refused to make payments for almost a year, which in turn caused IUC’s financial difficulties. Other factors also indicate the existence of economic duress, including the unequal bargaining power of the two parties and the disparity among IUC’s actual costs ($811,816), the amount NET’s engineers had recommended for settlement ($775,000) and the final amount offered as a “take-it-or-leave-it” with the release ($575,000). 23. Conrad Schaneman was a Russian immigrant who could neither read nor write the English language. In 2012 Conrad deeded (conveyed) a farm he owned to his eldest son, Laurence, for $23,500, which was the original purchase price of the property in 1982. The value of the farm in 2012 was between $145,000 and $160,000. At the time he executed the deed, Conrad was an eighty-two-year-old invalid, severely ill, and completely dependent on others for his personal needs. He weighed between 325 and 350 pounds, had difficulty breathing, could not walk more than fifteen feet, and needed a special jackhoist to get in and out of the bathtub. Conrad enjoyed a long-standing, confidential relationship with Laurence, who was his principal adviser and handled Conrad's business affairs. Laurence also obtained a power of attorney from Conrad and made himself a joint owner of Conrad's bank account and $20,000 certificate of deposit. Conrad brought this suit to cancel the deed, claiming it was the result of Laurence's undue influence. The district court found that the deed was executed as a result of undue influence, set aside the deed, and granted title to Conrad. Laurence appealed. Decision? Answer: Undue Influence. Judgment for Conrad Schaneman. A confidential or fiduciary relationship exists between two persons if one has gained the confidence of the other and purports to act or advise with the other's interest in mind. In such a relationship, the court will scrutinize critically any transaction between the two parties, especially where age, infirmity, and instability are involved, to see that no injustice has occurred. Here, the evidence shows that a confidential relationship existed between Conrad and Laurence and that due to age and physical infirmities, Conrad was, for all intents and purposes, an invalid at the time of the conveyance. It further supports a finding that Conrad's mental acuity was impaired at times and that he sometimes suffered from disorientation and lapse of memory. Conrad was subject to the influence of Laurence, who was acting in a confidential relationship; the opportunity to exercise undue influence existed; there was a disposition on the part of Laurence to exercise such undue influence; and the conveyance appeared to be the effect of such influence. Accordingly, the deed is canceled for undue influence. 24. At the time of her death, Olga Mestrovic was the owner of a large number of works of art created by her late husband, Ivan Mestrovic, an internationally known sculptor and artist whose works were displayed throughout Europe and the United States. By the terms of Olga’s will, all the works of art created by her husband were to be sold and the proceeds distributed to members of the Mestrovic family. Also included in the estate of Olga Mestrovic was certain real property which 1st Source Bank (the Bank), as personal representative of the estate of Olga Mestrovic, agreed to sell to Terrence and Antoinette Wilkin. The agreement of purchase and sale made no mention of any works of art, although it did provide for the sale of such personal property as dishwasher, drapes, and French doors in the attic. Immediately after closing on the real estate, the Wilkins complained to the Bank of the clutter left on the premises; the Bank gave the Wilkins an option of cleaning the house themselves and keeping any personal property they desired, to which the Wilkins agreed. At the time these arrangements were made, neither the Bank nor the Wilkins suspected that any works of art remained on the premises. During clean-up, however, the Wilkins found eight drawings and a sculpture created by Ivan Mestrovic to which the Wilkins claimed ownership based upon their agreement with the Bank that, if they cleaned the real property, they could keep such personal property as they desired. Who is entitled to ownership of the art work? Answer: Mutual Mistake of Fact. The art belongs to the estate, to be sold, with the proceeds distributed to the family. The parties in this case shared a common presupposition as to certain facts which proved false. The Bank and the Wilkins considered the real estate which the Wilkins had purchased to be cluttered with items of personal property variously characterized as “junk,” “stuff” or “trash.” Neither party suspected that Mestrovic works of art remained on the premises, and the discovery of those works of art by the Wilkins was unexpected. Where both parties share a common assumption about a vital fact, upon which they based their bargain, the transaction may be avoided if, because of the mistake, a quite different exchange of values occurs from the exchange of values contemplated by the parties. The gain to the Wilkins and the loss to the Bank were not contemplated when they made their agreement, and so a true meeting of the minds never occurred, allowing the Bank to avoid the agreement. 25. Ronald D. Johnson is a former employee of International Business Machines Corporation (IBM). As part of a downsizing effort, IBM discharged Johnson. In exchange for an enhanced severance package, Johnson signed a written release and covenant not to sue IBM. IBM’s downsizing plan provided that surplus personnel were eligible to receive benefits, including outplacement assistance, career counseling, job retraining, and an enhanced separation allowance. These employees were eligible, at IBM’s discretion, to receive a separation allowance of two weeks’ pay. However, employees who signed a release could be eligible for an enhanced severance allowance equal to one week’s pay for each six months of accumulated service with a maximum of twenty-six weeks’ pay. Surplus employees could also apply for alternate, generally lower-paying, manufacturing positions. Johnson opted for the release and received the maximum twenty-six weeks’ pay. He then alleged, among other claims, that IBM subjected him to economic duress when he signed the release and covenant-not-to-sue, and he sought to rescind both. What will Johnson need to show in order to prove his cause of action? Answer: Duress. To constitute duress, there must be an application of such pressure or constraint as compels someone to go against their free will. Parties to a contract must freely and mutually consent to its terms. If consent to a contract is not freely given, the contract may be rescinded by the parties. In order to establish a claim for economic duress, the Plaintiff must prove by a preponderance of evidence the following elements: (1) the Defendant engaged in a sufficiently coercive wrongful act such that; (2) a reasonably prudent person in Plaintiff’s economic position would have had no reasonable alternative but to succumb to Defendant’s coercion; (3) Defendant knew of Plaintiff’s economic vulnerability; and (4) Defendant’s coercive wrongful act actually caused or induced plaintiff to enter into a contract. Johnson’s case fails to meet these elements. First, IBM did not commit a wrongful act by designating Johnson a surplus employee or by requiring that he choose between severance options. Although the wrongful act need not be criminal or tortious, being allowed a voluntary choice of perfectly legitimate alternatives is the antithesis of duress. Encouragement or incentives is a far cry from coercion or denial of choice. Second, Johnson had reasonable alternatives to signing the release. In determining whether a reasonable alternative was available, courts employ an objective test dependent on the circumstances of each case. Johnson was not facing imminent bankruptcy or financial ruin. Regardless of what he may have subjectively believed, Johnson had reasonable alternatives available. Third, IBM had no knowledge of Johnson’s particular economic circumstances nor of any peculiar economic vulnerability he had. Finally, Johnson’s decision was his own and was not caused by any unfair action on the part of IBM. Therefore, at the time he signed the release, Johnson was not subject to economic duress. 26. Vernon and Janene Lesher agreed to purchase an eighteen-acre parcel of real property from the Strids with the intention of using it to raise horses. In purchasing the property, the Leshers relied on their impression that at least four acres of the subject property had a right to irrigation from Slate Creek. The earnest money agreement to the contract provided: D. Water Rights are being conveyed to Buyer at the close of escrow.… Seller will provide Buyer with a written explanation of the operation of the irrigation system, water right certificates, and inventory of irrigation equipment included in sale. The earnest money agreement also provided: THE SUBJECT PROPERTY IS BEING SOLD “AS IS” subject to the Buyer's approval of the tests and conditions as stated herein. Buyer declares that Buyer is not depending on any other statement of the Seller or licensees that is not incorporated by reference in this earnest money contract [Bold in original]. Before signing the earnest money agreement, the Strids presented to the Leshers a 1977 Water Resources Department water rights certificate and a map purporting to show an area of the subject property to be irrigated (“area to be irrigated” map), which indicated that the property carried a four-acre water right. Both parties believed that the property carried the irrigation rights and that the Leshers needed such rights for their horse farm. The Leshers did not obtain the services of an attorney or a water rights examiner before purchasing the property. After purchasing the property and before establishing a pasture, the Leshers learned that the property did not carry a four-acre water right. Explain whether the Leshers may rescind the contract. Answer: Mistake. Yes, the Leshers may rescind the contract. Lesher v. Strid, 165 Or.App. 34, 996 P.2d 988 (Court of Appeals of Oregon, 2000). Grounds for rescission on the basis of a mutual mistake of fact or innocent misrepresentation must be proved by clear and convincing evidence. An innocent misrepresentation of fact renders a contract voidable by a party if the party is relying on the material misrepresentation by the other party. A mutual mistake of fact renders a contract voidable by the adversely affected party, if the mistake is so fundamental that it frustrates the purpose of the contract. Even though it appears that the trial court did not apply the clear and convincing standard, the plaintiffs' evidence meets that standard. Both defendant and plaintiffs testified that they believed that the four acres of water rights were appurtenant to the subject property. Defendant does not dispute that the 1977 water rights certificate and the “area to be irrigated” map are her representation about the water right. Plaintiffs also established by clear and convincing evidence that the existence of the four-acre water right was material and essential to the contract. Vernon testified that the motivation for the purchase was to expand his ability to raise horses from property they already owned where they had a two-acre irrigation right and that the subject property's water right was essential to the contract. Certainly, a smaller water right would limit, not expand, the plaintiffs' ability to raise horses. The mistake, therefore, goes to the very essence of the contract. The defendant argues that the plaintiffs bore the risk of that mistake. The Restatement (Second) of Contracts § 154 explains that a party bears the risk of a mistake, in part, if the risk is allocated to the party by agreement of the parties, or if the risk is allocated to the party “by the court on the ground that it is reasonable in the circumstances to do so.” There is nothing in the contract that would allocate to plaintiffs the risk of a mistake as to the existence of a four-acre water right. Defendant argues in the alternative that the plaintiffs' mistake of fact is the result of the defendant's misrepresentation, on which plaintiffs could not reasonably rely. An “innocent misrepresentation may support a claim for rescission of a real estate agreement if the party who relied on the misrepresentations of another establishes a right to have done so.” Defendant argues that her representations about the four-acre water right were extrinsic to the contract and that the contract's “as is” clause expressly excluded reliance on such extrinsic representations. The “as is” clause specifically contemplated reliance on any statements by the seller that were “incorporated by reference” in the earnest money agreement. The earnest money agreement specifically referred to the conveyance of water rights. ANSWERS TO “TAKING SIDES” PROBLEMS Mrs. Audrey E. Vokes, a widow of fifty-one years and without family, purchased fourteen separate dance courses from J. P. Davenport’s Arthur Murray, Inc., School of Dance. The fourteen courses totaled in the aggregate 2,302 hours of dancing lessons at a cost to Mrs. Vokes of $31,090.45. Mrs. Vokes was induced continually to reapply for new courses by representations made by Mr. Davenport that her dancing ability was improving, that she was responding to instruction, that she had excellent potential, and that they were developing her into an accomplished dancer. In fact, she had no dancing ability or aptitude and had trouble “hearing the musical beat.” Mrs. Vokes brought action to have the contracts set aside. (a) What are the arguments that the contract should be set aside? (b) What are the arguments that the contract should be enforced? (c) What is the proper outcome? Explain. Answer: (a) Ordinarily, for a misrepresentation to be actionable, it must be one of fact rather than of opinion. Where, as here, however, a statement is made by a party having superior knowledge, that statement may be taken as one of fact, although it would be considered an opinion if the parties were dealing on equal terms. Here it could be said that Mr. Davenport had superior knowledge as to Mrs. Vokes’ dancing potential and as to her degree of improvement and that he set forth those “facts” in a greatly exaggerated fashion to induce her to enter into new contracts. Even in contractual situations where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquires as to those facts, if he undertakes to speak, he must disclose the whole truth. Because of his superior knowledge, Davenport’s statements regarding Mrs. Vokes’ dancing ability and potential may be taken as statements of fact. (b) The defendant would argue that the comments they made were opinion and not fact. That they were merely trying to help an older woman enjoy her life and give her positive feedback. She enjoyed her dance lessons and freely and voluntarily entered into all of her contracts. (c) Mrs. Vokes should prevail. Vokes v. Arthur Murray, Inc. Florida Court of Appeals, 1968, 212 So.2d 906 Chapter 12 CONSIDERATION ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. In consideration of $1800 paid to him by Joyce, Hill gave Joyce a written option to purchase his house for $180,000 on or before April 1. Prior to April 1, Hill verbally agreed to extend the option until July 1. On May 18, Hill, known to Joyce, sold the house to Gray, who was ignorant of the unrecorded option. Is there a contract between Joyce & Hill? Explain. Answer: Bargained-for Exchange. No. Consideration was paid to Hill for holding the property for the specified time subject to the right of Joyce to exercise the option whether to buy or not. When the time limit expired, the contract was at an end and the right under the option was extinguished. Of course, if that right were extended by some valid binding agreement, then it could be enforced. Joyce did not attempt to exercise the option and complete a contract of purchase within the time limited by the written agreement. It is true that before the expiration of the time stated, Hill verbally agreed or promised to extend the time for the exercise of the option from April 1 to July 1, and that it was within this latter or extended period and after the property had been sold and conveyed to Gray that Joyce presented himself ready to accept the property and pay the price. However, such acceptance came too late. There was no consideration for the verbal promise or agreement to extend the time, and such promise was therefore not enforceable. After April 1 the verbal agreement operated simply as a mere offer continuing until withdrawn or otherwise ended by some act of the offeror, Hill. The sale to Gray was known to Joyce and resulted in a revocation of the offer. (NOTE: In addition, the Statute of Frauds would require an extension of the option to be in writing because such an option deals with an “interest in” or “concerns” land.) 2. (a) Ann owed $2,500 to Barry for services Barry rendered to Ann. The debt was due June 30, 2016. In March 2017, the debt was still unpaid. Barry was in urgent need of ready cash and told Ann that if she would pay $1,500 of the debt at once, Barry would release her from the balance. Ann paid $1,500 and stated to Barry that all claims had been paid in full. In August 2017, Barry demanded the unpaid balance and subsequently sued Ann for $1,000. Result? (b) Modify the facts in (a) by assuming that Barry gave Ann a written receipt stating that all claims had been paid in full. Result? (c)Modify the facts in (a) by assuming that Ann owed Barry the $2,500 on Ann’s purchase of a motorcycle from Barry. Result? Answer: Settlement of an Undisputed Debt. (a) Decision for Barry. As this debt arose out of a contract for services, the common law of contracts would apply. At common law the payment of a lesser sum of money in full satisfaction of a liquidated, undisputed debt in a greater amount is legally insufficient consideration for a promise of the creditor to discharge the entire debt. There is no legal detriment to the promisee or legal benefit to the promisor. UCC: Renunciation. (b) Decision for Barry unless UCC Section 1-107 applies. It is unclear whether Section 1-107 applies to transactions outside of the Code. If it does not, then the written receipt would not change the result in question 2a. If Section 1-107 applies, then the written receipt would constitute a written waiver or renunciation signed and delivered by the aggrieved party and would discharge the debt. Modification of a Pre-existing Contract. (c) This transaction would be subject to the Uniform Commercial Code. Under Section 2-209 (1) a contract for the sale of goods can be validly modified by the parties without new consideration provided they so intend and act in good faith. This problem presents a question of intent and good faith. Since payment was already due and Barry was acting under economic urgency, the modification is probably not binding. However, if Barry gave Ann a written release as was done in (2) (b), the result would most likely differ. UCC Section 1-107 expressly provides that any claim or right arising out of any breach can be discharged in whole or in part “without consideration” by a written waiver or renunciation signed and delivered by the aggrieved party. Consequently, under the Code, consideration is no longer required to discharge a debt. The only requirement is that the creditor sign and deliver a sufficient writing, which Barry did. Barry’s only defense would be that of economic duress, which should be found to exist under the facts as stated. 3. (a) Judy orally promises her daughter, Liza, that she will give her a tract of land for her home. Liza, as intended by Judy, gives up her homestead and takes possession of the land. Liza lives there for six months and starts construction of a home. Is Judy bound to convey the real estate? (b) Ralph, knowing that his son, Ed, desires to purchase a tract of land, promises to give him the $25,000 he needs for the purchase. Ed, relying on this promise, buys an option on the tract of land. Can Ralph rescind his promise? Answer: Promissory Estoppel. (a) Yes, decision for Liza. Usually, gift promises are ruled as lacking consideration and are not binding agreements. In this case, Liza justifiably relied on the promise and acted to her detriment by selling her home, moving onto the property, and starting construction of a new house. The doctrine of promissory estoppel applies to such promises that induce action by the promisee that would be reasonably expected by the promisor. Judy becomes liable for having induced the change in position by Liza. (b) Yes, judgment for Ralph. The doctrine of promissory estoppel does not make every gift promise binding just because the promisee has changed positions. There must be a justifiable reliance on the promise to the extent that the promisee takes definite and substantial action. Since Ed purchased only an option to buy the property, this probably would not be construed as a substantial action on his part. 4. George owed Keith $800 on a personal loan. Neither the amount of the debt nor George's liability to pay the $800 was disputed. Keith had also rendered services as a carpenter to George without any agreement as to the price to be paid. When the work was completed, an honest and reasonable difference of opinion developed between George and Keith with respect to the value of Keith's services. Upon receiving from Keith a bill of $600 for the carpentry services, George mailed in a properly stamped and addressed envelope his check for $800 to Keith. In an accompanying letter, George stated that the enclosed check was in full settlement of both claims. Keith indorsed and cashed the check. Thereafter, Keith unsuccessfully sought to collect from George an alleged unpaid balance of $600. May Keith recover the $600 from George? Answer: Settlement of Disputed/Undisputed Debts. Decision, in part, in favor of Keith. This common law problem presents questions attending the payment or settlement of (1) a past due, undisputed or liquidated debt and (2) a disputed debt. In Pinnel’s Case, 5 Coke 117, and Cumber v. Wayne, 1 Strange, 426, the question presented and decided was “that payment of a lesser sum on the day in satisfaction of a greater, cannot be in satisfaction for the whole,” although the parties agreed that such payment should satisfy the whole. An accord and satisfaction is a contract and like any other contract must be supported by a valid consideration. Consideration consists of a benefit to the promisor or a detriment to the promisee. Because of the past due undisputed debt, George was under legal obligation to pay $800. By paying $800 in full settlement of both obligations, George did not suffer a legal detriment as to the second (carpentry) contract. George merely did something which he was already legally bound to do. The payment of the $800 discharged the undisputed obligation but, since it did not constitute consideration for the disputed debt, that debt remains. In short, Keith still had a claim for $600 which George could, of course, contest, as to the amount. Had George paid an amount greater than $800, he would have a better argument as to settlement of both debts. 5. The Snyder Mfg. Co., being a large user of coal, entered into separate contracts with several coal companies. In each contract it was agreed that the coal company would supply coal during the entire year in such amounts as the manufacturing company might desire to order, at a price of $55 per ton. In February the Snyder Company ordered one thousand tons of coal from Union Coal Company, one of the contracting parties. Union Coal Company delivered five hundred tons of the order and then notified Snyder Company that no more deliveries would be made and that it denied any obligation under the contract. In an action by Union Coal to collect $55 per ton for the five hundred tons of coal delivered, Snyder files a counterclaim, claiming damages of $1,500 for failure to deliver the additional five hundred tons of the order and damages of $4,000 for breach of agreement to deliver coal during the balance of the year. What contract, if any, exists between Snyder and Union? Answer: Illusory Promises. Snyder Mfg. Co. owes Union the rate of $55 per ton for 500 tons of coal already delivered. Moreover, the alleged contracts, to the extent executory, are probably not binding on either party. These agreements to supply Snyder with such amounts of coal as “it might desire to order” contain illusory promises. Snyder did not agree to order or to buy any coal. It was therefore not contractually bound to do so. Where one party to an agreement is not bound, neither party is bound. Even though the contracts come within the UCC, its good faith provisions could, but probably would not validate these illusory promises. These alleged contracts would not constitute requirements contracts because Snyder has contracted with several companies and has not promised any of them that it would buy all its requirements of coal from them. 6. On February 5, Devon entered into a written agreement with Gordon whereby Gordon agreed to drill a well on Devon's property for the sum of $5,000 and to complete the well on or before April 15. Before entering into the contract, Gordon made test borings and had satisfied himself as to the character of the subsurface. After two days of drilling, Gordon struck hard rock. On February 17, Gordon removed his equipment and advised Devon that the project had proved unprofitable and that he would not continue. On March 17, Devon went to Gordon and told Gordon that he would assume the risk of the enterprise and would pay Gordon $100 for each day required to drill the well, as compensation for labor, the use of Gordon's equipment, and Gordon's services in supervising the work, provided Gordon would furnish certain special equipment designed to cut through hard rock. Gordon said that the proposal was satisfactory. The work was continued by Gordon and completed in an additional fifty-eight days. Upon completion of the work, Devon failed to pay, and Gordon brought an action to recover $5,800. Devon answered that he had never become obligated to pay $100 a day and filed a counterclaim for damages in the amount of $500 for the month's delay based on an alleged breach of contract by Gordon. Decision? Answer: Pre-existing Contractual Obligation. Decision in favor of Gordon. As a general rule, a promise to do what one is already bound to do by a valid contract will not be sufficient consideration for a new agreement. However, Section 89 of the Restatement, Second, Contracts provides that a “promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made . . .” Alternatively, although of dubious validity in this problem, the same result may be reached on the ground of a substituted contract: that the original contract was rescinded by mutual agreement and that new promises were then made which furnished consideration for each other. 7. Discuss and explain whether there is valid consideration for each of the following promises: (a) A and B entered into a contract for the purchase and sale of goods. A subsequently promised to pay a higher price for the goods when B refused to deliver at the contract price. (b) A promised in writing to pay a debt, which was due from B to C, on C's agreement to extend the time of payment for one year. (c) A orally promised to pay $150 to her son, B, solely in consideration of past services rendered to A by B, for which there had been no agreement or request to pay. Answer: Pre-existing Contractual Obligation. (a) At common law there would be no legally sufficient consideration. A’s promise to pay a higher price is not supported by anything other than what B had already agreed to do. The consideration on the part of the promisee does not involve any legal detriment to him. However, under Section 2-209 (1) of the Code, the new agreement would be binding without consideration if it was entered into voluntarily and in good faith. (b) Valid consideration. Agreement to extend the time of payment is a legal detriment. (c) No valid consideration. In general, past consideration is no consideration. 8. Alan purchased shoes from Barbara on open account. Barbara sent Alan a bill for $10,000. Alan wrote back that two hundred pairs of the shoes were defective and offered to pay $6,000 and give Barbara his promissory note for $1,000. Barbara accepted the offer, and Alan sent his check for $6,000 and his note, in accordance with the agreement. Barbara cashed the check, collected on the note, and one month later sued Alan for $3,000. Is Barbara bound by her acceptance of the offer? Answer: Settlement of a Disputed Debt. Yes, decision in favor of Alan and against Barbara. The problem indicates that a genuine dispute occurred between Alan and Barbara. Where a check is tendered by the debtor to the creditor in full payment or settlement, the cashing of the check constitutes an accord and satisfaction. Revised 3-311. The fact that Alan gave Barbara his promissory note for $1,000 and that Barbara collected on the note strengthens the conclusion stated. Moreover, under UCC Section 2-209(1), consideration to modify a contract is not needed. 9. Nancy owed Sharon $1,500, but Sharon did not initiate a lawsuit to collect the debt within the time prescribed by the statute of limitations. Nevertheless, Nancy promises Sharon that she will pay the barred debt. Thereafter, Nancy refuses to pay. Sharon brings suit to collect on this new promise. Is Nancy’s new promise binding? Explain. Answer: Promise to Pay Debt Barred by the Statute of Limitations. Decision in favor of Sharon. Section 82 of the Restatement, Second, Contract provides: “A promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the effect of the statute of limitations.” It should be noted that a number of states require by statute that such a promise be in writing to be binding. 10. Anthony lends money to Frank. Frank dies without having paid the loan. Frank's widow, Carol, promises Anthony to repay the loan. Upon Carol's refusal to pay the loan, Anthony brings suit against Carol for payment of the loan. Is Carol bound by her promise to pay the loan? Answer: Moral obligation. No. The general rule is that where a promise is made to satisfy a pre-existing moral obligation, it is unenforceable due to a lack of consideration. Anthony should instead bring suit against Frank's estate. 11. The parties entered into an oral contract in June, under which plaintiff agreed to construct a building for defendant on a time and materials basis, at a maximum cost of $56,146, plus sales tax and extras ordered by defendant. When the building was 90 percent completed, defendant told plaintiff he was unhappy with the whole job as “the thing just wasn't being run right.” The parties then on October 17 signed a written agreement lowering the maximum cost to $52,000 plus sales tax. Plaintiff thereafter completed the building at a cost of $64,155. The maximum under the June oral agreement, plus extras and sales tax, totaled $61,040. Defendant contended that he was obligated to pay only the lower maximum fixed by the October 17 agreement. Decision? Answer: Modification. The Supreme Court of Washington held that the October 17th modification agreement was not binding for lack of consideration and plaintiff was entitled to recover under the original agreement, stating: “Applying our holding to the facts in this case, we must conclude that no consideration existed to support the October 17th agreement. Under the oral contract plaintiff had an antecedent duty to complete the building; defendant had an antecedent duty to pay a maximum of $56,146 plus extras, plus sales tax. Under the October 17th agreement plaintiff had the same duty while defendant had a lesser duty, unsupported by consideration. This is not a case of the mutual surrender of rights constituting consideration.” Rosellini v. Banchero, 83 Wash.2d 268, 272, 517 P.2d 955, 958 (1974). 12. Taylor assaulted his wife, who then took refuge in Ms. Harrington's house. The next day, Mr. Taylor entered the house and began another assault on his wife, who knocked him down and, while he was lying on the floor, attempted to cut his head open or decapitate him with an ax. Harrington intervened to stop the bloodshed, and the ax, as it was descending, fell upon her hand, mutilating it badly, but sparing Taylor his life. Afterwards, Taylor orally promised to compensate Harrington for her injury. Is Taylor’s promise enforceable? Explain. Answer: Moral Obligation. No. Taylor may have a moral obligation to honor his promise but not a binding contractual one. Harrington's humanitarian act "voluntarily performed, is not such consideration as would entitle her to recover at law." The Restatement takes a contrary position (which is a minority position) regarding such situations and provides that a promise after the rendering of emergency services is binding even if not supported by consideration. Section 86, comment d. Harrington v. Taylor, 225 N.C. 690, 36 S.E.2d 227 (1945). 13. Jonnel Enterprises, Inc., contracted to construct a student dormitory at Clarion State College. On May 6, Jonnel entered into a written agreement with Graham and Long as electrical contractors to perform the electrical work and to supply materials for the dormitory. The contract price was $70,544.66. Graham and Long claim that they believed the May 6 agreement obligated them to perform the electrical work on only one wing of the building, but that three or four days after work was started, a second wing of the building was found to be in need of wiring. At that time Graham and Long informed Jonnel that they would not wire both wings of the building under the present contract, so a new contract was orally agreed upon by the parties. Under the new contract Graham and Long were obligated to wire both wings and were to be paid only $65,000, but they were relieved of the obligations to supply entrances and a heating system. Graham and Long resumed their work, and Jonnel made seven of the eight progress payments called for. When Jonnel did not pay the final payment, Graham and Long brought this action. Jonnel claims that the May 6 contract is controlling. Is Jonnel correct in its assertion? Why? Answer: Substituted Contracts. No. The substituted contract was enforceable. It was entered into to settle a disputed claim and since both parties still had rights under the original contract, giving up those rights constitutes valid consideration. Graham v. Jonnel Enterprises, Inc. 435 Pa. 396, 257 A.2d 256 (1969). 14. Baker entered into an oral agreement with Healey, the State distributor of Ballantine & Sons liquor products, that Ballantine would supply Baker with its products on demand and that Baker would have the exclusive agency for Ballantine within a certain area of Connecticut. Shortly thereafter the agreement was modified to give Baker the right to terminate at will. Eight months later, Ballantine & Sons revoked its agency, May Baker enforce the oral agreement? Answer: Illusory Promises. No. To agree to do something and reserve the right to cancel the agreement at will is no agreement at all. By the valid addition to their oral agreement, Baker had an unconditional right to terminate the contract at will. His promise under the agreement, then, was merely illusory. As such, it was insufficient consideration to support Ballantine's promise of an exclusive agency to Baker. R.F. Baker & Co., Inc. v. P. Ballantine & Sons. Supreme Court of Errors of Connecticut. 127 Conn. 680, 20 A.2d 82. (1941). 15. PLM, Inc. entered into an oral agreement with Quaintance Associates, an executive “headhunter” service, for the recruitment of qualified candidates to be employed by PLM. As agreed, PLM's obligation to pay Quaintance did not depend on PLM's actually hiring a qualified candidate presented by Quaintance. After several months Quaintance sent a letter to PLM, admitting that it had so far failed to produce a suitable candidate, but included a bill for $9,806.61, covering fees and expenses. PLM responded that Quaintance's services were only worth $6,060.48, and that payment of the lesser amount was the only fair way to handle the dispute. Accordingly, PLM enclosed a check for $6,060.48, writing on the back of the check “IN FULL PAYMENT OF ANY CLAIMS QUAINTANCE HAS AGAINST PLM, INC.” Quaintance cashed the check and then sued PLM for the remaining $3,746.13. Decision? Answer: Settlement of a Disputed Debt. Judgment for PLM, Inc. When there is a good faith dispute as to the amount due, it makes no difference that the creditor protests or states that he does not accept the amount offered in full satisfaction of the debt. The creditor either must accept what is offered with the condition upon which it is offered, or refuse the payment entirely. Quaintance Associates, Inc. v. PLM, Inc., 95 Ill.App. 818, 420 N.E.2d 567 (1981). 16. Red Owl Stores told the Hoffman family that, upon the payment of approximately $518,000, a grocery store franchise would be built for them in a new location. Upon the advice of Red Owl, the Hoffmans bought a small grocery store in their hometown in order to get management experience. After the Hoffmans operated at a profit for three months, Red Owl advised them to sell the small grocery, assuring them that Red Owl would find them a larger store elsewhere. Although selling at that point would cost them much profit, the Hoffmans followed Red Owl’s directions. In addition, to raise the money required for the deal, the Hoffmans sold their bakery business in their hometown. The Hoffmans also sold their house, and moved to a new home in the city where their new store was to be located. Red Owl then informed the Hoffmans that it would take $624,100, not $518,000, to complete the deal. The family scrambled to find the additional funds. However, when told by Red Owl that it would now cost them $654,000 to get their new franchise, the Hoffmans decided to sue instead. Should Red Owl be held to its promises? Explain. Answer: Promissory Estoppel. Yes. All the requirements of promissory estoppel are present in these facts. 1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a substantial character by the promisee; 2) Did the promise in fact induce such action or forbearance; and 3) Can injustice be avoided only by enforcement of the promise? Note that the promise need not be so definite as to translate into an offer were consideration exchanged. Hoffman v. Red Owl Stores, Inc., 26 Wis.2d 683, 133 N.W.2d 267 (1965). 17. Plaintiff, Brenner, entered into a contract with the defendant, Little Red School House, Ltd., which stated that in return for a non-refundable tuition of $1,080 Brenner's son could attend defendant's school for a year. When Brenner's ex-wife refused to enroll their son, plaintiff sought and received a verbal promise of a refund. Defendant now refuses to refund plaintiff's money for lack of consideration. Did mutual consideration exist between the parties? Explain. Answer: Contractual Modification. Yes, judgment for Brenner. A contract modification must be supported by consideration to be binding. Such consideration can be found in the promisee refraining from doing anything he has a legal right to do in exchange for the modification. Here, Brenner relinquished the right to have his son attend the Little Red School House. This detriment constituted sufficient consideration to support the school's promise to refund his money. 18. Ben Collins was a full professor with tenure at Wisconsin State University in 2012. In March 2012 Parsons College, in an attempt to lure Dr. Collins from Wisconsin State, offered him a written contract promising him the rank of full professor with tenure and a salary of $55,000 for the 2012-13 academic year. The contract further provided that the College would increase his salary by $2,000 each year for the next five years. In return, Collins was to teach two trimesters of the academic year beginning in October 2012. In addition, the contract stipulated, by reference to the College's faculty bylaws, that tenured professors could be dismissed only for just cause and after written charges were filed with the Professional Problems Committee. The two parties signed the contract, and Collins resigned his position at Wisconsin State. In February 2014, the College tendered a different contract to Collins to cover the following year. This contract reduced his salary to $45,000 with no provision for annual increments, but left his rank of full professor intact. It also required that Collins waive any and all rights or claims existing under any previous employment contracts with the College. Collins refused to sign this new contract, and Parsons College soon notified him that he would not be employed the following year. The College did not give any grounds for his dismissal; nor did it file charges with the Professional Problems Com¬mittee. As a result, Collins was forced to take a teaching position at the University of North Dakota at a substantially reduced salary. He sued to recover the difference between the salary Parsons College promised him until 2017 and the amount he earned. Decision? Will Collins prevail? Explain. Answer: Legal Sufficiency. Yes, judgment for Collins. The College’s promise to employ Collins permanently (with tenure), at a specified salary with increments for five years, must be supported by consideration from Collins to be enforceable. Collins did not promise to serve permanently or even for five years in exchange for the College’s promise. Consideration, however, may consist of a detriment to the promisee (Collins) and benefit need not move to the promisor (the College). Parsons College promised Collins tenure, knowing that he would have to resign his permanent, tenured position at Wisconsin State. Therefore, Collins’ surrender of his former position to accept the College’s offer constituted binding consideration. 19. Rodney and Donna Mathis (Mathis) filed a wrongful death action against St. Alexis Hospital and several physicians, arising out of the death of their mother, Mary Mathis. Several weeks before trial, an expert consulted by Mathis notified the trial court and Mathis’s counsel that, in his opinion, Mary Mathis’s death was not proximately caused by the negligence of the physicians. Shortly thereafter, Mathis voluntarily dismissed the wrongful death action. Mathis and St. Alexis entered into a covenant-not-to-sue in which Mathis agreed not to pursue any claims against St. Alexis or its employees in terms of the medical care of Mary Mathis. St. Alexis, in return, agreed not to seek sanctions, including attorney fees and costs incurred in defense of the previously dismissed wrongful death action. Subsequently, Mathis filed a second wrongful death action against St. Alexis Hospital, among others. Mathis asked the court to rescind the covenant-not-to-sue, arguing that because St. Alexis was not entitled to sanctions in connection with the first wrongful death action, there was no consideration for the covenant-not-to-sue. Are they correct in this contention? Explain. Answer: Unilateral Contracts: Consideration. No, they are wrong, and so the trial court granted summary judgment for St. Alexis. A promise to forbear pursuit of a legal claim can be sufficient consideration to support a contract when the promisor has a good faith belief in the validity of the claim. However, the standard for evaluating the validity of a foreborne claim is a subjective one. St. Alexis sufficiently asserted a good faith belief in the validity of its sanctions claims based on the fact that the only expert testimony presented on the issue indicated that St. Alexis’ actions did not proximately cause Mary Mathis’ death. Thus, foregoing the claim would constitute sufficient consideration for the covenant-not-to-sue. Mathis also argues that St. Alexis has not shown that Mathis engaged in any frivolous conduct,i.e., that he did act in good faith and not without cause. However, the standard for evaluating the validity of a foreborne claim is a subjective one. St. Alexis sufficiently asserted a good faith belief in the validity of its sanctions claims. St. Alexis asserted that its belief in the validity of its sanctions claim was based on Mathis’ complete failure to produce any expert testimony on the issue of proximate cause. Since the only expert testimony presented on the issue indicated that St. Alexis’ actions did not proximately cause Mary Mathis’ death, St. Alexis’ belief in the validity of its sanctions claim was reasonable. Thus, foregoing the claim would constitute sufficient consideration for the covenant-not-to-sue. 20. Harold Pearsall and Joe Alexander were friends for over twenty-five years. About twice a week they would get together after work and proceed to a liquor store, where they would purchase what the two liked to refer as a “package”—a half-pint of vodka, orange juice, two cups, and two lottery tickets. Occasionally these lottery tickets would yield modest rewards of two or three dollars, which the pair would then “plow back” into the purchase of additional tickets. On December 16, Pearsall and Alexander visited the liquor store twice, buying their normal “package” on both occasions. For the first package, Pearsall went into the store alone, and when he returned to the car, he said to Alexander, in reference to the tickets, “Are you in on it?” Alexander said, “Yes.” When Pearsall asked him for his half of the purchase price, though, Alexander replied that he had no money. When they went to Alexander’s home, Alexander snatched the tickets from Pearsall’s hand and “scratched” them, only to find that they were both worthless. Later that same evening Alexander returned to the liquor store and bought a second “package.” This time, Pearsall snatched the tickets from Alexander and said that he would “scratch” them. Instead, he gave one to Alexander, and each man scratched one of the tickets. Alexander’s was a $20,000 winner. Alexander cashed the ticket and refused to give Pearsall anything. Can Pearsall recover half of the proceeds from Alexander? Explain. Answer: Legal Sufficiency. Yes. The record supports Pearsall’s contention that an agreement to share the proceeds existed. The conduct of the two men on December 16, when the ticket was purchased, clearly demonstrates a meeting of the minds. After purchasing the first pair of tickets, Pearsall asked Alexander if he was “in on it.” Not only did Alexander give his verbal assent, but also he snatched both tickets from Pearsall and “scratched” them. It is clear that Alexander considered himself “in on” an agreement to share in the fortunes of the tickets. It is also clear that in giving over the tickets he purchased, Pearsall gave his assent to the agreement he had proposed earlier. This conduct took place within the context of a longstanding pattern of similar conduct, which included the parties’ practice of “plowing back” small returns from tickets to purchase additional tickets. It is clear that by exchanging mutual promises to share in the proceeds, the parties entered into a valid, enforceable contract. Judgment reversed and remanded with instructions to enter judgment in favor of Pearsall. Pearsall v. Alexander, District of Columbia Court of Appeals, 1990, 572 A.2d 113. ANSWERS TO “TAKING SIDES” PROBLEMS Anna Feinberg began working for the Pfeiffer Company in 1969 at age seventeen. By 2007, she had attained the position of bookkeeper, office manager, and assistant treasurer. In appreciation for her skill, dedication, and long years of service, the Pfeiffer board of directors resolved to increase Feinberg's monthly salary to $4,000 and to create for her a retirement plan. The plan allowed that Feinberg would be given the privilege of retiring from active duty at any time she chose and that she would receive retirement pay of $2,000 per month for life, although the Board expressed the hope that Feinberg would continue to serve the company for many years. Feinberg, however, chose to retire two years later. The Pfeiffer Company paid Feinberg her retirement pay until 2016. The company thereafter discontinued payments. (a) What are the arguments that the company’s promise to pay Feinberg $2,000 per month for life is enforceable? (b) What are the arguments that the company’s promise is not enforceable? (c) What is the proper outcome? Explain. Answer: (a) Plaintiff could argue that her continuing to work for the defendant for another two years, on which date she retired, was consideration for the defendant’s promise and that the promise therefore was enforceable as a contract. In addition, plaintiff could contend that the promise is enforceable under the doctrine of promissory estoppel because she would not have quit the defendant’s employ had she not known and relied upon the promise of defendant to pay her $2,000 a month for life. (b) Defendant would argue that the resolution adopted by its Board of Directors was a mere promise to make a gift, and that no contract resulted from the resolution. They would argue that plaintiff did not give any consideration for the promise. Moreover, a promise to make a gift is not binding unless supported by a legal consideration, that the only apparent consideration for the adoption of the foregoing resolution was the “many years of long and faithful service” expressed, and that past services are not a valid consideration for a promise. There is nothing in the resolution that made its effectiveness conditional upon plaintiff's continued employment, stated she was not under contract to work for any length of time but was free to quit whenever she wished, and noted she had no contractual right to her position and could have been discharged at any time. (c) Resolution: (1) There was no contract. No language in the resolution predicates plaintiff’s right to a pension upon her continued employment. She was not required to work for the defendant for any period of time as a condition to gaining such retirement benefits. She was told that she could quit the day upon which the resolution was adopted, as she herself testified, and it is clear from her own testimony that she made no promise or agreement to continue in the employ of the defendant in return for its promise to pay her a pension. Hence there was lacking that mutuality of obligation, which is essential to the validity of a contract. (2) There was promissory estoppel. Section 90 of the Restatement of the Law of Contracts states that “[a] promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” Was there such an act on the part of plaintiff, in reliance upon the promise contained in the resolution, as will estop the defendant, and therefore create an enforceable promise under the doctrine of promissory estoppel? Yes. At the time she retired plaintiff was fifty-seven years of age. At the time the payments were discontinued she was more than sixty-three years of age. It is a matter of common knowledge that it is very difficult for a person of that age to find satisfactory employment, much less a position comparable to that which plaintiff enjoyed at the time of her retirement. The plaintiff's retirement from a lucrative position was action or forbearance of a definite and substantial character and was made in reliance upon the defendant's promise to pay her an annuity or pension. Chapter 13 ILLEGAL BARGAINS ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Johnson and Wilson were the principal shareholders in Matthew Corporation, located in the city of Jonesville, Wisconsin. This corporation was engaged in the business of manufacturing paper novelties, which were sold over a wide area in the Midwest. The corporation was also in the business of binding books. Johnson purchased Wilson's shares of the Matthew Corporation and, in consideration thereof, Wilson agreed that for a period of two years he would not (a) manufacture or sell in Wisconsin any paper novelties of any kind that would compete with those sold by the Matthew Corporation or (b) engage in the bookbinding business in the city of Jonesville. Discuss the validity and effect, if any, of this agreement. Answer: Common Law Restraint of Trade. (a) The agreement to refrain from doing business in the State of Wisconsin was no more than necessary to prevent competition upon the part of Wilson. The restraints as to both time and territory are reasonable. See Restatement, Second, Sections 186 and 188. The view has been taken, however, in some cases that agreements to refrain from doing business in an entire state, even though no more than necessary to prevent competition, are invalid and unenforceable for the reason that it is against the policy of the state that the people of the whole state should be deprived of the industry and skill of a person in an employment useful to the public, or that such person should be compelled either to engage in another business or move from the state and cease to be a citizen thereof. (b) Even if contracts in general restraint of trade are deemed void, as being contrary to public policy, contracts in partial restraint of trade are valid if the restraint imposed is reasonable both as to time and as to limits of the area in which such restraint is imposed. Agreements not to engage in a particular business within a city for a period of two years have generally been held to be valid and enforceable. The second portion of Wilson's agreement would be binding upon him. 2. Wilkins, a Texas resident licensed by that state as a certified public accountant(CPA), rendered service in his professional capacity in Louisiana to Coverton Cosmetics Company. He was not registered as a CPA in Louisiana. His service under his contract with the cosmetics company was not the only occasion on which he had practiced his profession in that state. The company denied liability and refused to pay him, relying on a Louisiana statute declaring it unlawful for any person to perform or offer to perform services as a CPA for compensation until he has been registered by the designated agency of the state and holds an unrevoked registration card. The statute provides that a CPA certificate may be issued without examination to any applicant who holds a valid unrevoked certificate as a CPA under the laws of any other state. The statute provides further that rendering services of the kind performed by Wilkins, without registration, is a misdemeanor punishable by a fine or imprisonment in the county jail or by both fine and imprisonment. Discuss whether Wilkins would be successful in an action against Coverton seeking to recover a fee in the amount of $1,500 as the reasonable value of his services. Answer: Licensing Statute. Decision in favor of Coverton Cosmetics Company. The statute is a regulatory measure designed to protect the public by permitting only persons with the necessary qualifications to practice accounting. The statute declares that it shall be unlawful for a person to perform services as a CPA for compensation without a license, and prescribes a penalty for its violation. Contracts for the rendition of services as a CPA by an unlicensed person are void and incapable of enforcement. Where the statute does not contain an express provision rendering void a contract entered into by one not qualified under its provisions but, as in the problem, imposes a penalty for its violation, it is generally held that the penalty implies the prohibition. Restatement, Second, Contracts, Section 181. 3. Michael is interested in promoting the passage of a bill in the State legislature. He agrees with Christy, an attorney, to pay Christy for her services in drawing the required bill, procuring its introduction in the legislature, and making an argument for its passage before the legislative committee to which it will be referred. Christy renders these services. Subsequently, upon Michael's refusal to pay her, Christy sues Michael for damage for breach of contract. Will Christy prevail? Explain. Answer: Corrupting Public Officials. Yes. Decision in favor of Christy. There is nothing in the agreement which offends public policy. It is perfectly legitimate for a citizen to seek to have a bill introduced in the legislature and to promote its passage. Here, Christy merely agreed to engage in what she considered services for procuring the legislation desired. The services were legal in nature and Christy is entitled to remuneration from Michael. 4. Anthony promises to pay McCarthy $10,000 if McCarthy reveals to the public that Washington is a Communist. Washington is not a Communist and never has been. McCarthy successfully persuades the media to report that Washington is a Communist and now seeks to recover the $10,000 from Anthony, who refuses to pay. McCarthy initiates a lawsuit against Anthony. What result? Answer: Violation of Public Policy: Tortious Conduct. Decision for Anthony. The promise is unenforceable on grounds of public policy. A promise to commit, or induce commission of, a tort is unenforceable. Restatement, Second, Contracts, Section 192. In this case the tort is defamation and both parties would be liable to Washington. Although McCarthy cannot recover the money from Anthony, that doesn’t leave Anthony in the clear. Both Anthony and McCarthy may find themselves in trouble for inducing commission of a tort under these facts. 5. The Dear Corporation was engaged in the business of making and selling harvesting machines. It sold everything pertaining to its business to the ABC Company, agreeing “not again to go into the manufacture of harvesting machines anywhere in the United States.” The Dear Corporation, which had a national and international goodwill in its business, now begins the manufacture of such machines contrary to its agreement. Should the court enjoin it? Answer: Common Law Restraint of Trade. The question is whether the restraint is reasonable and therefore binding upon Dear Corporation. Since Dear Corp. sells harvesting machines throughout the country, the nationwide restraint arguably amounted merely to reasonable protection to the purchaser of the business, the ABC Company. The purchaser of a business may protect the good will by exacting a restrictive covenant that is reasonable with respect to the area within which it operates. The controlling fact that determines the reasonableness of the area is the territorial extent of the business of the purchased company. Restatement, Second, Contracts, Section 188. A more serious problem to the validity of the restraint is the fact that the covenant is not limited as to its duration, but lasts into perpetuity. Thus, the covenant is of dubious validity. An argument that can be raised in favor of its validity is the fact that it prohibits the manufacture but not the sale of machines in the United States. 6. Charles Leigh, engaged in the industrial laundry business in Central City, employed Tim Close, previously employed in the home laundry business, as a route salesperson. Leigh rents linens and industrial uniforms to commercial customers; the soiled linens and uniforms are picked up at regular intervals by the route drivers and replaced with clean ones. Every employee is assigned a list of customers whom she services. The contract of employment stated that in consideration of being employed, on termination of his employment, Close would not “directly or indirectly engage in the linen supply business or any competitive business within Central City, Illinois, for a period of one year from the date when his employment under this contract ceases.” On May 10 of the following year, Close’s employment was terminated by Leigh for valid reasons. Close then accepted employment with Ajax Linen Service, a direct competitor of Leigh in Central City. He began soliciting former customers he had called on for Leigh and obtained some of them as customers for Ajax. Will Leigh be able to enforce the provisions of the contract? Answer: Common Law Restraint of Trade. Leigh is entitled to the relief sought. Close was permitted, under the contract, to engage in the home laundry business in which he was previously employed before entering Leigh's employment. He was not being deprived of this means of earning a living. The restriction was held to be reasonable in that it was only for one year and applied only to laundry business with commercial customers. In Bailey v. King, 398 S.W. 2d 906, the court stated: "To say that this contract was unreasonable would actually have the effect of saying that no employment agreement in the laundry or linen supply business could be upheld * * *." "Whether a provision in an employment contract restraining an employee from competing with his employer after termination of employment is reasonable and thus valid is a matter to be determined under the particular circumstances involved." "Numerous cases support the enforceability or protective covenants where the consideration is based simply upon employment." In accord: Restatement,2nd, Contracts, Sect 188. The breach of a covenant not to compete is, of course, of a continuing nature, and an action for damages, is hardly adequate, mainly because of the extreme difficulty in determining the amount of damage caused by a loss of business. It appears that the only realistic relief for a breach of this type of contract is by injunction. One further question which may be discussed is whether the fact that Close was terminated by Leigh should alter the result. The facts only state that Close was discharged for valid reasons and thus the equities involved are not known. 7. On April 30, 2016, Barack and George entered into a bet on the outcome of the 2016 Kentucky Derby. On January 28, 2017, Barack, who bet on the winner, approached George, seeking to collect the $3,000 George had wagered. George paid Barack the $3,000 wager but now seeks to recover the funds from Barack. Result? Answer: Gambling Statutes. Decision for Barack. As the wager was illegal, the contract was unenforceable on grounds of public policy. Neither party can successfully sue the other for breach nor recover for any performance rendered. So, if George had never paid, Barack would not have been able to enforce payment, but since George DID pay, he cannot force recovery either. The courts will not aid one wrongdoer by granting him restitution of a benefit conferred upon another party. 8. Carl, a salesperson for Smith, comes to Benson’s home and sells him a complete set of “gourmet cooking utensils” that are worth approximately $300. Benson, an eighty-year-old man who lives alone in a one-room efficiency apartment, signs a contract to buy the utensils for $1,450 plus a credit charge of $145 and to make payments in ten equal monthly installments. Three weeks after Carl leaves with the signed contract, Benson decides he cannot afford the cooking utensils and has no use for them. What can Benson do? Explain. Answer: Unconscionable Contracts. Benson is not bound to his obligation. The doctrine of "unconscionability" as set forth in the UCC would probably apply here. If it did, Benson could obtain release from the obligation for that reason. Smith may have used high pressure tactics and taken advantage of Benson's malleability as evidenced by the unreasonable price agreed to by Benson. As in Williams v. Walker-Thomas Furniture Company, 350 F. 2d 445: Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration. 9. Consider the same facts in Question 8 but assume that the price was $350. Assume further that Benson wishes to avoid the contract based on the allegation that Carl befriended and tricked him into the purchase. Discuss. Answer: Violations of Public Policy. Decision for Benson. Benson could argue that the contract was induced by Carl's fraudulent conduct. Contracts based on fraud are voidable by the victimized party. 10. Adrian rents a bicycle from Barbara. The bicycle rental contract Adrian signed provides that Barbara is not liable for any injury to the renter caused by any defect in the bicycle or the negligence of Barbara. Injured when she is involved in an accident due to Barbara's improper maintenance of the bicycle, Adrian sues Barbara for her damages. Will Barbara be protected from liability by the provision in their contract? Answer: Exculpatory Clauses. Decision for Adrian; Barbara is still liable to Adrian. Most courts would hold that this exculpatory clause is void against public policy. In deciding this question courts look at such factors as: "(1) It concerns a business of a type generally thought suitable for public regulation. (2) The party seeking exculpation is engaged in performing a service of great importance to the public which is often a matter of practical necessity for some members of the public. (3) The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least any member coming within certain established standards. (4) As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services. (5) In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional fees and obtain protection against negligence. (6) Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents." See Tunkl v. Regents of the University of California (1963) 60 Cal.2d 92, 32 Cal. Rptr. 33, 383 P. 2d 441. 11. Merrill Lynch employed Post and Maney as account executives. Both men elected to be paid a salary and to participate in the firm’s pension and profit-sharing plans rather than take a straight commission. Thirteen years later, Merrill Lynch terminated the employment of both Post and Maney without cause. Both men began working for a competitor of Merrill Lynch. Merrill Lynch then informed them that all of their rights in the company-funded pension plan had been forfeited pursuant to a provision of the plan that permitted forfeiture in the event an employee directly or indirectly competed with the firm. Is Merrill Lynch correct in its assertion? Answer: Restrictive Covenants/Employment Relationship. No, Merrill-Lynch is not correct; Judgment for Post and Maney. Employment contracts prohibiting competition create a tension between the freedom of individuals to contract and the reluctance to see one barter away his freedom. Nevertheless, the state will enforce limited restraints on an employee's employment mobility where a mutuality of obligation is freely bargained for by the parties. An essential aspect of that relationship, however, is the employer's continued willingness to employ the party while he does not compete. Where the employer terminates the employment relationship without cause, his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture. Thus the forfeiture of the pension benefits is unreasonable as a matter of law, and Post and Maney are entitled to the benefits due. Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 397 N.B.2d 358, 421 N.Y.S.2d 847 (1979). 12. Tovar applied for the position of resident physician in Paxton Community Memorial Hospital. The hospital examined his background and licensing and assured him that he was qualified for the position. Relying upon the hospital’s promise of permanent employment, Tovar resigned from his job and began work at the hospital. He was discharged two weeks later, however, because he did not hold a license to practice medicine in Illinois as required by state law. He had taken the examination but had never passed it. Tovar claims that the hospital promised him a position of permanent employment and that by discharging him, it breached their employment contract. Discuss. Answer: Licensing Statute. Judgment for Paxton Hospital. The purpose of the licensing statute is not to generate revenue but rather to protect the public by assuring them of adequately trained physicians. Since the purpose of the licensing requirements is to protect the public from unqualified persons, any contract relating to the licensed activity and entered into with an unlicensed person is illegal. The contact between the hospital and Tovar was illegal, and therefore is unenforceable as against public policy. Tovar v. Paxton Community Memorial Hospital, 29 Ill. App. 3d 218, 330 N.E.2d 247 (1975). 13. Carolyn Murphy, a welfare recipient with very limited education and with four minor children, responded to an advertisement that offered the opportunity to purchase televisions without a deposit or credit history. She entered into a rent-to-own contract for a twenty-five-inch console color television set that required seventy-eight weekly payments of $16 (a total of $1,248, which was two and one-half times the retail value of the set). Under the contract, the renter could terminate the agreement by returning the television and forfeiting any payments already made. After Murphy had paid $436 on the television, she read a newspaper article criticizing the lease plan. She stopped payment and sued the television company. In response, the television company has attempted to take possession of the set. Decision? Answer: Usury/Unconscionability. Judgment for Murphy. The contract was unconscionable because the television company failed to inform Murphy of the true purchase price and required her to pay two and one half times the retail sales price. Murphy was lured into a contract in which she had unequal bargaining power by the company’s deceptive advertising. Moreover, it is usurious to charge a consumer with unequal bargaining power an excessive price; two and one half times the retail value of an item is excessive. Murphy v. McNamara, 36 Conn. Sup. 183, 416 A. 2d 170 (1979). 14. Albert Bennett, an amateur cyclist, participated in a bicycle race conducted by the United States Cycling Federation. During the race, Bennett was hit by an automobile. He claims that employees of the Federation improperly allowed the car onto the course. The Federation claims that it cannot be held liable to Bennett because Bennett signed a release exculpating the Federation from responsibility for any personal injury resulting from his participation in the race. Is the exculpatory clause effective? Answer: Exculpatory Clause. Judgment for Bennett; the clause in not effective. A valid exculpatory clause must be clear, explicit, unambiguous and comprehensible to both of the parties. The terms of the agreement also must apply to the specific misconduct of the defendant. In this case, Bennett waived the right to sue based on foreseeable misconduct on the part of the Federation. He did not, however, waive the Federation’s liability for actions deviating from normal race procedures, including the presence of automobiles on the course. Bennett v. United States Cycling Federation, 193 Cal. App. 3d 1485, 239 Cal. Rptr. 55 (1987). 15. In February, Brady contracted to construct a house for Fulghum for $206,850. Brady began construction on March 13. Neither during the negotiation of this contract nor when he began performance was Brady licensed as a general contractor as required by North Carolina law. Brady was awarded his builder’s license on October 22, having passed the examination on his second attempt. At that time, he had completed two-thirds of the work on Fulghum’s house. Fulghum paid Brady $204,000. Brady brought suit, seeking an additional $2,850 on the original contract and $29,000 for “additions and changes” Fulghum requested during construction. Is Fulghum liable to Brady? Explain Answer: Licensing Statute. No-- Fulghum is not liable. Generally, contracts entered into by unlicensed general contractors, in violation of a statute passed for the protection of the public, are unenforceable by the contractor. Since a contractor must rely on his illegal act (contracting and working without a license) to enforce the contract, courts have held that there is no legal remedy for that which is illegal itself. Furthermore, the contract cannot be validated by the subsequent procurement of a license. Even though Brady eventually obtained his license before completing the house, he did not have one when he negotiated the contract or began construction. Also, Brady is not entitled to recover for extras, additions, or changes made pursuant to this contract. However, it must be noted that the contract is not void. Others, such as the Fulghums or subcontractors, not regulated by the licensing contract, which was passed for their own protection, do not act illegally in becoming parties to such contracts. Therefore, other parties may enforce the contract against the unlicensed contractor. Brady v. Fulghum, 308 S.E.2d 327 (N.C. 1983). 16. Robert McCart owned and operated an H&R Block tax preparation franchise. When Robert became a district manager for H&R Block, he was not allowed to continue operating a franchise. So, in accordance with company policy, he signed over his franchise to his wife June. June signed the new franchise agreement, which included a covenant not to compete for a two-year period within a fifty-mile radius of the franchise territory should the H&R Block franchise be terminated, transferred, or otherwise disposed of. June and Robert were both aware of the terms of this agreement, but June chose to terminate her franchise agreement anyway. Shortly thereafter, June sent out letters to H&R Block customers, criticizing H&R Block’s fees and informing them that she and Robert would establish their own tax preparation services at the same address as the former franchise location. Each letter included a separate letter from Robert detailing the tax services to be offered by the McCarts’ new business. Should H&R Block be able to obtain an injunction against June? Against Robert? Answer: Common Law Restraint of Trade. Yes on both injunctions. Judgment for H&R Block. A covenant in general restraint of trade is void as against public policy. However, a covenant which is clear, specific, and reasonable as to duration and geographic limitation will be enforced. Both the two-year duration and the fifty-mile radius of this covenant not to compete, in this situation, are reasonable. Nonetheless, Robert contends that since he was not a party to the new franchise agreement containing the covenant not to compete, such a restraint of trade should not apply to him. The rule, however, that a stranger to a covenant may be enjoined from aiding and assisting the covenanter in violating the covenant is supported by the overwhelming weight of authority. Robert had knowingly participated and aided June in violating her contract with H&R Block. Robert, as well as June, is therefore properly within the scope of the injunction. McCart v. H&R Block, Inc. 70 N.E.2d 756 (1984). 17. Michelle Marvin and actor Lee Marvin began living together, holding themselves out to the general public as man and wife without actually being married. The two orally agreed that while they lived together they would share equally any and all property and earnings accumulated as a result of their individual and combined efforts. In addition, Michelle promised to render her services as “companion, homemaker, housekeeper and cook” to Lee. Shortly thereafter, she gave up her lucrative career as an entertainer in order to devote her full time to being Lee’s companion, homemaker, housekeeper, and cook. In return he agreed to provide for all of her financial support and needs for the rest of her life. After living together for six years, Lee compelled Michelle to leave his household but continued to provide for her support. One year later, however, he refused to provide further support. Michelle sued to recover support payments and half of their accumulated property. Lee contends that their agreement is so closely related to the supposed “immoral” character of their relationship that its enforcement would violate public policy. The trial court granted Lee’s motion for judgment on the pleadings. Decision? Answer: Public Policy. Judgment for Michelle Marvin. Adults who voluntarily live together and engage in sexual relations can, nonetheless, make arrangements concerning their earnings and property rights. They cannot, however, contract to pay for the performance of sexual services; such a contract is essentially an agreement for prostitution and is illegal. Here, the Marvins' agreement does not rest, explicitly or entirely, upon a promise of sexual services or any other illicit consideration. The allocation of their finances and property rights as they choose does not violate public policy. Therefore, their agreement furnishes a suitable basis upon which a trial court can render relief. Marvin v. Marvin, 18 Cal.3d 660, 557 P.2d 106 (1976). 18. Richard Brobston was hired by Insulation Corporation of America (ICA) in 2006. Initially, he was hired as a ter¬ritory sales manager but was promoted to national account manager in 2010 and to general manager in 2014. In 2016, ICA was planning to acquire computer-assisted design (CAD) technology to upgrade its product line. Prior to acquiring this technology, ICA required that Brobston and certain other employees sign employment contracts that contained restrictive covenants or be terminated and changed their employment status to “at will” employees. These restrictive covenants provided that in the event of Brobston’s termination for any reason, Brobston would not reveal any of ICA’s trade secrets or sales information and would not enter into direct competition with ICA within three hundred miles of Allentown, Pennsylvania, for a period of two years from the date of termination. The purported consideration for Brobston’s agreement was a $2,000 increase in his base salary and proprietary information concerning the CAD system, customers, and pricing. Brobston signed the proffered employment contract. In October 2016, Brobston became vice president of special products, which included responsibility for sales of the CAD system products as well as other products. Over the course of the next year, Brobston failed in several respects to properly perform his employment duties and on August 13, 2017, ICA terminated Brobston’s employment. In December 2017, Brobston was hired by a competitor of ICA who was aware of ICA’s restrictive covenants. Can ICA enforce the employment agreement by enjoining Brobston from disclosing proprietary information about ICA and by restraining him from competing with ICA? If so, for what duration and over what geographic area? Answer: Restrictive Covenants/Employment Relationship. Preliminary injunction affirmed to the extent it enjoins Brobston from disclosing trade secrets and reversed to the extent that it restricts Brobston from competing with ICA. In order for a “non-competition” covenant to be valid, it must relate to a contract for employment, be supported by adequate consideration and be reasonably limited in both time and territory. More specifically, where a restrictive covenant has been entered into between an employer and its employee, courts have permitted the enforcement of post-employment restraints only where they are ancillary to an employment relationship between the parties, the restrictions are reasonably necessary to protect the employer, and the restrictions are reasonably limited in duration and geographic extent. Brobston’s agreement was ancillary since it was supported by new consideration in the form of the $2,000 raise and a change in employment status from “at-will” to a written year to year contract. The more salient issue in this case is whether the restrictions in Brobston’s contract were reasonable. The determination of reasonableness involves the weighing of competing interests--that of the employer’s need for protection--against the hardship of the restriction upon the employee. Notably, there is a significant factual distinction between the hardship imposed by the enforcement of a restrictive covenant on an employee who voluntarily leaves his employer and that imposed upon an employee who is terminated for failing to do his job. In this case, Brobston was terminated for poor performance. Where an employer determines that an employee has failed to promote the employer’s legitimate business interests, it clearly suggests an implicit decision on the part of the employer that its business interests are best promoted without the employee in its service. Such a determination by an employer diminishes the employer’s need to protect itself and it is unreasonable as a matter of law to permit the employer to retain unfettered control over that which it has effectively deemed worthless to its business interests. Moreover, the non-disclosure agreement in this case renders the non-competition agreement unnecessary. As the agreement states, its purpose was to protect the proprietary CAD technology. However, Brobston never actually received sufficient training to operate the CAD technology. He had access only to sales and profit margin information, the security of which is addressed adequately by the non-disclosure agreement. Therefore in this case, ICA’s interests are sufficiently protected without enforcement of the non-competition agreement. Insulation Corporation of America v. Brobston, 667 A.2d 729 (1995). 19. Henrioulle, an unemployed widower with two children, received public assistance in the form of a rent subsidy. He entered into an apartment lease agreement with Marin Ventures that provided “INDEMNIFICATION: Owner shall not be liable for any damage or injury to the tenant, or any other person, or to any property, occurring on the premises, or any part thereof, and Tenant agrees to hold Owner harmless for any claims for damages no matter how caused.” Henrioulle fractured his wrist when he tripped over a rock on a common stairway in the apartment building. At the time of the accident, the landlord had been having difficulty keeping the common areas of the apartment building clean. Will the exculpatory clause effectively bar Henrioulle from recovery? Explain. Answer: Exculpatory Clause. No. Judgment for Henrioulle. The criteria used to identify when an exculpatory clause is invalid as against public policy include whether: (1) it concerns a business of a type generally thought suitable for public regulation; (2) the party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public; (3) the party seeking exculpation is in a superior bargaining position; (4) the exculpatory clause is part of a standard adhesion contract in which the terms of the contract are put on a “take-it-or-leave-it” basis. Here, the transaction, a residential rental agreement, meets these criteria and, therefore, the exculpatory clause is invalid as contrary to public policy. Accordingly, Henrioulle is entitled to recover for his injuries. Henrioulle v. Marin Ventures, Inc., 20 Cal.3d 512, 573 P.2d 465, 143 Cal.Rptr. 247 (1978). 20. Emily was a Java programmer employed with Sun Microsystems in Palo Alto, California. Upon beginning employment, Emily signed a contract which included a noncompetition clause that prevented her from taking another Java programming position with any of five companies Sun listed as “direct competitors” within three months of terminating her employment. Later that year Emily resigned and two months later accepted a position with Hewlett-Packard (HP) in Houston, Texas. HP was listed in Emily’s contract as a “direct competitor,” but she argues that due to the significant geographic distance between both jobs, the contract is not enforceable. Explain whether the contract is enforceable. Answer: Noncompete clause/Employment Relationship. In National Business Services, Inc. v. Wright, courts determined that geographic location is not a factor when considering Internet-related non-compete clauses. The three-month non-compete time also appears reasonable. If Sun can show that it acted reasonably to protect its interest it will prevail. Nevertheless, it may be very difficult to show how Emily going to work for HP can injure them. 21. Between 2012 and 2017, Williams purchased a number of household items on credit from Walker-Thomas Furniture Co., a retail furniture store. Walker-Thomas retained the right in its contracts to repossess an item if Williams defaulted on an installment payment. Each contract also provided that each installment payment by Williams would be credited pro rata to all outstanding accounts or bills owed to Walker-Thomas. As a result of this provision, an unpaid balance would remain on every item purchased until the entire balance due on all items, whenever purchased, was paid in full. Williams defaulted on a monthly installment payment in 2017, and Walker-Thomas sought to repossess all the items that Williams had purchased since 2012. Discuss. Answer: Unconscionable Contracts. Judgment for Williams. In general, one who signs an agreement without knowledge of its terms is bound and is held to have assumed the risk that the bargain was one-sided. But if a party with little bargaining power and, therefore, no meaningful choice enters into a commercially unreasonable contract with little or no knowledge or understanding of its terms, one cannot say that the supposed acceptance was an objective manifestation of assent to all of the terms of the contract. In cases involving allegedly unconscionable terms, the court will examine the reasonableness or fairness of the term at the time that the contract was entered into to determine whether it should be enforced. Generally, the suspect term is evaluated in light of general commercial background and the particular reason for the term's inclusion. If the term is found to be so extreme as to be unconscionable, enforcement of that term should be denied. The contract provision as to prorating each payment on all purchases whenever made is unconscionable and therefore unenforceable Williams v. Walker-Thomas Furniture Co. United States Court of Appeals, District of Columbia Circuit, 1965 350 F.2d 445 22. Universal City Studios, Inc. (Universal) entered into a general contract with Turner Construction Company (Turner) for the construction of the Jurassic Park ride. Turner entered into a subcontract with Pacific Custom Pools, Inc. (PCP), for PCP to furnish and install all water treatment work for the project for the contract price of $959,131. PCP performed work on the project from April 2016 until June 2017 for which it was paid $897,719. PCP’s contractor’s license, however, was under suspension from October 12, 2016, to March 14, 2017. In addition, PCP’s license had expired as of January 31, 2017, and it was not renewed until May 5, 2017.. California Business and Professions Code Section 7031 provides that no contractor may bring an action to recover compensation for the performance of any work requiring a license unless he or she was “a duly licensed contractor at all times during the performance of that [work], regardless of the merits of the cause of action brought by the contractor.” The purpose of this licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. PCP brought suit against Universal and Turner, the defendants, for the remainder of the contract price. Explain who should prevail. Answer: Licensing Statute. Universal and Turner should prevail. As a general rule, the failure to comply with a regulatory license prevents the noncomplying party from recovering for services rendered if (1) the statute provides that a noncomplying agreement is unenforceable or (2) the public policy behind the regulatory purpose clearly outweighs the noncomplying party’s interest in being paid for services rendered. In this case, the statute expressly provides that a noncomplying agreement is unenforceable. This problem is based on the case of Pacific Custom Pools, Inc. v. Turner Construction Company, Court of Appeal, Second District, Division 4, California, 2000, 79 Cal.App.4th 1254, 94 Cal.Rptr.2d 756, which held: California law (Section 7031) provides that a contractor may not maintain an action for the recovery of compensation for the performance of work requiring a license unless it was “a duly licensed contractor at all times during the performance of that” work. The purpose of the licensing law is to protect the public from incompetence and dishonesty in those who provide building and construction services. Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay. It is well settled that Section 7031 applies despite injustice to the unlicensed contractor. An exception may be made if the contractor proves that it had been licensed before performing work, acted reasonably in trying to maintain a license, and did not know or reasonably should not have known that it was not licensed. Such a case might occur where noncompliance with licensure requirements was the result of inadvertent clerical error or other error or delay not caused by the negligence of the licensee. In this case, however, (1) PCP was aware in November 1995 that its license was suspended for failure to file a judgment bond and that the deadline date for license renewal was January 31, 1996; (2) PCP knew shortly after February 23, 1996, that a renewal application sent in February 1996 was untimely; and (3) PCP was advised on April 22, 1996, that its license had not been renewed because PCP’s filing fee check had been dishonored. The court found under these facts that PCP did not act reasonably or in good faith to maintain its license. Pacific Custom Pools, Inc. v. Turner Construction Company, Court of Appeal, Second District, Division 4, California, 2000, 79 Cal.App.4th 1254, 94 Cal.Rptr.2d 756] 23. Octavio Sanchez worked as a delivery driver at a Domino’s Pizza restaurant owned by Western Pizza. He drove his own car in making deliveries. His hourly wage ranged from the legal minimum wage to approximately $0.50 above minimum wage. Western Pizza reimburses him at a fixed rate of $0.80 per delivery regardless of the number of miles driven or actual expenses incurred. Sanchez brought this class action against Western Pizza, alleging that the flat rate at which drivers were reimbursed for delivery expenses violated wage and hour laws and that the drivers were paid less than the legal minimum wage. Sanchez and Western Pizza are parties to an undated arbitration agreement. The agreement states that (1) the execution of the agreement “is not a mandatory condition of employment”; (2) any dispute that the parties are unable to resolve informally will be submitted to binding arbitration before an arbitrator approved by both parties and “selected from the then-current Employment Arbitration panel of the Dispute Eradication Services”; (3) the parties waive the right to a jury trial; (4) the arbitration fees will be borne by Western Pizza, and except as otherwise required by law, each party will bear its own attorney fees and costs; (5) small claims may be resolved by a summary small claims procedure; and (6) the parties waive the right to bring class arbitration. Should Sanchez be compelled to submit to arbitration to resolve his complaint? Explain. Answer: Unconscionability. No because the arbitration agreement is procedurally and substantively unconscionable. Sanchez v. Western Pizza Enterprises, Inc., 172 Cal.App.4th 154 (Court of Appeals of California, Second District, Division Three, 2009). Procedural and substantive unconscionability must both be present to justify the refusal to enforce a contract or clause based on unconscionability. Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms. The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination. The record indicates a degree of procedural unconscionability in two respects. First, the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to choose from (“the then-current Employment Arbitration panel of the Dispute Eradication Services”) and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a “repeat player” before the same arbitrator will reap a significant advantage. These circumstances indicate that the employees' decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. Thus the court must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly one-sided as to be substantively unconscionable. The Arbitrator Selection Provision Is Substantively Unconscionable Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided. “Given the lack of choice and the potential disadvantages that even a fair arbitration system can harbor for employees, we must be particularly attuned to claims that employers with superior bargaining power have imposed one-sided, substantively unconscionable terms as part of an arbitration agreement. ‘Private arbitration may resolve disputes faster and cheaper than judicial proceedings. Private arbitration, however, may also become an instrument of injustice imposed on a “take it or leave it” basis.’” Sanchez contends the arbitration agreement is substantively unconscionable in several respects. He cites the class arbitration waiver, the small claims provision, the absence of any provision requiring a written arbitration award, the designation of an arbitration provider consisting of a single arbitrator, and the absence of any express provision for discovery. An arbitration agreement must provide for a neutral arbitrator. Here, the designation of a “panel” of arbitrators consisting of a single arbitrator selected by Western Pizza created a false appearance of mutuality in the selection of an arbitrator. Moreover, the effective designation of a single arbitrator in what appears to be a standard arbitration agreement applicable to a large number of corporate employees gives rise to a significant risk of financial interdependence between Western Pizza and the arbitrator, and an opportunity for Western Pizza to gain an advantage through its knowledge of and experience with the arbitrator. Thus, this provision is unfairly one-sided and substantively unconscionable. The Entire Arbitration Agreement Is Unenforceable The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement, together these provisions indicate an effort to impose on an employee a forum with distinct advantages for the employer. Thus, the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper. ANSWERS TO “TAKING SIDES” PROBLEMS EarthWeb provided online products and services to business professionals in the information technology (IT) industry. EarthWeb operated through a family of websites offering information, products, and services for IT professionals to use for facilitating tasks and solving technology problems in a business setting. EarthWeb obtained this content primarily through licensing agreements with third parties. Schlack began his employment with EarthWeb in its New York City office. His title at EarthWeb was Vice President, Worldwide Content, and he was responsible for the content of all of EarthWeb’s websites. Schlack’s employment contract stated that he was an employee at will and included a section titled “Limited Agreement Not To Compete.” That section provided: (c) For a period of twelve (12) months after the termination of Schlack’s employment with EarthWeb, Schlack shall not, directly or indirectly: (1) work as an employee . . . or in any other . . . capacity for any person or entity that directly competes with EarthWeb. For the purpose of this section, the term “directly competing” is defined as a person or entity or division on an entity that is (i) an online service for Information Professionals whose primary business is to provide Information Technology Professionals with a directory of third party technology, software, and/or developer resources; and/or an online reference library, and or (ii) an online store, the primary purpose of which is to sell or distribute third party software or products used for Internet site or software development. About one year later, Schlack tendered his letter of resignation to EarthWeb. Schlack revealed at this time that he had accepted a position with ITworld.com. a. What arguments would support EarthWeb’s enforcement of the covenant not to compete? b. What arguments would support Schlack’s argument that the covenant is not enforceable? c. Which side should prevail? Explain. Answer: (a) EarthWeb would argue that a contract should be upheld since both parties voluntarily entered into the agreement. In addition, Schlack could reveal trade secrets to a competitor that could injure EarthWeb. Finally, the covenant not to compete is reasonable in both time and space. (b) Schlack would argue that the position waiting for him at IDG is so different that he would have no occasion to divulge any trade secrets belonging to EarthWeb. Schlack also would contend that whatever he knows about EarthWeb’s strategic planning is likely to become obsolete rather quickly because the company’s websites are constantly changing. In addition, EarthWeb plans to revamp its software infrastructure in the near future, so any knowledge Schlack has may soon become obsolete. In contrast to EarthWeb’s emphasis on obtaining the products and services of third parties through acquisitions and licensing agreements and then making those materials readily accessible on its websites, ITworld.com will rely on original content for over 70 percent of its website’s material. Schlack contends that ITworld.com will also be distinguishable from EarthWeb in the type of audience it targets. (c) Decision for Schlack. Even if the terms of EarthWeb’s restrictive covenant reached Schlack’s prospective employment at ITworld.com, EarthWeb would still have to establish that the restraint is reasonable and necessary to protect its legitimate interests. In New York, noncompete covenants will be enforced only if reasonably limited in scope and duration, and only “to the extent necessary (1) to prevent an employee’s solicitation or disclosure of trade secrets, (2) to prevent an employee’s release of confidential information regarding the employer’s customers, or (3) in those cases where the employee’s services to the employer are deemed special or unique.” Applying these principles here, the court found that EarthWeb’s restrictive covenant failed to pass muster even if Schlack’s position at ITworld.com fell within the provision’s relatively narrow parameters. The court further ruled that the one-year duration of EarthWeb’s restrictive covenant is too long given the dynamic nature of this industry. Moreover, Schlack’s services are not “unique and extraordinary.” This criteria usually refers to an employee with special talents; such as musicians, professional athletes, actors, and the like. To justify enforcement of a restrictive covenant, the employer must show that the employee’s services “are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury.” Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637