CH-14-16 Contractual Capacity – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 14 to 16 Chapter 14 CONTRACTUAL CAPACITY ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Michael, a minor, operates a one-man automobile repair shop. Anderson, having heard of Michael’s good work on other cars, takes her car to Michael’s shop for a thorough engine overhaul. Michael, while overhauling Anderson’s engine, carelessly fits an unsuitable piston ring on one of the pistons, with the result that Anderson’s engine is seriously damaged. Michael offers to return the sum that Anderson paid him for his work, but refuses to pay for the damage. Can Anderson recover from Michael in tort for the damage to her engine? Why? Answer: Liability for Tort Connected with Contract. No. Decision for Michael. It is clear that the negligence by Michael in carelessly fitting an unsuitable piston ring on one of the pistons, thereby seriously damaging the engine in Anderson’s car, grew out of a voidable contract (the contract of a minor— Michael); it would not have occurred had there been no contract, and it is inextricably bound to and interwoven into the contract. To allow recovery for the tort would indirectly enforce the contract, which the court would not permit. 2. Explain the outcome of each of the following transactions. (a) On March 20, Andy Small became seventeen years old, but he appeared to be at least eighteen (the age of majority). On April 1, he moved into a rooming house in Chicago where he orally agreed to pay the landlady $300 a month for room and board, payable at the end of each month. On April 30, he refused to pay his landlady for his room and board for the month of April (b) On April 4, he went to Honest Hal’s Carfeteria and signed a contract to buy a used car on credit with a small down payment. He made no representation as to his age, but Honest Hal represented the car to be in top condition, which it subsequently turned out not to be. . On April 25, he returned the car to Honest Hal and demanded a refund of his down payment. (c) On April 7, Andy sold and conveyed to Adam Smith a parcel of real estate that he owned. On April 28, he demanded that Adam Smith reconvey the land although the purchase price, which Andy received in cash, had been spent in riotous living. Answer: Liability for Necessaries. (a) Even where a minor is liable for necessaries he is not liable at the contract rate but only for the reasonable value. Here, Andy is liable for the reasonable value of the room and board for April. The court must determine what is a reasonable rate for the room and board. (b) Liability for Misrepresentation of Age. Andy did not misrepresent his age. He may disaffirm the contract and, upon returning the car to Honest Hal, since he still has it, he will be entitled to a refund of his down payment, and will not be liable for the balance of the purchase price. Hal may be charged with fraudulent inducement if he had knowledge of the car’s poor condition. (c) Disaffirmance. Where a minor sells real property he may not disaffirm the transaction until his majority. Upon reaching majority and within a reasonable time thereafter he may disaffirm the sale. A minor need only return the consideration received, under the majority rule, if he still has it in his possession at the time of disaffirmance. 3. Jones, a minor, owned a 2016 automobile. She traded it to Stone for a 2017 car. Jones went on a three-week trip and found that the 2017 car was not as good as the 2016 car. She asked Stone to return the 2016 car but was told that it had been sold to Tate. Jones thereupon sued Tate for the return of the 2016 car. Is Jones entitled to regain ownership of the 2016 car? Explain. Answer: Disaffirmance. No. Although Jones could avoid the sale as against Stone, he could not recover the car from Tate who purchased the car in good faith and for value from Stone. At common law Jones, the minor, could recover the car from the third person, Tate, to whom Stone, the other party to the contract with Jones had transferred it, even though the third person did not know of the minority and purchased the car for value. However, the UCC repudiates this rule, Section 2-403(1) provides that "a person with voidable title has power to transfer a good title to a good faith purchaser for value." 4. On May 7, Roy, a minor, a resident of Smithton, purchased an automobile from Royal Motors, Inc., for $18,750 in cash. On the same day, he bought a motor scooter from Marks, also a minor, for $750 and paid him in full. On June 5, two days before attaining his majority, Roy disaffirmed the contracts and offered to return the car and the motor scooter to the respective sellers. Royal Motors and Marks each refused the offers. On June 16, Roy brought separate appropriate actions against Royal Motors and Marks to recover the purchase price of the car and the motor scooter. By agreement on July 30, Royal Motors accepted the automobile. Royal then filed a counterclaim against Roy for the reasonable rental value of the car between June 5 and July 30. The car was not damaged during this period. Royal knew that Roy lived twenty-five miles from his place of employment in Smithton and that he probably used the car, as he did, for transportation. What is the decision as to (a) Roy’s action against Royal Motors, Inc., and its counterclaim against Roy; and, (b) Roy’s action against Marks? Answer: Liability for Necessaries. (a) Roy, a minor, had the right to disaffirm the contract for the purchase of the automobile, if it is a non-necessary. On the other hand, if the car is considered a necessary, Roy would be liable for the reasonable value of the automobile unless Royal allows Roy to disaffirm. Here, since Royal accepted the return of the automobile it may have forfeited its right to the reasonable value of the automobile. Thus, it would seem that whether a necessary or not, Roy has legally effected a disaffirmance. What are Roy’s duties with respect to the automobile after disaffirmance? The courts do not agree on this question. The majority hold that the minor must return any property received from the other party to the contract, provided she is in possession of it at the time of disaffirmance. Other states require at least the payment of a reasonable amount for the use of the property or of the amount by which the property depreciated while in the hands of the minor. (b) Disaffirmance. Decision for Roy and against Marks for the return of the purchase price of the motor scooter. The general rule that the contracts of a minor are voidable at his option applies to an executed contract between two minors. To hold the rule inapplicable, the court, in Hurwitz v. Barr, D.C. App., 193 A.2d 360 said: “would convert the privilege of infancy, which the law intends as a shield to protect the minor, into a sword to be used to the possible injury of others.” While Marks as a minor has the option of disaffirming the contract, this option cannot nullify any rights or privileges which Roy, also a minor, is capable of asserting. Accordingly, Marks cannot destroy Roy’s right to rescind, and the contract was therefore voidable by Roy. 5. On October 1, George Jones entered into a contract with Johnson Motor Company, a dealer in automobiles, to buy a used car for $10,850. He paid $1,100 down and, under the agreement, was to make monthly payments thereafter of $325 each. Jones was seventeen years old at the time he made the contract, but he represented to the company that he was twenty-one years old because he was afraid that if the company knew his real age, it would not sell the car to him. His appearance was that of a man of twenty-one years of age. After making the first payment on November 1, he failed to make any more payments. On December 15, the company repossessed the car under the terms provided in the contract. At that time, the car had been damaged and was in need of repairs. On December 20, George Jones became of age and at once disaffirmed the contract and demanded the return of the $1,425 he had paid on it. On refusal of the company to do so, George Jones brought an action to recover the $1,425, and the company set up a counterclaim for $1,500 for expenses it incurred in repairing the car. Who will prevail? Why? Answer: Liability for Misrepresentation of Age. George Jones may disaffirm the contract even though he deliberately misrepresented his age. Most courts would hold that Jones is not estopped from asserting his minority in order to sue Johnson Motor Company. At the same time, many courts would not grant Jones the relief sought unless he offered to return the car and also to account to the company for depreciation and the value of the use of the car where he has falsified his age. Here, the car has already been repossessed by Johnson Motor Company. This problem is based upon the leading case of Myers v. Hurley Motor Co., 273 U.S. 18, 47 S.Ct. 277, 71 L.Ed. 515, 50 A.L.R. 1181, where a minor appeared to be more than 21 but made no misrepresentation to induce the making of the contract for the purchase of an automobile. The seller repossessed the car, and the minor, after attaining his majority, sought to recover the amount paid on the purchase price. The seller sought to recover a somewhat larger amount for damages to the car while in the minor's possession. The United States Supreme Court stated that: "The defense, in effect, is that the plaintiff was guilty of tortious conduct to the injury of the defendant in the transaction out of which his own cause of action arose. In such case it is well settled that the relief is by way of recoupment." The seller was held entitled to a setoff up to but not exceeding the amount of the plaintiff's claim. The company would be entitled to a setoff for depreciation in value, against the amount of Jones' claim. 6. Rebecca entered into a written contract to sell certain real estate to Mary, a minor, for $80,000, payable $4,000 on the execution of the contract and $800 on the first day of each month thereafter until paid. Mary paid the $4,000 down payment and eight monthly installments before attaining her majority. Thereafter, Mary made two additional monthly payments and caused the contract to be recorded in the county where the real estate was located. Mary was then advised by her lawyer that the contract was voidable. After being so advised, Mary immediately tendered the contract to Rebecca, together with a deed reconveying all of Mary’s interest in the property to Rebecca. Also, Mary demanded that Rebecca return the money paid under the contract. Rebecca refused the tender and declined to repay any portion of the money paid to her by Mary. Can Mary cancel the contract and recover the amount paid to Rebecca? Explain. Answer: Ratification. No. Decision in favor of Rebecca. A minor may disaffirm a contract for the sale of real property made by her during minority within a reasonable time after attaining her majority and she may, by acts recognizing the contract after becoming of age, ratify it. Since Mary had made two payments and caused the contract to be recorded, after she became of age, she ratified the contract and will not be permitted to say that she performed these acts of ratification in ignorance of her right to disaffirm. Moreover, she was not induced by fraud or misrepresentation to enter into the contract. 7. Anita sold and delivered an automobile to Marvin, a minor. Marvin, during his minority, returned the automobile to Anita, saying that he disaffirmed the sale. Anita accepted the automobile and said she would return the purchase price to Marvin the next day. Later in the day, Marvin changed his mind, took the automobile without Anita’s knowledge, and sold it to Chris. Anita had not returned the purchase price when Marvin took the car. On what theory, if any, can Anita recover from Marvin? Explain. Answer: Liability for Tort Connected with Contract. Marvin, the minor, having made a contract for the purchase of the car from Anita, and having received possession thereof, was the owner of the car, subject to disaffirmance. The act of disaffirmance, however, is not a new contract, which the minor, in turn, may disaffirm. Upon disaffirmance he merely had the right to the return of the purchase price. Therefore, when Marvin changed his mind and returned the car to Anita, he created no new rights in himself. He had retransferred possession and title to the car to Anita. Marvin's taking the car constituted the tort of conversion, and Marvin would be liable in an appropriate action based upon his tortious act. 8. Ira, who in 2014 had been found innocent of a criminal offense because of insanity, was released from a hospital for the criminally insane during the summer of 2015 and since that time has been a reputable and well-respected citizen and businessperson. On February 1, 2016, Ira and Shirley entered into a contract in which Ira would sell his farm to Shirley for $100,000. Ira now seeks to void the contract. Shirley insists that Ira is fully competent and has no right to avoid the contract. Who will prevail? Why? Answer: Mental Illness or Defect. Shirley should prevail. As Ira was not under guardianship, he would have to establish that he was unable to comprehend the subject of the contract, its nature and probable consequences in order to avoid the contract. The facts of this problem do not establish such a situation. 9. Daniel, while under the influence of alcohol, agreed to sell his used automobile to Belinda for $13,000. The next morning, when Belinda went to Daniel’s house with the $13,000 in cash, Daniel stated that he did not remember the transaction but that “a deal is a deal.” One week after completing the sale, Daniel decides that he wishes to avoid the contract. What result? Answer: Intoxicated Persons. Judgment for Belinda. Even if Daniel at the time of entering into the agreement had been unable to comprehend the nature and effect of the transaction because of intoxication, Daniel affirmed the contract the next morning and is thereby precluded from avoiding the contract. 10. Langstraat, age seventeen, owned a motorcycle that he insured against liability with Midwest Mutual Insurance Company. He signed a notice of rejection attached to the policy indicating that he did not desire to purchase uninsured motorists’ coverage from the insurance company. Later he was involved in an accident with another motorcycle owned and operated by a party who was uninsured. Langstraat now seeks to recover from the insurance company, asserting that his rejection was not valid because he is a minor. Can Langstraat recover from Midwest? Explain. Answer: Ratification/Disaffirmance. Judgment for Midwest Mutual Insurance Company. This is not a case in which the minor seeks to disaffirm a contract. What Langstraat seeks here is to ratify and retain the benefits of the policy but to avoid the one provision which has become burdensome. A minor is not permitted this selective choice. Ratification and disaffirmance go to the whole contract. Since Langstraat did not wish to disaffirm the insurance policy, the notice of rejection is valid, and he is not entitled to recover. Langstraat v. Midwest Mutual Ins. Co., 217 N.W.2d 570 (Iowa 1974). 11. G.A.S. married his wife, S.I.S., on January 19, 2006. He began to suffer mental health problems in 2012, during which year he was hospitalized at the Delaware State Hospital for eight weeks. Similar illnesses occurred in 2014 and the early part of 2016, with G.A.S. suffering from such symptoms as paranoia and loss of a sense of reality. In early 2017, G.A.S. was still committed to the Delaware State Hospital, attending a regular job during the day and returning to the hospital at night. During this time, he entered into a separation agreement pre¬pared by his wife’s attorney. G.A.S., however, never spoke with the attorney about the contents of the agreement; nor did he read it prior to signing. Moreover, G.A.S. was not independently represented by counsel when he executed this agreement. Can G.A.S. disaffirm the separation agreement? Explain. Answer: Incapacity. Yes he may disaffirm it. Only competent persons can make a contract, and where there is no capacity to understand, there is no contract. Although petitioner was still under commitment to Delaware State Hospital at the time of the separation agreement, he had not been judicially adjudicated mentally incompetent, and therefore the agreement is not void but may be voidable. The mental incapacity sufficient to permit the cancellation of an agreement must render the individual incapable of understanding the nature and effect of the transaction, and unable to properly, intelligently and fairly protect and preserve his property rights. The domestic relations court held that even if the mental weakness of the petitioner in this case did not rise to the level of contractual incapacity, such weakness is a circumstance that operates to make the separation agreement voidable when coupled with the evidence of lack of independent counsel, undue influence, and unfairness in the transaction that is present in this case. GAS v. SIS, 407 A.2d 253 (Del. 1978). 12. A fifteen-year-old minor was employed by Midway Toyota, Inc. On August 18, 2015, the minor, while engaged in lifting heavy objects, injured his lower back. In October 2015 he underwent surgery to remove a herniated disk. Midway Toyota paid him the appropriate amount of temporary total disability payments ($53.36 per week) from August 18, 2015, through November 15, 2016. In February 2017 a final settlement was reached for 150 weeks of permanent partial disability benefits totaling $6,136.40. Tom Mazurek represented Midway Toyota in the negotiations leading to the agreement and negotiated directly with the minor and his mother, Hermione Parrent. The final settlement agreement was signed by the minor only. Mrs. Parrent, who was present at the time, did not object to the signing, but neither she nor anyone else of “legal guardian status” co-signed the agreement. The minor later sought to disaffirm the agreement and reopen his workers’ compensation case. The workers’ compensation court denied his petition, holding that Mrs. Parrent “participated fully in consideration of the offered final settlement and . . . ratified and approved it on behalf of her ward . . . to the same legal effect as if she had actually signed [it] . . .” The minor appealed. Decision? Answer: Disaffirmance. Judgment for the minor. The Montana statute allows a minor to disaffirm his contract. Because the minor claimant signed the petition for final settlement in his own behalf, he alone was the contracting party. Tom Mazurek chose to contract with the claimant; he must be prepared to accept the consequences of claimant's disaffirmance of the petition. The person who deals with an infant does so at his own peril. Defendant claims that the mother, Hermoine Parrent, was present at all times during the signing of the contract, that the mother approved of the contract; that there was no objection to the contract; that the adjuster negotiated with the mother and the claimant prior to and after the signing of the contract, the mother was aware of the contract rights of claimant and did not object to the same. Nevertheless, since the mother did not sign the agreement and since the minor is not bound by the agreement, the agreement is unenforceable. Parrent v. Midway Toyota, 626 P.2d 848 (Mont. 1981). 13. Rose, a minor, bought a new Buick Riviera from Sheehan Buick. Seven months later, while still a minor, he attempted to disaffirm the purchase. Sheehan Buick refused to accept the return of the car or to refund the purchase price. Rose, at the time of the purchase, gave all the appearance of being of legal age. The car had been used by him to carry on his school, business, and social activities. Can Rose successfully disaffirm the contract? Answer: Liability for Necessaries. Decision for Sheehan Buick; Rose cannot disaffirm the contract. The car is a necessary item for Rose to carry out his schooling, business and other activities. Therefore, he cannot avoid the obligation. Rose v. Sheehan Buick, Inc., 204 So.2d 903 (1967). 14. L. D. Robertson bought a pickup truck from King and Julian, who did business as the Julian Pontiac Company. At the time of purchase, Robertson was seventeen years old, living at home with his parents, and driving his father’s truck around the county to different construction jobs. According to the sales contract, he traded in a passenger car for the truck and was given $2,723 credit toward the truck’s $6,743 purchase price, agreeing to pay the remainder in monthly installments. After he paid the first month’s installment, the truck caught fire and was rendered useless. The insurance agent, upon finding that Robertson was a minor, refused to deal with him. Consequently, Robertson sued to exercise his right as a minor to rescind the contract and to recover the purchase price he had already paid ($2,723 credit for the car traded in plus the one month’s installment). The defendants argue that Robertson, even as a minor, cannot rescind the contract because it was for a necessary item. Are they correct? Answer: Disaffirmance by a Minor/Necessary Items. No, judgment for Robertson. A minor may rescind a contract to purchase where the property involved is not a necessary. There was no evidence that Robertson, who lived at home with his parents, needed the truck in connection with any work he was doing. Since the defendant failed to prove that the truck was a necessary item, Robertson, as a minor, may rescind. Upon avoidance of the contract, Robertson was entitled to recover the car he had traded in, but the defendants had already disposed of it. Robertson was therefore entitled to receive only the actual value of the traded-in car, even if the actual value of the trade-in is less than the credit given for it. Neither party is bound by the contract value. Thus, Robertson is entitled to recover the reasonable market value of the car at the time of trade-in (which in this case is $250), rather than the value stated in the contract ($723). Robertson v. King, 225 Ark. 276, 280 S.W.2d 402 (1955). 15. Haydocy Pontiac sold Jennifer Lee a used automobile for $21,552, of which $20,402 was financed with a note and security agreement. At the time of the sale, Lee, age twenty, represented to Haydocy that she was twenty-one years old, the age of majority then, and capable of contracting. After receiving the car, Lee allowed John Roberts to take possession of it. Roberts took the car and has not returned. Lee has failed to make any further payments on the car. Haydocy has sued to recover on the note, but Lee disaffirms the contract, claiming that she was too young to enter into a valid contract. Can Haydocy recover the money from Lee? Explain. Answer: Infancy. Judgment for Haydocy for the value of the automobile not to exceed its contract price. Although the law allows infants the privilege of disaffirming contracts which operate to their detriment, an infant is estopped from using this defense when the other party has contracted in good faith and it is the infant who induces the contract through false representation. Under the minority rule, which Ohio follows, the infant in such cases may not disaffirm the contract without returning the consideration to the other party. Haydocy Pontiac, Inc. v. Lee, 19 Ohio App.2d 217, 250 N.E. 2d 898 (1969). 16. Carol White ordered a $225 pair of contact lenses through an optometrist. White, an emancipated minor, paid $100 by check and agreed to pay the remaining $125 at a later time. The doctor ordered the lenses, incurring a debt of $110. After the lenses were ordered, White called to cancel her order and stopped payment on the $100 check. The lenses could be used by no one but White. The doctor sued White for the value of the lenses. Will the doctor be able to recover the money from White? Explain. Answer: Infancy. Judgment for doctor in the amount of $150 (amount considered reasonable by the court). The contact lenses are considered necessaries and are of no value to anyone except White. Due to the nature of the goods, the doctor cannot be compensated for his loss except by payment of a reasonable amount. An infant may be held liable for the fair value of necessaries despite a contract to pay more. Cidis v. White, 71 Misc. 2d 481, 336 N.Y.S.2d 362 (1972). 17. Williamson, her mortgage in default, was threatened with foreclosure on her home. She decided to sell the house. The Matthewses learned of this and contacted her about the matter. Williamson claims that she offered to sell her equity for $17,000 and that the Matthewses agreed to pay off the mortgage. The Matthewses contend that the asking price was $1,700. On September 27, the parties signed a contract of sale, which stated the purchase price to be $1,800 (an increase of $100 to account for furniture in the house) plus the unpaid balance of the mortgage. The parties met again on October 10 to sign the deed. Later that day, Williamson, concerned that she had not received her full $17,000 consideration, contacted an attorney. Can Williamson set aside the sale based upon inadequate consideration and mental weakness due to intoxication? Answer: Intoxicated Persons. The drunkenness of a party at the time of making a contract may render the contract voidable, but it does not render it void; and to render the contract voidable, it must be made to appear that the party was intoxicated to such a degree that he was, at the time of the contracting, incapable of exercising judgment, understanding the proposed engagement, and of knowing what he was about when he entered into the contract sought to be avoided. Proof merely that the party was drunk on the day the sale was executed does not per se, show that he was without contractual capacity; there must be some evidence of a resultant condition indicative of that extreme impairment of the faculties which amount to contractual incapacity. However, numerous factors combine to warrant the conclusion that the plaintiff was operating under diminished capacity. Testimony showed that Williamson's capacity to transact business was impaired, that she had a history of drinking, that she had been drinking the day she conducted negotiations, and that she had an apparent weakened will because she was pressured by the possibility of an impending foreclosure. Moreover, Williamson made complaint to an attorney only hours after the transaction. These factors are combined with a gross inadequacy of consideration. Williamson v. Matthews, 379 So.2d 1245 (Ala. 1980). 18. Halbman, a minor, purchased a used car from Lemke for $11,250. Under the terms of the contract, Halbman would pay $1,000 down and the balance in $125 weekly installments. Upon making the down payment, Halbman received possession of the car, but Lemke retained the title until the balance was paid. After Halbman had made his first four payments, a connecting rod in the car’s engine broke. Lemke denied responsibility, but offered to help Halbman repair it if Halbman would provide the parts. Halbman, however, placed the car in a garage where the repairs cost $637.40. Halbman never paid the repair bill. Hoping to avoid any liability for the vehicle, Lemke transferred title to Halbman even though Halbman never paid the balance owed. Halbman returned the title with a letter disaffirming the contract and demanded return of the money paid. Lemke refused. As the repair bill remained unpaid, the garage removed the car’s engine and transmission and towed the body to Halbman’s father’s house. Vandalism during the period of storage rendered the car unsalvageable. Several times Halbman requested Lemke to remove the car. Lemke refused. Halbman sued Lemke for the return of his consideration, and Lemke countersued for the amount still owed on the contract. Decision? Answer: Disaffirmance. Judgment for Halbman. Halbman, as a minor, had an absolute right to disaffirm the contract for the purchase of the car, if it is not a necessary item. He is also entitled to recover all consideration he has conferred incident to the transaction. As a disaffirming minor, he is under an enforceable duty to return only that much of the consideration as remained in his possession; he need not make restitution for that which he does not possess. If there was a misrepresentation by Halbman or willful destruction of the car, Lemke could have recovered damages in tort. Otherwise, to require a disaffirming minor to make restitution for diminished value is to bind the minor to a part of the obligation that by law he is privileged to avoid. Halbman v. Lemke, 298 N.W.2d 562 (Wisc. 1980). 19. On June 11, Chagnon bought a used Buick from Keser for $9950. Chagnon, who was then a minor, obtained the contract by falsely advising Keser that he was over the age of majority. On September 25, two months and four days after reaching his majority, Chagnon disaffirmed the contract and, ten days later, returned the Buick to Keser. He then brought suit to recover the money he had paid for the automobile. Keser counterclaimed that he suffered damages as the direct result of Chagnon’s false representation of his age. A trial was had to the court, sitting without a jury, all of which culminated in a judgment in favor of Chagnon against Keser in the sum of $6557.80. This particular sum was arrived at by the trial court in the following manner: the trial court found that Chagnon initially purchased the Buick for the sum of $9950 and that he was entitled to the return of his $9950; and then, by way of setoff, the trial court subtracted from the $9950 the sum of $3392.20, apparently representing the difference between the purchase price paid for the vehicle and the reasonable value of the Buick on October 5, the date when the Buick was returned to Keser. Is this legally correct? Do you agree? Why? Answer: Liability for Misrepresentation of Age. Judgment for Keser. If a minor does not exercise his right to disaffirm a contract within a "reasonable time" after he reaches the age of majority, he loses that right. Here, however, Chagnon's disaffirmance just two months after reaching majority, was within a reasonable time. Once he returned the car–the only consideration in his possession–he was entitled to recover the full $9950. While a false representation of his age does not destroy a minor's right to disaffirm, it does permit the seller to deduct from the buyer's compensation any damages that he suffered due to the false representation. The measure of damages for the seller is the difference between the reasonable value of the property on the date of delivery and its reasonable value on the date of return. Since Chagnon obtained the contract by false representation of his age, he will not recover his full $9950. Instead, his recovery is decreased by the amount of Keser's damages–the loss of the Buick's reasonable value. 20. On April 29, 2013, Kirsten Fletcher and John E. Marshall III jointly signed a lease to rent an apartment for the term beginning on July 1 , and ending on June 30 of the following year, for a monthly rent of $525 per month. At the time the lease was signed, Marshall was not yet eighteen years of age. Marshall turned eighteen on May 30. Two weeks later, the couple moved into the apartment. About two months later, Marshall moved out to attend college, but Fletcher remained. She paid the rent herself for the remaining ten months of the lease and then sought contribution for Marshall’s share of the rent plus court costs in the amount of $2,500. Can Fletcher collect from Marshall? Answer: Minors: Ratification. Yes. A contract of a minor is not void, but is voidable at the election of the minor. After attaining majority, a minor may either disaffirm or ratify a contract that he entered into while he was still a minor. Also, once a contract is ratified by the minor it cannot then be disaffirmed by subsequent conduct. After becoming 18 years of age, Marshall moved into the apartment and paid rent. He lived in the apartment for about 2 months and never took any action to disaffirm the lease before moving out. Marshall’s occupancy and payment of rent constitute unequivocal ratification of the lease. Because he had already ratified the lease, his later attempt to disaffirm it by moving out of the apartment and refusing to make further payments was of no effect. Marshall remained liable for the rent for the remainder of the lease term and is therefore liable to Fletcher for the rent payments she made on his behalf. 21. Rogers was a nineteen-year-old (the age of majority then being twenty-one) high school graduate pursuing a civil engineering degree when he learned that his wife was expecting a child. As a result, he quit school and sought assistance from Gastonia Personnel Corporation in finding a job. Rogers signed a contract with the employment agency providing that he would pay the agency a service charge if it obtained suitable employment for him. The employment agency found him such a job, but Rogers refused to pay the service charge, asserting that he was a minor when he signed the contract. Gastonia sued to recover the agreed-upon service charge from Rogers. Should Rogers be liable under his contract? If so, for how much? Answer: Minors: Necessaries. Yes. Judgment for Gastonia Personnel Corp. In general, a contract with a minor is voidable by the minor unless the contract is for necessaries. The law is based on the idea that society has a moral obligation to protect the interests of minors from overreaching adults. In its effort to protect "older minors" from improvident or unfair contract, however, the law should not deny them the opportunity and the right to obligate themselves for articles of property or services that are reasonably necessary to enable them to provide for the proper support of themselves and their dependents. Since the service provided by the employment agency in finding Rogers a suitable job qualifies as such a service, the contract is not voidable, and the agency can recover the charge. 22. On September 29, just under two weeks before his 18th birthday, Bagley, a highly skilled and experienced snow-boarder, purchased a season pass from Mt. Bachelor ski facility. Upon purchasing the season pass, he executed a release agreement as required by Mt. Bachelor. The significant portions of the release agreement were also printed on the pass. Beginning on November 18, after his 18th birthday, Bagley used his season pass to ride Mt. Bachelor’s lifts at least 119 times over the course of twenty-six days spent snowboarding at the ski area. However, on February 16 of the following year, while snowboarding over a manmade jump in Mt. Bachelor’s “air chamber” terrain park, Bagley sustained serious injuries resulting in permanent paralysis. Bagley sued Mt. Bachelor for negligence, claiming that he had timely disaffirmed the release agreement by notifying Mt. Bachelor of the injury. Mt. Bachelor argued that Bagley had manifested his intent to ratify (a) by failing to disaffirm the voidable release agreement within a reasonable period of time after reaching the age of majority and (b) by accepting the benefits of that agreement. Explain whether Bagley has ratified the contract. Answer: Ratification of Minor’s Contract. Bagley has ratified the contact. Bagley v. Mt. Bachelor, Inc., 310 P.3d 692, 258 Or. App. 390 (2013). [On appeal, the Oregon Supreme Court held that enforcement of the release at issue in this case would be unconscionable. See Chapter 13.] In Oregon, a former minor may disaffirm a contract within a "reasonable time" after reaching the age of majority, or, conversely, may ratify a contract after reaching the age of majority by manifesting an intent to let the contract stand. Applying those principles to these facts, we agree with Mt. Bachelor and conclude that no objectively reasonable juror could find that Bagley disaffirmed the release agreement within a reasonable time after turning 18. Rather, the record gives rise to only one reasonable conclusion: By using the season pass at least 119 times over the course of 26 days, Bagley objectively manifested his intent to let the release stand—affirmatively electing to ride the lifts and snowboard under the terms of the agreement (i.e., to accept the benefits of the agreement). ANSWERS TO “TAKING SIDES” PROBLEMS Joseph Eugene Dodson, age sixteen, purchased a used pickup truck from Burns and Mary Shrader. The Shraders owned and operated Shrader’s Auto Sales. Dodson paid $14,900 in cash for the truck. At the time of sale, the Shraders did not question Mr. Dodson’s age, but thought he was eighteen or nineteen. Dodson made no misrepresentation concerning his age. Nine months after the date of purchase, the truck began to develop mechanical problems. A mechanic diagnosed the problem as a burnt valve but could not be certain. Dodson, who could not afford the repairs, continued to drive the truck until one month later, when the engine “blew up.” Dodson parked the vehicle in the front yard of his parents’ home and contacted the Shraders to rescind the purchase of the truck and to request a full refund. The Shraders refused. Explain whether Dodson will be permitted to disaffirm the contract and recover the $4,900. (a) What arguments would support Dodson’s termination of the contract? (b) What arguments would support Shrader’s position that the contract is not voidable? (c) Which side should prevail? Explain. Answer: (a) A contract of minor is voidable during the infant’s minority and for a reasonable time thereafter. A minor upon reaching majority can determine what contracts are fair and reasonable and which ones are not. (b) The Shraders would argue that this rule is not fair and that a minor should, at a minimum, pay the reasonable value of the use of the good. The refund provided to the minor should not be complete but it is only fair to deduct the minor’s benefit from the use of the automobile. If there has been any fraud or imposition on the part of the seller or if the contract is unfair, or any unfair advantage has been taken of the minor inducing him to make the purchase, then the rule does not apply. This will fully and fairly protect the minor against injustice or imposition, and at the same time it will be fair to a business person who has dealt with such minor in good faith. This rule is best adapted to modern conditions under which minors are permitted to, and do in fact, transact a great deal of business for themselves, long before they have reached the age of legal majority. The law does not question their right to buy if they have the money to pay for their purchases. It seems intolerably burdensome for everyone concerned if merchants and business people cannot deal with them safely, in a fair and reasonable way. (c) The court ruled that the rule to be followed hereafter, in reference to a contract of a minor, to be where the minor has not been overreached in any way, and there has been no undue influence, and the contract is a fair and reasonable one, and the minor has actually paid money on the purchase price, and taken and used the article purchased, that he ought not to be permitted to recover the amount actually paid, without allowing the vendor of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to the article purchased, while in his hands. The court noted that in this case, some nine (9) months after the date of purchase, the truck purchased by Dodson began to develop mechanical problems. Dodson was informed of the probable nature of the difficulty. Nevertheless, Dodson continued to drive the vehicle until the engine “blew up” and the truck became inoperable. Whether or not this involved gross negligence or intentional conduct on his part is a matter for determination at the trial level. The determination of the fair market value of the vehicle at the time of tender is also an issue for the trier of fact. DODSON v. SHRADER, Supreme Court of Tennessee, 1992, 824 S.W.2d 545 Chapter 15 CONTRACTS IN WRITING ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Rafferty was the principal shareholder in Continental Corporation, and, as a result, he received the lion’s share of Continental Corporation’s dividends. Continental Corporation was anxious to close an important deal for iron ore products to use in its business. A written contract was on the desk of Stage Corporation for the sale of the iron ore to Continental Corporation. Stage Corporation, however, was cautious about signing the contract, and it did not sign until Rafferty called Stage Corporation on the telephone and stated that if Continental Corporation did not pay for the ore, he would pay. Business reversals struck Continental Corporation, and it failed. Stage Corporation sued Rafferty. What defense, if any, has Rafferty? Answer: Suretyship Provision. Main Purpose Doctrine. Rafferty has the defense that his oral agreement to pay for the iron ore was a contract to guarantee the payment of the debt of another which the statute of frauds requires to be in writing to be enforceable. Rafferty's oral promise to pay Continental Corporation's debt was collateral to the debt or liability of Continental Corporation. Rafferty's promise cannot be said to be an original promise or undertaking even though he was the principal shareholder in Continental Corporation. However, the main purpose doctrine will be available to Stage Corporation and can bind Rafferty to his oral promise. 2. Green was the owner of a large department store. On Wednesday, January 26, he talked to Smith and said, “I will hire you to act as sales manager in my store for one year at a salary of $48,000. You are to begin work next Monday.” Smith accepted and started work on Monday, January 31. At the end of three months, Green discharged Smith. On May 15, Smith brought an action against Green to recover the unpaid portion of the $48,000 salary. Is Smith’s employment contract enforceable? Answer: One Year Provision. No, decision in favor of Green. The oral contract of employment between Green and Smith was entered into on Wednesday, January 26, but Smith was not required to begin work until Monday, January 31, five days after the making of the contract. The agreement was thus not capable of performance within one year from the day on which it was made and is within the statute of frauds. The contract is, hence, not enforceable. Where a contract of service is for the term of a year beginning or which may begin on the day of the making of the contract, the statute of frauds is inapplicable. An oral contract for a year’s services, as here, to begin more than one day after the contract is entered into is impossible of performance within one year from the date of making and is therefore unenforceable under the statute of frauds. Part performance of an oral contract not performable within a year does not take a contract out of the statute of frauds. 3. Rowe was admitted to the hospital suffering from a critical illness. He was given emergency treatment and later underwent surgery. On at least four occasions, Rowe’s two sons discussed with the hospital the payment for services to be rendered by the hospital. The first of these four conversations took place the day after Rowe was admitted. The sons informed the treating physician that their father had no financial means but that they themselves would pay for such services. During the other conversations, the sons authorized whatever treatment their father needed, assuring the hospital that they would pay for the services. After Rowe’s discharge, the hospital brought this action against the sons to recover the unpaid bill for the services rendered to their father. Are the sons’ promises to the hospital enforceable? Explain. Answer: Suretyship Provision: Collateral Promises. Decision for the hospital; the promises are enforceable. The promise of the sons is not to answer for the debt of another. The oral promise of the sons is an original undertaking by themselves to pay the hospital expenses to be incurred by Rowe. The sons did not guarantee to pay the hospital in the event Rowe did not pay the bill; they agreed, instead, in the first instance, to pay the father’s bill. Peterson v. Rowe, 63 N.M. 135, 314 P.2d 892 (1957). 4. Ames, Bell, Cain, and Dole each orally ordered LCD televisions from Marvel Electronics Company, which accepted the orders. Ames’s television was to be encased in a specially designed ebony cabinet. Bell, Cain, and Dole ordered standard televisions described as “Alpha Omega Theatre.” The price of Ames’s television was $1,800, and the televisions ordered by Bell, Cain, and Dole were $700 each. Bell paid the company $75 to apply on his purchase; Ames, Cain, and Dole paid nothing. The next day, Marvel sent Ames, Bell, Cain, and Dole written confirmations captioned “Purchase Memorandum,” numbered 12345, 12346, 12347, and 12348, respectively, containing the essential terms of the oral agreements. Each memorandum was sent in duplicate with the request that one copy be signed and returned to the company. None of the four purchasers returned a signed copy. Ames promptly called the company and repudiated the oral contract, which it received before beginning manufacture of the set for Ames or making commitments to carry out the contract. Cain sent the company a letter reading in part, “Referring to your Contract No. 12347, please be advised I have canceled this contract. Yours truly, (Signed) Cain.” The four televisions were duly tendered by Marvel to Ames, Bell, Cain, and Dole, all of whom refused to accept delivery. Marvel brings four separate actions against Ames, Bell, Cain, and Dole for breach of contract. Decide each claim.. Answer: U.C.C. (a) Decision for Ames. The U.C.C. has tightened the so-called special order rule. The Code requires, in order that such an oral contract be enforceable against the buyer, that the seller, before receiving notice of repudiation and under circumstances which reasonably indicate that the goods are for the buyer, either make a substantial beginning of their manufacture or commitments for their procurement. Section 2-201 (3). Ames repudiated before Marvel commenced manufacture of the set or made commitments for procurement of the goods. (b) Decision for Marvel. Bell has made part payment of the purchase price. Section 2-201(3) (c) of the U.C.C. provides that a contract which does not satisfy the requirements of the U.C.C. statute of frauds but which is valid in other respects is enforceable "with respect to goods for which payment has been made and accepted or which have been received and accepted." Where the contract is indivisible, as here, there is a division of authority as to whether part payment makes the whole contract enforceable. The majority rule is that part payment and acceptance makes the entire contract enforceable. (c) Decision for Marvel. Cain has signed a writing sufficient to indicate that a contract for sale has been made between Marvel and himself. Section 2-201(1). (d) Decision for Dole. Dole is not liable on the contract. He has done nothing to make his oral contract enforceable. 5. Moriarity and Holmes enter into an oral contract by which Moriarity promises to sell and Holmes promises to buy Blackacre for $100,000. Moriarity repudiates the contract by writing a letter to Holmes in which she states accurately the terms of the bargain, but adds “our agreement was oral. It, therefore, is not binding upon me, and I shall not carry it out.” Thereafter, Holmes sues Moriarity for specific performance of the contract. Moriarity interposes the defense of the statute of frauds, arguing that the contract is within the statute and hence unenforceable. What result? Discuss. Answer: Writing or Memorandum. Judgment for Holmes. Moriarity, the party whom Holmes seeks to charge, signed a letter stating the terms of the oral contract. By signing the letter, which serves as a memorandum, Moriarity complied with the requirements of the statute of frauds. Thus the contract is enforceable and Holmes is entitled to specific performance of the contract. Specific performance is available because land is a unique commodity. 6. On March 1, Lucas called Craig on the telephone and offered to pay him $190,000 for a house and lot that Craig owned. Craig accepted the offer immediately on the telephone. Later in the same day, Lucas told Annabelle that if she would marry him, he would convey to her the property then owned by Craig that was the subject of the earlier agreement. On March 2 Lucas called Penelope and offered her $25,000 if she would work for him for the year commencing March 15, and she agreed. Lucas and Annabelle were married on June 25. By this time, Craig had refused to convey the house to Lucas. Thereafter, Lucas renounced his promise to convey the property to Annabelle. Penelope, who had been working for Lucas, was discharged without cause on July 5; Annabelle left Lucas and instituted divorce proceedings.. What rights, if any, have (a) Lucas against Craig for his failure to convey the property; (b) Annabelle against Lucas for failure to convey the house to her; and (c) Penelope against Lucas for discharging her before the end of the agreed term of employment? Answer: Land Contract Provision. (a) Lucas has no rights against Craig for his failure to convey the property. To be enforceable, a contract for the sale of land must be in writing. (b) Annabelle has no rights against Lucas for failure to convey the property to her. No action shall be brought upon a promise or contract in consideration of marriage unless there is a written contract or a memorandum of the agreement signed by the party to be charged. There is no writing here. In this case the contract is not merely a mutual promise to marry, but involves consideration in addition to the promises to marry. (c) Penelope has no rights against Lucas for breach of the contract of employment. This contract must be in writing because it cannot be performed within one year from the date of entering into the oral agreement—March 1. 7. Clay orally promises Trent to sell him five crops of potatoes to be grown on Blackacre, a farm in Minnesota, and Trent promises to pay a stated price for them on delivery. Is the contract enforceable? Answer: One Year Provision. The contract may not be enforceable. Where an oral agreement cannot be performed within one year from the date of the making of the contract it is within the statute of frauds. The contract is within the statute of frauds for the reason that it is impossible in Minnesota for five crops of potatoes to mature in one year, but if they could, then the contract would be enforceable. 8. Grant leased an apartment to Epstein for the term May 1 to April 30 at $750 a month “payable in advance on the first day of each and every month of said term.” At the time the lease was signed, Epstein told Grant that he received his salary on the tenth of the month and that he would be unable to pay the rent before that date each month. Grant replied that would be satisfactory. On June 2, due to Epstein’s not having paid the June rent, Grant sued Epstein for such rent. At the trial, Epstein offered to prove the oral agreement as to the date of payment each month. Is the oral evidence admissible?? Answer: Parol Evidence Rule. Decision for Grant. The lease expressly provided that the rent for each month was payable in advance on the first day of the month. The oral agreement that the lessee could pay each month's rent on the 10th of the month would not be admissible to change the terms of the lease, because it is contemporaneous parole evidence that contradicts an integrated document. If Grant had allowed Epstein to make the payment on the 10th of the month for several months, his actions may give Epstein a stronger argument for enforcement of the oral agreement under a course of performance argument. 9. Rachel bought a car from the Beautiful Used Car Agency under a written contract. She purchased the car in reliance on Beautiful’s agent’s oral representations that it had never been in a wreck and could be driven at least two thousand miles without adding oil. Thereafter, Rachel discovered that the car had, in fact, been previously wrecked and rebuilt, that it used excessive quantities of oil, and that Beautiful’s agent was aware of these facts when the car was sold. Rachel brings an action to rescind the contract and recover the purchase price. Beautiful objects to the introduction of oral testimony concerning representations of its agent, contending that the written contract alone governed the rights of the parties. Explain whether Rachel should succeed? Answer: Parol Evidence Rule. Decision for Rachel. The used car agency's objection to the introduction of the oral testimony would be overruled. The oral representations by used car agency's agent that the car had never been in a wreck and could be driven two thousand miles without adding oil were fraudulent. The parol evidence rule does not exclude the admission of evidence to establish fraud. The reason for the rule is that where the parties have reduced their contract to writing, they intend that all of the terms of the contract are incorporated in the writing. Consequently, the introduction of extrinsic evidence to vary, alter, change, or add to the terms contained in writing would be changing the contract made by the parties. However, fraudulent misrepresentations which induced the contract are not part of the contract but separate and apart from it. The introduction of evidence of fraud, therefore, is not prohibited by the parol evidence rule. Restatement, Second, Contracts, Section 214. 10. In a contract drawn up by Booke Company, it agreed to sell and Yermack Contracting Company agreed to buy wood shingles at $950 per bunch. After the shingles were delivered and used, Booke Company billed Yermack Company at $950 per bunch of nine hundred shingles. Yermack Company refused to pay because it thought the contract meant $950 per bunch of one thousand shingles. Booke Company brought action to recover on the basis of $950 per bunch of nine hundred shingles. The evidence showed that there was no applicable custom or usage in the trade and that each party held its belief in good faith. Decision? Answer: Interpretation of Contracts. Decision for Yermack Contracting Company. In the absence of an applicable custom or trade usage, the contract is ambiguous. As it was written by the seller, Booke Company, under ordinary rules of construction, it would be construed most strongly against Booke Company as the party drafting it. Booke Company in good faith believed that the price of the wood shingles was $950 per bunch of 900 shingles, whereas Yermack Contracting Company in good faith believed that each bunch contained 1,000 shingles. As the contract did not define the number of shingles to be contained in each bunch, Booke Company would not be able to recover at the rate of $950 per bunch of 900 shingles. Yermack Contracting Company is unable to establish any basis for its contention that each bunch should contain 1,000 shingles. It appears, therefore, that the parties never reached an agreement on the price. However, they did intend to make a contract, and the shingles were actually delivered to and used by the buyer. Consequently, Yermack Contracting Company is under a duty to pay the Booke Company a reasonable price for the shingles which it received. U.C.C. Section 2-305. 11. Halsey, a widower, was living without family or housekeeper in his house in Howell, New York. Burns and his wife claim that Halsey invited them to give up their house and business in Andover, New York, to live in his house and care for him. In return, they allege, he promised them the house and its furniture upon his death. Acting upon this proposal, the Burnses left Andover, moved into Halsey’s house, and cared for him until he died five months later. No deed, will, or memorandum exists to authenticate Halsey’s promise. McCormick, the administrator of the estate, claims the oral promise is unenforceable under the statute of frauds. Explain whether McCormick is correct. Answer: Land Contract Provision. Yes, McCormick is correct. In general, a contract to convey an interest in land must be in writing to satisfy the statute of frauds. As an exception, equity will sometimes enforce an oral agreement affecting rights in land if the one who will gain the interest has partially performed his promise under the agreement. However, to satisfy this exception, the partial performance must be “unequivocally referable” to the agreement–such as possession or improvement of the promised land. Here, the Burnses never occupied the land as owners or under claim of present right. As boarders, they did not even have possession. Halsey maintained possession; they were merely his personal servants or guests. Though likely to have been rewarded in some fashion, their services to Halsey are not unequivocally referable to his promise to convey the land. Therefore, in the absence of a writing confirming it, his promise is unenforceable. 12. Amos orally agrees to hire Elizabeth for an eight-month trial period. Elizabeth performs the job magnificently, and after several weeks Amos orally offers Elizabeth a six-month extension at a salary increase of 20 percent. Elizabeth accepts the offer. At the end of the eight-month trial period, Amos discharges Elizabeth, who brings suit against Amos for breach of contract. Is Amos liable? Why? Answer: One Year Provision: The Possibility Test. No, Amos is not liable. The modified contract is unenforceable because employment contracts for one year or longer must be in writing. In this case, Amos extended the contract orally to a period of time in excess of one year. 13. Ethel Greenberg acquired the ownership of the Carlyle Hotel on Miami Beach. Having had little experience in the hotel business, she asked Miller to participate in and counsel her operation of the hotel, which he did. He claims that because his efforts produced a substantial profit, Ethel made an oral agreement for the continuation of his services. Miller alleges that in return for his services, Ethel promised to marry him and to share the net income resulting from the operation of the hotel. Miller maintains that he rendered his services to Ethel in reliance upon her promises. The couple planned to wed in the fall, but Ethel, due to physical illness, decided not to marry. Miller sued for damages for Ethel’s breach of their agreement. Is the oral contract enforceable? Discuss. Answer: Marriage Provision. Judgment for Ethel Greenberg. Any oral promise or agreement made in consideration of marriage, other than a mutual promise to marry, is within the statute of frauds. If the marriage is not the real end or purpose of the agreement but a mere incident or condition, then the statute is not applicable. The statute applies in full force and effect when, despite other inducements, marriage is in whole or in part the real consideration for the agreement. In this case, the oral agreement was supported by two promises by Ethel–to marry and to share the net income of the hotel. Her promise of marriage was an essential element of the indivisible contract and cannot be removed without destroying the parties’ intentions. Since the consideration of marriage was not merely incidental but was the real consideration for their agreement, the statute applies. Thus, their oral agreement is unenforceable. Miller v. Greenberg, 1958. 104 So.2d 457 (Fla. 1958). 14. Dean was hired on February 12 as a sales manager of the Co-op Dairy for a minimum period of one year with the dairy agreeing to pay his moving expenses. By February 26, Dean had signed a lease, moved his family from Oklahoma to Arizona, and reported for work. After he worked for a few days, he was fired. Dean then brought this action against the dairy for his salary for the year, less what he was paid. The dairy argues that the statute of frauds bars enforcement of the oral contract because the contract was not to be performed within one year. Is the dairy correct in its assertion? Answer: One Year Provision. Judgment for Dean. A contract of employment to start in the future and to continue for one year is within the statute of frauds because the one-year period runs from the date the contract is made, not the date when performance is to begin. A contract for one year’s employment to commence the day following the making of the contract is not within the statute of frauds. The contract here did not prohibit Dean from commencing work until he had moved from Oklahoma. Since he could have reported to work the next day, there was the possibility that the contract could have been performed within one year. The statute of frauds is not applicable if there is the slightest possibility that the contract can be fully performed within one year. Therefore, Dean can recover on the contract even though it was not in writing. Co-op Dairy, Inc. v. Dean, Supreme Court of Arizona, 1968. 102 Ariz. 573, 435 P.2d 470. 15. Alice solicited an offer from Robett Manufacturing Company to manufacture certain clothing that Alice intended to supply to the government. Alice contends that in a telephone conversation Robett made an oral offer that she immediately accepted. She then received the following letter from Robett, which, she claims, confirmed their agreement: Confirming our telephone conversation, we are pleased to offer the 3,500 shirts at $14.00 each and the trousers at $13.80 each with delivery approximately ninety days after receipt of order. We will try to cut this to sixty days if at all possible. This, of course, as quoted f.o.b. Atlanta and the order will not be subject to cancellation, domestic pack only. Thanking you for the opportunity to offer these garments, we are Very truly yours, ROBETT MANUFACTURING CO., INC. Is the agreement enforceable against Robett? Answer: Writing or Memorandum. No, judgment for Robett Manufacturing Company. Since the alleged transaction involved a sale of goods for more than $500, the memorandum must satisfy the statute of frauds. Under the Uniform Commercial Code, the memorandum need not contain all the terms of the agreement. It must, however: (1) evidence a contract for the sale of goods between the parties; (2) be signed by the party to be charged; and (3) specify a quantity. Here, Robett admits the signing of the letter and that the letter specifies a quantity. Nevertheless, the writing does not evidence a contract for the sale of goods; it merely constitutes an offer to sell. Hence, the memorandum does not satisfy the minimum requirements of the statute of frauds and the agreement is unenforceable. Alice v. Robett Manufacturing Co., United States District Court, District of Georgia, 1970. 328 F.Supp. 1377. 16. David and Nancy Songer planned to travel outside the United States and wanted to acquire medical insurance prior to departure. They spoke with an agent of Continental who requested that Nancy Songer undergo a medical examination based on a statement that she had a heart murmur. She promptly complied, and the Songers later met with the agent to complete the application. David Songer signed the application and tendered a check for the first six months' premium. The Songers also claim that the agent stated that a “binder” was in effect such that policy coverage was available immediately. The agent subsequently denied making this statement, relying, instead, on a clause in the contract that required home office acceptance. The Songers left the United States and sixty days later inquired as to the status of their application. At approximately the same time, Continental denied the application and sent a refund to the Songers. Nancy Songer was then severely injured in an automobile accident. When Continental refused to honor the policy, the Songers claimed that the oral representation constituted part of the contract due to the vagueness of the policy “acceptance” language. Is the evidence regarding the oral representations admissible? Answer: Parol Evidence Rule. Judgment for Songer reversed and case remanded for retrial. The statements of the Continental agent could only have been considered to form a temporary contract with the Songers if such evidence did not violate the parol evidence rule. This rule states that "[i]n the absence of fraud or mistake, parol evidence is inadmissible to change, alter or vary the express terms in a written contract." The Songers correctly point out that parol evidence may be admitted to clarify documents that contain ambiguities or the potential for differing interpretations. In this case, however, the language in the insurance application is "too clear to admit of any doubt." The alleged representation by Continental's agent that the insurance would take effect immediately is clearly at odds with the express terms of the written contract, as provided in the application, that the insurance would take effect when the application was "accepted by the Company at its Home Office." Therefore, the parol evidence rule bars admission of the agent's statements. Continental Life and Acc. Co. v. Songer, 603 P.2d 921 (Ariz. 1979). 17. Yokel, a grower of soybeans, had sold soybeans to Campbell Grain and Seed Company and other grain companies in the past. Campbell entered into an oral contract with Yokel to purchase soybeans from him. Promptly after entering into the oral contract, Campbell signed and mailed to Yokel a written confirmation of the oral agreement. Yokel received the written confirmation but neither signed it nor objected to its content. Campbell now brings this action against Yokel for breach of contract upon Yokel’s failure to deliver the soybeans. Should Yokel be considered a merchant and thus bound by Campbell’s written confirmation? Answer: U.C.C.: Written Confirmation. Judgment for Campbell—the agreement is binding. Under the Code a written confirmation between merchants satisfies the statute of frauds provision of the Code against the recipient as well as the sender unless the recipient gives written notice of his objection within ten days after receiving the confirmation. Yokel, however, insists that he is not a "merchant" within the meaning of the Code, and, therefore, the written confirmation provision is not applicable. The term "merchant" means a person who deals in goods of the kind sold, or otherwise by his occupation holds himself out as having knowledge or skill particular to the practices or goods involved. Yokel is a dealer in soybeans and hence is a merchant within the meaning of the Code. The written confirmation to which Yokel failed to object, therefore, satisfies the statute of frauds provision of the Code. Campbell v. Yokel, 20 Ill.App.3d 702, 313 N.E.2d 628 (1974). 18. Presti claims that he reached an oral agreement with Wilson by telephone in October 2016 to buy a horse for $60,000. Presti asserts that he sent Wilson a bill of sale and a postdated check, which Wilson retained. Presti also claims that Wilson told him that he wished not to consummate the transaction until January 1, 2017, for tax reasons. The check was neither deposited nor negotiated. Wilson denies that he ever agreed to sell the horse or that he received the check and bill of sale from Presti. Presti’s claim is supported by a copy of his check stub and by the affidavit of his executive assistant, who says that he monitored the telephone call and prepared and mailed both the bill of sale and the check. Wilson argues that the statute of frauds governs this transaction and that because there was no writing, the contract claim is barred. Is Wilson correct? Explain. Answer: UCC Statute of Frauds/Writing Requirement. Yes, Wilson is correct. The sale of a horse is governed by the Uniform Commercial Code covering sales of goods. Presti sought to avoid the writing requirement of 2-201 based on two exceptions found in 2-210: first, that the statute does not apply if Wilson admitted the contract was made; and second, that it does not apply where payment was made and accepted. However, Wilson denied under oath that any agreement was made. The exception for part performance or for payment and acceptance involves mutual participation and not unilateral acts. It requires objective evidence of the assent of both parties. That evidence is missing here, because the only evidence of payment was Presti's testimony that the check was to be held until the next year to gain a tax advantage. The check was never deposited in the defendant's account or negotiated by him. The testimony that exists is evidence that the plaintiff could create, and therefore, it is not an objective manifestation of assent to the contract such as to make it enforceable without a writing. Presti v. Wilson, 348 F. Supp. 543 (N.D.N.Y. 1972). 19. Louie E. Brown worked for the Phelps Dodge Corporation under an oral contract for approximately twenty-three years. In 2016, he was suspended from work for unauthorized possession of company property. In 2017, Phelps Dodge fired Brown after discovering that he was using company property without permission and building a trailer on company time. Brown sued Phelps Dodge for benefits under an unemployment benefit plan. According to the plan, “in order to be eligible for unemployment benefits, a laid-off employee must: (1) Have completed two or more years of continuous service with the company, and (2) Have been laid off from work because the company had determined that work was not available for him.” The trial court held that the wording of the second condition was ambiguous and should be construed against Phelps Dodge, the party who chose the wording. A reading of the entire contract, however, indicates that the plan was not intended to apply to someone who was fired for cause. What is the correct interpretation of this contract? Answer: Interpretation of Contracts. Decision for Phelps Dodge. A reading of the entire contract indicates that no ambiguity exists. The contract was not meant to apply to someone who was dismissed for cause. Brown was not entitled to recover under the plan. Phelps Dodge Corp. v. Brown, 112 Ariz. 179, 540 P.2d 651 (1975). 20. Katz offered to purchase land from Joiner, and, after negotiating the terms, Joiner accepted. On October 13, over the telephone, both parties agreed to extend the time period for completing and mailing the written contract until October 20. Although the original paperwork deadline in the offer was October 14, Katz stated he had inserted that provision “for my purpose only.” All other provisions of the contract remained unchanged. Accordingly, Joiner completed the contract and mailed it on October 20. Immediately after, however, Joiner sent Katz an overnight letterstating that “I have signed and returned contract, but have changed my mind. Do not wish to sell property.” Joiner now claims an oral modification of a contract within the statute of frauds is unenforceable. Katz counters that the modification is not material, and therefore does not affect the underlying contract. Explain who is correct. Answer: Modification or Recission of Contracts. Judgment for Katz. This problem emphasizes the difficulty of determining fixed limits of the statute of frauds. Look to the written contract before modification, and to the modification itself. If neither the portion of the written contract affected by the subsequent modification nor the matter encompassed by the modification itself is required by the statute of frauds to be in writing, then the oral modification will not render the contract unenforceable. Here, the oral modification concerned only an extension of time for finishing paperwork–the underlying land sale was unaffected. 21. When Mr. McClam died, he left the family farm, heavily mortgaged, to his wife and children. In order to save the farm from foreclosure, Mrs. McClam planned to use insurance proceeds and her savings to pay off the debts. She was unwilling to do so, however, unless she had full ownership of the property. Mrs. McClam wrote her daughter, stating that the daughter should deed over her interest in the family farm to her mother. Mrs. McClam promised that upon her death all the children would inherit the farm from their mother equally. The letter further explained that if foreclosure occurred, each child would receive very little, but if they complied with their mother’s plan, each would eventually receive a valuable property interest upon her death. Finally, the letter stated that all the other children had agreed to this plan. The daughter also agreed. Years later, Mrs. McClam tried to convey the farm to her son Donald. The daughter challenged, arguing that the mother was contractually bound to convey the land equally to all children. Donald says this was an oral agreement to sell land, and is unenforceable. The daughter says the letter satisfies the statute of frauds, making the contract enforceable. Who gets the farm? Explain. Answer: Methods of Compliance (Statute of Frauds). Judgment for the daughter, so all children share equally upon Mrs. McClam's death. The letter signed by Mrs. McClam, reasonably identifies the subject matter of the contract (here the family farm), sufficiently indicates the parties to the contract (here Mrs. McClam and all her children), and the essential terms of the contract can be ascertained with reasonable certainty. Smith v. McClam, 346 S.E.2d 720 (S.C. 1986). 22. Butler Brothers Building Company sublet all of the work in a highway construction contract to Ganley Brothers, Inc. Soon thereafter, Ganley brought this action against Butler for fraud in the inducement of the contract. The contract, however, provided: “The contractor [Ganley] has examined the said contracts . . . , knows all the requirements, and is not relying upon any statement made by the company in respect thereto.” Can Ganley introduce into evidence the oral representations made by Butler? Answer: Parol Evidence Rule/Evidence of Fraud in the Inducement. Yes, decision for Ganley. Parol evidence is admissible to show that the making of the contract was procured by fraudulent representations. This does not vary the terms of the contract. It is merely to show the presence of fraud which permits an avoidance of the contract. The fact that the contract has been reduced to writing does not change the rule. The contract as written was induced by fraud. The law should not and does not permit a covenant of immunity to be drawn that will protect a person against his own fraud. No agreement of parties can preclude the defense that fraud in the inducement of the agreement renders the agreement voidable. Ganley Brothers, Inc. v. Butler Brothers Building Company, 170 Minn. 373, 212 N.W. 602 (1927). 23. Shane Quadri contacted Don Hoffman, an employee of Al J. Hoffman & Co. (Hoffman Agency), to procure car insurance. Later, Quadri’s car was stolen on October 25 or 26. Quadri contacted Hoffman, who arranged with Budget Rent-a-Car for a rental car for Quadri until his car was recovered. Hoffman authorized Budget Rent-a-Car to bill the Hoffman Agency. Later, when the stolen car was recovered, Hoffman telephoned Goodyear and arranged to have four new tires put on Quadri’s car to replace those damaged during the theft. Budget and Goodyear sued Hoffman for payment of the car rental and tires. Is Hoffman liable on his oral promise to pay for the car rental and the four new tires? Answer: Original Promises. Judgment for Budget and Goodyear against Hoffman. Although the statute of frauds makes unenforceable oral contracts to pay the debts of a third person, it does not apply to original promises to pay for services rendered to a third person. Hoffman initiated the transactions with both Budget and Goodyear by telephone, indicating that Quadri was insured, and authorized the billing of the Hoffman Agency. By signing the rental agreement and tire invoice, Quadri merely obtained the benefits of the transactions authorized by Hoffman. Since credit was extended solely to the Hoffman Agency, the statute does not apply to Hoffman's oral promises. Thus, they are enforceable against Hoffman. 24. Thomson Printing Company is a buyer and seller of used machinery. On April 10, the president of the company, James Thomson, went to the surplus machinery department of B.F. Goodrich Company in Akron, Ohio, to examine some used equipment that was for sale. Thomson discussed the sale, including a price of $9,000, with Ingram Meyers, a Goodrich employee and agent. Four days later, on April 14, Thomson sent a purchase order to confirm the oral contract for purchase of the machinery and a partial payment of $1,000 to Goodrich in Akron. The purchase order contained Thomson Printing’s name, address, and telephone number, as well as certain information about the purchase, but did not specifically mention Meyers or the surplus equipment department. Goodrich sent copies of the documents to a number of its divisions, but Meyers never learned of the confirmation until weeks later, by which time the equipment had been sold to another party. Thomson Printing brought suit against Goodrich for breach of contract. Goodrich claimed that no contract had existed and that at any rate the alleged oral contract could not be enforced because of the statute of frauds. Is the contract enforceable? Why? Answer: Written Confirmation. Yes, the contract is enforceable; thus judgment for Thomson Printing. The merchants’ confirmation exception to the statute of frauds provides that an oral contract between merchants may be enforced by the sender of a written confirmation of the agreement where the recipient of the confirmation has reason to know its contents and does not object to them in writing within ten days. Goodrich acknowledged receipt of the purchase order but claimed that it was not received by anyone who had reason to know its contents and that Thomson erred in not designating Meyers or the surplus equipment department on any of the materials it sent. The "merchants’" exception, however, does not expressly require that the confirmation be received by a particular individual. Moreover, even if such a requirement were in force, Section 1-201 of the Uniform Commercial Code states that notice received by an organization "is effective . . . from the time when it would have been brought to [the attention of the individual conducting that transaction] if the organization had executed due diligence." If Goodrich had exercised due diligence in this situation, the items would have come to Meyer's attention reasonably promptly. The purchase order should have immediately alerted the mailroom to the type of transaction involved and the intended destination of the documents. Alternatively, the mailroom could have placed a simple phone call to Thomson Printing. Thomson Printing v. B.F. Goodrich, 714 F.2d 744. 25. On July 5, 2006, Richard Price signed a written employment contract as a new salesman with the Mercury Supply Company. The contract was of indefinite duration and could be terminated by either party for any reason upon fifteen days’ notice. Between 2006 and 2011, Price was promoted several times. In 2011, Price was made vice president of sales. In September 2014, however, Price was told that his performance was not satisfactory and that if he did not improve he would be fired. In February 2017, Price received notice of termination. Price claims that in 2011 he entered into a valid oral employment contract with Mercury Supply Company wherein he was made vice president of sales for life or until he should retire. Is the alleged oral contract barred by the one-year provision of the statute of frauds? Answer: Statute of Frauds. Judgment for Mercury Supply Co. The statute of frauds requires that all contracts that cannot possibly be completed within a year must be in writing in order to be enforceable. Conversely, contracts that can possibly be performed within a year may still be enforced even if they are oral. The alleged oral contract could be performed within a year because Price could have died or chosen to retire within that first year. The evidence, however, showed that the alleged oral contract, if actually made, was still a terminable-at-will employment contract. Therefore, Mercury Supply Company could discharge Price at any time without breaching the oral contract. Price v. Mercury Supply Co. 682 S.W.2d 924. 26. Plaintiffs leased commercial space from the defendant to open a florist shop. After the lease was executed, the plaintiffs learned that they could not place a freestanding sign along the highway to advertise their business because the Deschutes County Code allowed only one freestanding sign on the property, and the defendant already had one in place. The plaintiffs filed this action, alleging that defendant had breached the lease by failing to provide them with space in which they could erect a freestanding sign. Paragraph 16 of the lease provides as follows: “Tenant shall not erect or install any signs . . . visible from outside the leased premises with out [sic] the previous written consent of the Landlord.” Explain whether this evidence is admissible. Answer: Parol Evidence. Yes, the evidence is admissible. The parol evidence rule is a rule of integration. It prohibits oral evidence of those aspects of the bargain that the parties intended to memorialize in their written agreement. If the parties did not intend the writing to represent their entire agreement, the agreement is only partially integrated, and prior consistent additional terms not evidenced by the writing may still form part of the entire agreement. An oral agreement is not integrated in a contemporaneous writing if it is not inconsistent with the written agreement and is such an agreement as the parties might naturally make as a separate agreement. We start with a presumption that the parties intend the writing to be a complete integration. The integration clause in the lease indicates that the lease was intended to be a complete agreement, but it is not conclusive. Defendant testified that he told plaintiffs that they could have a sign and that he did not require them to obtain his written consent, despite the words in paragraph 16 of the lease. There was evidence to support the trial court’s holding that the parties did not intend the written lease to reflect their entire agreement, thereby overcoming the presumption of integration. The next question is whether a separate oral agreement to allow a freestanding sign was inconsistent with the written lease. No provision of the lease prohibits a freestanding sign, thus, the disputed parol evidence was not inconsistent with the written agreement.. 27. Jesse Carter and Jesse Thomas had an auto accident with a driver insured by Allstate. Carter and Thomas hired attorney Joseph Onwuteaka to represent them. Mr. Onwuteaka sent a demand letter for settlement of plaintiffs’ claims to Allstate’s adjustor, Ms. Gracie Weatherly. Mr. Onwuteaka claims Ms. Weatherly made, and he orally accepted, settlement terms on behalf of the plaintiffs. When Allstate did not honor the agreements, Carter and Thomas filed a suit for breach of contract. Discuss the enforceability of the oral agreement. Answer: Statute of Frauds. The appellants contend the alleged oral agreement is not governed by the Statute of Frauds. Allstate claims the Statute of Frauds is applicable to the alleged agreement under the suretyship provision, which allows "a promise by another person to answer for the debt, default, or miscarriage of another person." One test for determining whether a promise to pay the debt of another is within or without the Statute of Frauds is whether the promisor is a surety, only secondarily liable, or has accepted primary responsibility for the debt. If the party is primarily liable, its promise to pay a debt is not required to be in writing by the Statute of Frauds. However, if the party is a surety, the promise to pay the debt of a third party is required to be in writing. If Allstate were merely a surety, its obligation would have been to pay its insured's debt upon default by its insured. However, as an insurer, Allstate contracted with its insured to assume responsibility for the liability of its insured, at least to the limits of the insurance policy. By Allstate's oral promise to settle, it was settling not only its insured's potential liability but its own possible obligation to pay and its own duty to defend its insured. The oral promise to settle was an original undertaking, not a promise to answer for the debt of the insured. Therefore, the suretyship provision of the Statute of Frauds does not apply to Allstate's promise to settle. 28. Mary Iacono and Carolyn Lyons had been friends for almost thirty-five years. Mary suffers from advanced rheumatoid arthritis and is in a wheelchair. Carolyn invited Mary to join her on a trip to Las Vegas, Nevada, for which Carolyn paid. Mary contended she was invited to Las Vegas by Carolyn because Carolyn thought Mary was lucky. Sometime before the trip, Mary had a dream about winning on a Las Vegas slot machine. Mary’s dream convinced her to go to Las Vegas, and she accepted Carolyn’s offer to split “50–50” any gambling winnings. Carolyn provided Mary with money for gambling. Mary and Carolyn started to gamble but after losing $47, Carolyn wanted to leave to see a show. Mary begged Carolyn to stay, and Carolyn agreed on the condition that Carolyn put the coins into the machines because doing so took Mary too long. Mary agreed and led Carolyn to a dollar slot machine that looked like the machine in her dream. The machine did not pay on the first try. Mary then said, “Just one more time,” and Carolyn looked at Mary and said, “This one’s for you, Puddin.” They hit the jackpot, winning $1,908,064 to be paid over a period of twenty years. Carolyn refused to share the winnings with Mary. Is Mary entitled to one-half of the proceeds? Explain. Answer: Statute of Frauds. Yes, Mary is entitled to one-half of the proceeds. The defendant Carolyn asserted that the agreement, if any, was unenforceable under the statute of frauds because it could not be performed within one year. There is no dispute that the winnings were to be paid over a period of 20 years. The one year provision of the statute of frauds does not apply if the contract, from its terms, could possibly be performed within a year—however improbable performance within one year may be. To determine the applicability of the statute of frauds with indefinite contracts, this Court may use any reasonably clear method of ascertaining the intended length of performance. [Citation.] The method is used to determine the parties’ intentions at the time of contracting. The fact that the entire performance within one year is not required, or expected, will not bring an agreement within the statute. Assuming without deciding that the parties agreed to share their gambling winnings, such an agreement possibly could have been performed within one year. For example, if the plaintiff and defendant had won $200, they probably would have received all the money in one pay-out and could have split the winnings immediately. Therefore, the agreement does not fall under the statute of frauds. Iacono v. Lyons, Court of Appeals of Texas, 2000, 16 S.W.3d 92. 29. On February 9, George Jackson and his neighbors, Karen and Steve Devenyn, drafted and signed a document that purports to convey a seventy-nine-acre parcel of land owned by Jackson. By the terms of the agreement, Jackson wished to reserve a 1.3-acre portion of the parcel. Although the agreement contained a drawing and dimensions of the conveyance, it did not contain a specific description of the parcel. Jackson died on May 8, and his estate refused to honor the agreement. The Devenyns then filed a petition with the probate court to order a conveyance. Based on the parol evidence rule, the estate of Jackson objected to the admission of the witnesses' testimony that they could point out the specific area based on conversations with Jackson. Explain whether the oral evidence is admissible. Answer: Compliance with the Statute of Frauds. The oral evidence is not admissible. Estate of Jackson v. Devenyns, 892 P.2d 786 (Supreme Court of Wyoming, 1995). A written memorandum purporting to convey real estate must sufficiently describe the property to comply with the requirements of the statute of frauds and permit specific performance. A valid contract to convey land must expressly contain a description of the land, certain in itself or capable of being rendered certain by reference to an extrinsic source that the writing itself designates. It is expressly prohibited to supply the writing's essential provisions by inferences or presumptions deduced from oral testimony. This writing insufficiently describes the property it purports to convey, to reserve, and for which it grants an option to purchase. The writing's description of the property to be conveyed states: “George Jackson agrees to sell 79 acres.…” Such a description is insufficiently definite to identify the land without recourse to extrinsic evidence. When a writing states only the total acreage without any description of the location of the land involved, the statute of frauds' requirement that the subject matter be reasonably certain is not satisfied and the contract is void. The present description provides only the total acreage and does not provide any certainty that this particular tract was intended to be conveyed. Therefore, this agreement is too uncertain to be enforced. ANSWERS TO “TAKING SIDES” PROBLEMS Stuart Studio, an art studio, prepared a new catalog for the National School of Heavy Equipment, a school run by Gilbert and Donald Shaw. When the artwork was virtually finished, Gilbert Shaw requested Stuart Studio to purchase and supervise the printing of twenty-five thousand catalogs. Shaw told the art studio that payment of the printing costs would be made within ten days after billing and that if the “National School would not pay the full total that he would stand good for the entire bill.” Shaw was chairman of the board of directors of the school, and he owned 100 percent of its voting stock and 49 percent of its nonvoting stock. The school became bankrupt, and Stuart Studio was unable to recover the sum from the school. Stuart Studio then brought an action against Shaw on the basis of his promise to pay the bill. (a) What are the arguments that Shaw is not liable on his promise? (b) What are the arguments that Shaw is liable on his promise? (c) Is Shaw obligated to pay the debt in question? Explain. Answer: (a) Shaw would argue that his promise is that of a surety and thus it must be in writing to be enforceable. Because Shaw is promising to pay the debt of National School if National fails to pay the debt it is clearly a case of a surety promising to pay the debt of another. (b) Stuart Studio would argue that, since because Shaw was chairman of the board of National School and owned 100% percent of National’s voting shares, the main purpose rule exception to the Statute of Frauds would apply. The economic benefit of Stuart’s performance was to the economic benefit of Shaw. (c) Gilbert Shaw is liable for the debt. The statute of frauds requires promises to answer for the duties of another to be in writing to be enforceable. Where the promise is collateral and it appears that the promisor's main purpose in guaranteeing the obligation was to secure an advantage or economic benefit for himself, however, the promise is enforceable even though it was not in writing. The benefit accruing to a party merely by virtue of his position as a stockholder, officer, or director of a corporation alone is not such personal, immediate, and economic benefit as to invoke the main purpose rule. Rather, the court will examine the surety's position and ownership interest in the corporation to determine whether he has enough control of the corporation to benefit directly. Here, Gilbert Shaw exercised sufficient control over the National School to render his oral promise enforceable. Stuart Studio, Inc. v. Heavy Equipment, Inc., 25 N.C. App. 544, 214 S.E.2d 192 (1975). Chapter 16 THIRD PARTIES TO CONTRACTS ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. On December 1, Euphonia, a famous singer, contracted with Boito to sing at Boito's theater on December 31 for a fee of $45,000 to be paid immediately after the performance. (a) Euphonia, for value received, assigns this fee to Carter. (b) Euphonia, for value received, assigns this contract to sing to Dumont, an equally famous singer. (c) Boito sells his theatre to Edmund and assigns his contract with Euphonia to Edmund. State the effect of each of these assignments. Answer: Rights That are Assignable. (a) The assignment by Euphonia of her fee is valid, and Carter can collect it from Boito. Euphonia has assigned her right to the payment of money, as represented by the fee to be paid to her for singing at Boito’s theater. It makes no legal difference to Boito whether he pays the fee to Euphonia or to Carter, so long as such payment absolves him from his obligation to pay. (b) Delegation of Duties. The delegation of the contractual duty to Dumont is invalid. The personal element is the dominant feature of the contract. Dumont may be equally famous as a singer and yet Boito may, for perfectly valid reasons, not wish Dumont to sing in his theater. (c) Rights That Are Assignable. This contract is assignable. The contract required Euphonia’s special skill as a singer, but Euphonia was not required to perform any differently for Edmund than for Boito. Should this not be the case, it may be that the contract is not assignable because of its personal nature. 2. The Smooth Paving Company entered into a paving contract with the city of Chicago. The contract contained the clause “contractor shall be liable for all damages to buildings resulting from the work performed.” In the process of construction, one of the bulldozers of the Smooth Paving Company struck and broke a gas main, causing an explosion and a fire that destroyed the house of John Puff. Puff brought an action for breach of the paving contract against the Smooth Paving Company to recover damages for the loss of his house. Can Puff recover under this contract? Explain. Answer: Intended Beneficiary. Yes, Puff can recover for the loss of his house. Even though the contract did not clearly designate the party to whom the contractor was to be liable, the terms of the contract express clearly and unequivocally that the contractor assumed liability to the property owner. By so doing, the contractor assumed liability to protect the property owner, and, as a result, the property owner was a third party beneficiary and entitled to sue and recover. It is not essential to the third person’s right to enforce a contract made for his benefit that he be expressly named in the contract if he is otherwise sufficiently described or designated, and he may even be one of a class of persons if the class is sufficiently indicated. 3. Anne, who was unemployed, registered with the Speedy Employment Agency. A contract was then made under which Anne, in consideration of such position as the agency would obtain for her, agreed to pay the agency one half of her first month’s salary. The contract also contained an assignment by Anne to the agency of one half of her first month’s salary. Two weeks later, the agency obtained a permanent position for Anne with the Bostwick Co. at a monthly salary of $1, 900. The agency also notified Bostwick Co. of the assignment by Anne. At the end of the first month, Bostwick Co. paid Anne her salary in full. Anne then quit and disappeared. The agency now sues Bostwick Co. for $950 under the assignment. Who will prevail? Explain. Answer: Rights That Are Assignable. Decision for Bostwick Co. Bostwick Co. is not liable under the assignment because at the time the assignment was made by Anne she had no employment agreement with Bostwick Co. Although the potential right to money, such as wages to be earned under an existing employment contract, is assignable, the existence of a contract to which the assignor is a party is essential to the validity of the assignment. A purported assignment of a right expected to arise under a contract not in existence operates only as a promise to assign the right when it arises. 4. Georgia purchased an option on Greenacre from Pamela for $10,000. The option contract contained a provision by which Georgia promised not to assign the option contract without Pamela’s permission. Georgia, without Pamela’s permission, assigned the contract to Michael. Michael now seeks to exercise the option, and Pamela refuses to sell Greenacre to him. Must Pamela sell the land to Michael? Answer: Express Prohibition Against Assignment. Yes. Decision for Michael. A provision in a contract prohibiting an assignment of the contract, unless a different intention is manifested, gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective. Therefore, since an option contract is assignable, the assignment is valid. However, since Georgia did assign the contract without Pamela's permission Georgia did breach her contract and is liable to Pamela for damages, if any, caused by the assignment. 5. Julia contracts to sell to Hayden, an ice cream manufacturer, the amount of ice Hayden may need in his business for the ensuing three years to the extent of not more than 250 tons a week at a stated price per ton. Hayden makes a corresponding promise to Julia to buy such an amount of ice. Hayden sells his ice cream plant to Clark and assigns to Clark all Hayden’s rights under the contract with Julia. Upon learning of the sale, Julia refuses to furnish ice to Clark. Clark sues Julia for damages. Decision? Answer: Assignments and Delegations. The contract between Julia and Hayden is bilateral and executory, involving rights and duties on each side. Only rights are assignable. Duties are never assignable, but their performance may be delegated to another whenever delectus personae, choice of the person, is not integral to the performance. Hayden’s assignment of the entire contract to Clark involves a delegation to Clark of Julia’s duties under her contract with Hayden. These duties are related to the ice cream factory’s operating requirements for ice. Even though these requirements may be substantially different for a factory operated by Clark than for the same factory operated by Hayden, the contract places a maximum quantity upon the contract–250 tons per week. Therefore, it appears that the contract is both assignable and delegable. Cf. Restatement, Second, Contracts, Section 317, Illus. 5. 6. Brown enters into a written contract with Ideal Insurance Company under which, in consideration of her payment of the premiums, the insurance company promises to pay State College the face amount of the policy, $100,000, on Brown’s death. Brown pays the premiums until her death. Thereafter, State College makes demand for the $100,000, which the insurance company refuses to pay upon the ground that State College was not a party to the contract. Can State College successfully enforce the contract? Answer: Gift Promise. Yes. Decision for State College. This is an intended third party donee beneficiary type of contract. Privity of contract between the promisor Ideal and the donee beneficiary under the policy is not required. The right arises from the intention of Brown to confer a benefit upon State College, and the promise of the insurance company to Brown is enforceable directly by the intended third party beneficiary. 7. Grant and Debbie enter into a contract binding Grant personally to do some delicate cabinetwork. Grant assigns his rights and delegates performance of his duties to Clarence. (a) On being informed of this, Debbie agrees with Clarence, in consideration of Clarence’s promise to do the work, that Debbie will accept Clarence’s work, if properly done, instead of the performance promised by Grant. Later, without cause, Debbie refuses to allow Clarence to proceed with the work, though Clarence is ready to do so, and makes demand on Grant that Grant perform. Grant refuses. Can Clarence recover damages from Debbie? Can Debbie recover from Grant? (b) Instead, assume that Debbie refuses to permit Clarence to do the work, employs another carpenter, and brings an action against Grant, claiming as damages the difference between the contract price and the cost to employ the other carpenter. Explain whether Debbie will prevail. Answer: Assignment of Rights. a) The facts indicate that the parties have entered into a novation. By so doing, Grant has been discharged from his contract with Debbie, and Debbie has entered into a new and binding agreement with Clarence. Accordingly, Clarence can recover from Debbie for Debbie’s breach of her contractual obligations, and Debbie cannot recover from Grant. b) Section 318 of the Restatement, Contract, Second, provides: “(2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.” Thus, the question becomes whether Debbie had a substantial interest in having Grant perform the contract. It would seem that the decision hinges upon whether Debbie contracted with Grant due to Grant’s special expertise or with Grant merely because he was a competent, skilled carpenter. If the former, Debbie will prevail; if the latter, Grant will prevail. 8. Rebecca owes Lewis $2,500 due on November 1. On August 15, Lewis assigns this right for value received to Julia, who gives notice on September 10 of the assignment to Rebecca. On August 25, Lewis assigns the same right to Wayne, who in good faith gives value and has no prior knowledge of the assignment by Lewis to Julia. Wayne gives Rebecca notice of the assignment on August 30. What are the rights and obligations of Rebecca, Lewis, Julia, and Wayne? Answer: Successive Assignments of the Same Right. The majority rule provides that the first assignee in point of time prevails over subsequent assignees. Under this approach, Julia prevails over Wayne. Lewis is liable to Wayne for the successive assignment. Rebecca is obligated to pay Julia. The English rule, followed by a minority of states, provides that the first assignee that notifies the obligor prevails. This would permit Wayne to prevail over Julia because he notified Rebecca first in time. Julia would have to seek redress against Lewis, while Rebecca would be obligated to Wayne. 9. Lisa hired Jay in the spring, as she had for many years, to set out in beds the flowers Lisa had grown in her greenhouses during the winter. The work was to be done in Lisa’s absence for $300. Jay became ill the day after Lisa departed and requested his friend, Curtis, to set out the flowers, promising to pay Curtis $250 when Jay received his payment. Curtis agreed. On completion of the planting, an agent of Lisa’s, who had authority to dispense the money, paid Jay, and Jay paid Curtis. Within two days, it became obvious that the planting was a disaster. Because he did not operate Lisa’s automatic watering system properly, everything set out by Curtis had died of water rot. May Lisa recover damages from Curtis? May she recover damages from Jay? If so, does Jay have an action against Curtis? Answer: Intended Beneficiary. Lisa may maintain an action against Curtis for breach of the contract between Jay and Curtis. Lisa is an intended beneficiary of the contract between Jay and Curtis. Lisa may maintain an action against Jay. A promisor cannot delegate or relieve himself of his duties under a contract, even though they are of such type or character as to be delegable. “Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.” Restatement, Second, Contracts, Section 318(3). Lisa may recover damages against Jay and Curtis. Jay has an action against Curtis based upon their assignment and delegation agreement. 10. Caleb, operator of a window-washing business, dictated a letter to his secretary addressed to Apartments, Inc., stating, “I will wash the windows of your apartment buildings at $4.10 per window to be paid on completion of the work.” The secretary typed the letter, signed Caleb’s name, and mailed it to Apartments, Inc. Apartments, Inc., replied, “Accept your offer.” Caleb wrote back, “I will wash them during the week starting July 10 and direct you to pay the money you will owe me to my son, Bernie. I am giving it to him as a wedding present.” Caleb sent a signed copy of the letter to Bernie. Caleb washed the windows during the time stated and demanded payment to him of $8,200 (2,000 windows at $4.10 each), informing Apartments, Inc., that he had changed his mind about having the money paid to Bernie. What are the rights of the parties? Answer: Requirements of an Assignment. The right to receive the money was assigned to Bernie. There is no required form by which an assignment must be made. What is required is a manifestation by the assignor that he is presently giving up whatever rights he has in the contract. The signed order was sent both to the obligor and the assignee, and Caleb's words "I direct" and "I am giving" make it clear that Caleb is expressing an intention to transfer presently the right to the money to Bernie. There is, therefore, an assignment of that right to Bernie. "An assignment of a right to payment expected to arise out of an existing employment or other continuing business relationship is effective in the same way as an assignment of an existing right." Restatement, Second, Contracts, Section 321(1). The weight of modern authority is to the effect that the delivery of a written gift assignment to the assignee makes the assignment irrevocable. 4 Corbin on Contracts, Section 921. Restatement, Second, Contracts, Section 332, states: "(1) Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if (a) the assignment is in writing either signed or under seal that is delivered by the assignor." In the problem the assignment, although gratuitous, is contained in a signed writing and had been delivered both to the assignee and the obligor. The weight of modern authority would hold that it was irrevocable. 11. McDonald's has an undeviating policy of retaining the absolute control over who receives new franchises. McDonald’s granted to Copeland a franchise in Omaha, Nebraska. In a separate letter, it also granted him a right of first refusal for future franchises to be developed in the Omaha-Council Bluffs area. Copeland then sold all rights in his six McDonald’s franchises to Schupack. When McDonald’s offered a new franchise in the Omaha area to someone other than Schupack, he attempted to exercise the right of first refusal. McDonald’s would not recognize the right in Schupack, claiming that it was personal to Copeland and, therefore, nonassignable without its consent. Schupack brought an action for specific performance, requiring McDonald’s to accord him the right of first refusal. Is Schupack correct in his contention? Answer: Rights that Are Not Assignable. No, Schupack is not correct. Judgment for McDonald's. Contracts for personal services or involving relations of personal confidence and trust are not assignable without the consent of the other party to the contract. Whether the right of first refusal is personal and, therefore, not assignable depends on the intent of the parties to the original contract. It is the "basic and undeviating policy of McDonald's to retain the rigid and absolute control over who receives new franchises." Here, the right was granted solely to Copeland and independently of the franchise contract. Furthermore, McDonald's granted the right on the basis of the personal confidence and trust that it placed in Copeland. The intent and purpose of the letter granting the right was to look to the personal performance of Copeland. These factors indicate that McDonald's intended the right of first refusal to be personal to Copeland and nonassignable without its consent. Schupack v. McDonald's System, Inc., 264 N.W.2d 827 (Neb. 1978). 12. In 1952, the estate of George Bernard Shaw granted to Gabriel Pascal Enterprises, Limited, the exclusive rights to produce a musical play and a motion picture based on Shaw's play Pygmalion. The agreement contained a provision terminating the license if Gabriel Pascal Enterprises did not arrange for well-known composers, such as Lerner and Loewe, to write the musical and produce it within a specified time. George Pascal, owner of 98 percent of the Gabriel Pascal Enterprise's stock, attempted to meet these requirements but died in July 1954 before negotiations had been completed. In February 1954, however, while the license had two years yet to run, Pascal sent a letter to Kingman, his executive secretary, granting to her certain percentages of his share of the profits from the expected stage and screen productions of Pygmalion. Subsequently, Pascal's estate arranged for the writing and production of the highly successful My Fair Lady, based on Shaw's Pygmalion. Kingman then sued to enforce Pascal's gift assignment of the future royalties. Decision? Answer: Requirements of an Assignment. Judgment for Kingman affirmed. Assignments of rights to sums that are expected to become due to the assignor are enforceable. To make a gift of such an assignment, the donor need only demonstrate a present intent to transfer irrevocably his right to the donee. Although at the time of the delivery of the letter there was no musical play or motion picture in existence, Pascal's letter was intended to transfer irrevocably by assignment a percentage of the royalties from the future productions to Kingman. Therefore, the assignment is enforceable as a valid gift. 13. Northwest Airlines leased space in the terminal building at the Portland Airport from the Port of Portland. Crosetti entered into a contract with the Port to furnish janitorial services for the building, which required Crosetti to keep the floor clean, to indemnify the Port against loss due to claims or lawsuits based upon Crosetti’s failure to perform, and to provide public liability insurance for the Port and Crosetti. A patron of the building who was injured by a fall caused by a foreign substance on the floor at Northwest’s ticket counter brought suit for damages against Northwest, the Port, and Crosetti. Upon settlement of this suit, Northwest sued Crosetti to recover the amount of its contribution to the settlement and other expenses on the grounds that Northwest was a third-party beneficiary of Crosetti’s contract with the Port to keep the floors clean and, therefore, within the protection of Crosetti’s indemnification agreement. Will Northwest prevail? Why? Answer: Creditor Beneficiary. No. The court held that only two types of third party beneficiaries are entitled to recover; and that Northwest was not a creditor beneficiary as it was not a creditor of the Port since its lease contained no agreement by the Port to indemnify it; nor was it a donee beneficiary as there was no evidence of any intention of the Port in its contract with Crosetti to make a gift to Northwest or confer upon Northwest a right to indemnity. At most, Northwest was an incidental beneficiary, and as such had no right of recovery. Northwest Airlines, Inc. v. Crosetti Bros. Inc., 483 P.2d 70 (Or.1971). 14. Tompkins-Beckwith, as the contractor on a construction project, entered into a subcontract with a division of Air Metal Industries. Air Metal procured American Fire and Casualty Company to be surety on certain bonds in connection with contracts it was performing for Tompkins-Beckwith and others. As security for these bonds, on January 3, Air Metal executed an assignment to American Fire of all accounts receivable under the Tompkins-Beckwith subcontract. On November 26 of that year, Boulevard National Bank lent money to Air Metal. To secure the loans, Air Metal purported to assign to the bank certain accounts receivable it had under its subcontract with Tompkins-Beckwith. In June of the following year, Air Metal defaulted on various contracts bonded by American Fire. On July 1, American Fire served formal notice on Tompkins-Beckwith of Air Metal’s assignment. Tompkins-Beckwith acknowledged the assignment and agreed to pay. In August, Boulevard National Bank notified Tompkins-Beckwith of its assignment. Tompkins-Beckwith refused to recognize the bank’s claim and, instead, paid all remaining funds that had accrued to Air Metal to American Fire. The bank then sued to enforce its claim under Air Metal’s assignment. Is the assignment effective? Why? Answer: Successive Assignment of Same Right. No, the bank’s assignment is not effective. There are two rules of priority concerning successive assignments of the same contract right. The American (majority) rule gives priority to the first assignee in point of time of the assignment without regard to notice to the debtor. Under this rule, the bank would lose. The result is the same under the other rule: the English (minority) rule gives preference to the assignment of which the debtor was first given notice. Under this rule, since American Fire was the first assignee to give proper notice to the debtor Tompkins-Beckwith, its claim takes precedence over the bank's claim. Boulevard National Bank of Miami v. Air Metal Industries, 176 So. 2d 94 (Fla. 1965). 15. The International Association of Machinists (the union) was the bargaining agent for the employees of Powder Power Tool Corporation. On August 24, the union and the corporation executed a collective bargaining agreement providing for retroactively increased wage rates for the corporation’s employees effective as of the previous April 1. Three employees who were working for Powder before and for several months after April 1, but who were not employed by the corporation when the agreement was executed on August 24, were paid to the time their employment terminated at the old wage scale. The three employees assigned their claims to Springer, who brought this action against the corporation for the extra wages. Decision? Answer: Rights of Third Party Beneficiaries and Assignees. Decision for Springer as assignee of the employees’ claims. The assignment is a valid assignment of the right to payment of money. The employees are intended third party beneficiaries of the contract between the union and Powder Power Tool Corporation. The three employees were employed by Powder Power Tool during a period covered by the contract and thus are intended beneficiaries who are entitled to back wages for the period between April 1, and the time their employment ceased. Springer v. Powder Power Tool Corporation, 348 P.2d 1112 (1960). 16. In March, Adrian Saylor sold government bonds owned exclusively by him and with $6,450 of the proceeds opened a savings account in a bank in the name of “Mr. or Mrs. Adrian M. Saylor.” In June of the following year, Saylor deposited the additional sum of $2,132 of his own money in the account. There were no other deposits and no withdrawals prior to the death of Saylor in May a year later. Is the balance of the account on Saylor’s death payable wholly to Adrian Saylor’s estate, wholly to his widow, or half to each? Answer: Rights of Intended Donee Beneficiary. The entire account is payable to the widow. When Mr. Saylor deposited money, a contract was created between Mr. Saylor and the bank. The account was established and maintained in the names of Mr. Saylor and his wife. In the absence of evidence to the contrary, there is a rebuttable presumption that Mr. Saylor intended to and did make his wife a third party beneficiary of the contract. This presumption may be rebutted by evidence of a contrary intention. In the absence of such evidence, the stated circumstances are consistent with the intent to give her a right of survivorship. Saylor v. Saylor, 389 S.W.2d 904 (Ky. 1965). 17. Linda King was found liable to Charlotte Clement as the result of an automobile accident. King, who was insolvent at the time, declared bankruptcy and directed her attorney, Prestwich, to list Clement as an unsecured creditor. The attorney failed to carry out this duty, and consequently King sued him for legal malpractice. When Clement pursued her judgment against King, she received a written assignment of King’s legal malpractice claim against Prestwich. Clement has attempted to bring the claim, but Prestwich alleges that a claim for legal malpractice is not assignable. Decision? Answer: Assignability. Judgment against Clement. The court held that a claim for legal malpractice is not an asset which may be assigned in a bankruptcy action. Moreover, the assignment of an action for legal malpractice is not permitted for public policy reasons. The breach of duty by an attorney to a client is personal to the client. Clement v. Prestwich, 114 Ill. App. 3d 479, 488 N.E. 2d 1039 (1983). 18. Rensselaer Water Company contracted with the city of Rensselaer to provide water to the city for use in homes, public buildings, industry, and fire hydrants. During the term of the contract a building caught fire. The fire spread to a nearby warehouse and destroyed it and its contents. The water company knew of the fire but failed to supply adequate water pressure at the fire hydrant to extinguish the fire. The warehouse owner sued the water company for failure to fulfill its contract with the city. Can the owner of the warehouse enforce the contract? Explain. Answer: Incidental Third Party Beneficiaries. Judgment against the warehouse owner. The contract between the water company and the city created a duty to the city but not to its residents who are incidental beneficiaries. The court viewed the potential burden of liability of the water company to every inhabitant of the city as too great compared to the rewards of the contract. Payment of water fees would be insufficient consideration for such an extended risk. H.R. Moch, Inc. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 (1928). 19. While under contract to play professional basketball for the Philadelphia 76ers, Billy Cunningham, an outstanding player, negotiated a three-year contract with the Carolina Cougars, another professional basketball team. The contract with the Cougars was to begin at the expiration of the contract with the 76ers. In addition to a signing bonus of $125,000, Cunningham was to receive under the new contract a salary of $100,000 for the first year, $110,000 for the second, and $120,000 for the third. The contract also stated that Cunningham “had special, exceptional and unique knowledge, skill and ability as a basketball player” and that Cunningham therefore agreed the Cougars could enjoin him from playing basketball for any other team for the term of the contract. In addition, the contract contained a clause prohibiting its assignment to another club without Cunningham’s consent. In 1971, the ownership of the Cougars changed, and Cunningham’s contract was assigned to Munchak Corporation, the new owners, without his consent. When Cunningham refused to play for the Cougars, Munchak Corporation sought to enjoin his playing for any other team. Cunningham asserts that his contract was not assignable. Was the contract assignable? Explain. Answer: Rights that Are Assignable. Yes, the contract is assignable. Judgment for Munchak. Generally, the right to performance of a personal service contract requiring special skills and based upon the personal relationship between the parties cannot be assigned without the consent of the party rendering those services. Such contracts may be assigned, however, when the character of the performance and the obligation will not change following the assignment. Although the contract required his special skills as a ballplayer, Cunningham was not obligated to perform any differently for Munchak than for the original owners. Moreover, the contract prohibited its assignment to another club without his consent but did not prohibit assignment to another owner of the same club. Therefore, under these facts, his contract is assignable. Munchak Corp. v. Cunningham 20. Pauline Brown was shot and seriously injured by an unknown assailant in the parking lot of National Supermarkets. Pauline and George Brown brought a negligence action against National, Sentry Security Agency, and T. G. Watkins, a security guard and Sentry employee. The Browns maintained that the defendants have a legal duty to protect National’s customers, both in the store and in the parking lot, and that this duty was breached. The defendants denied this allegation. What will the Brown’s have to prove to prevail? Explain. Answer: Rights of Intended Beneficiary. The Browns will prevail only if they prove that they are third-party beneficiaries to the security contract between National and Sentry. The Browns need to show that National and Sentry entered into a contract whereby Sentry was to provide protection against criminal activities for National and its patrons both inside and outside the store. Depending upon the terms of the contract and the surrounding circumstances, National and Sentry may or may not have assumed a duty to the Browns. If the contract was formed for the primary benefit of such third parties as the Browns, then the Browns are third-party beneficiaries to the agreement. In such a situation, the Browns, as third-party beneficiaries, may sue in tort or contract for any contract breach by Sentry or its employees. Brown v. National Supermarkets. 21. Members of Local 100, Transport Workers Union of America (TWU), engaged in an 11-day mass transit strike that paralyzed the life and commerce of the city of New York. Plaintiffs are engaged in the practice of law as a profession, maintaining offices in Manhattan. Plaintiffs sue both individually and on behalf of all other professional and business entities (the class) that were damaged as a consequence of the defendants’ willful disruption of the service provided by the public transportation system of the City of New York. The law firm sought to recover as a third-party beneficiary of the collective bargaining agreement between the union and New York City. The agreement contains a no-strike clause and states that the TWU agreed to cooperate with the city to provide a safe, efficient, and dependable mass transit system. As a member of the public which depends on the public transit system and which employs dozens of persons who need the public transit system to get to and from work, plaintiffs argue that they are within the class of persons for whose benefit the TWU has promised to provide “dependable transportation service.” Are the members of the class action suit entitled to recover? Explain. Answer: Intended Beneficiary. Judgment for the TWU. A third party beneficiary must have been contemplated by the contracting parties and intended to receive a benefit from the contract. The government agency which negotiated for the transit services contract in this case was under no obligation to provide such service to the public. Therefore, no duty existed on behalf of the union to the general public. 22. On behalf of himself and other similarly situated options investors, Rick Lockwood sued defendant, Standard & Poor’s Corporation (Standard & Poor’s), for breach of contract. Lockwood alleged that he and other options investors suffered lost profits on certain options contracts because Standard & Poor’s failed to correct a closing stock index value. Standard & Poor’s compiles and publishes two composite stock indexes, the “S&P 100” and the “S&P 500” (collectively the S&P indexes). The S&P indexes are weighted indexes of common stocks primarily listed for trading on the New York Stock Exchange (NYSE). Standard & Poor’s licenses its S&P indexes to the Chicago Board Options Exchange (CBOE) to allow the trading of securities options contracts (S&P index options) based on the S&P indexes (the license agreement). S&P index options are settled by the Options Clearing Corporation (OCC). The exercise settlement values for S&P index options are the closing index values for the S&P 100 and S&P 500 stock market indexes as reported by Standard & Poor’s to OCC following the close of trading on the day of exercise. In his complaint, Lockwood alleged that at approximately 4:12 P.M. on Friday, December 15, 1989, the last trading day prior to expiration of the December 1989 S&P index options contracts, the NYSE erroneously reported a closing price for Ford Motor Company common stock. Ford Motor Company was one of the composite stocks in both the S&P 100 and S&P 500. At approximately 4:13 P.M., Standard & Poor’s calculated and disseminated closing index values for the S&P 100 and S&P 500 stock market indexes based on the erroneous price for Ford stock. The NYSE reported a corrected closing price for Ford Motor at approximately 4:18 P.M. Standard & Poor’s corrected the values of the S&P 100 and S&P 500 stock market indexes the following Monday, December 18, 1989. In the meantime, however, OCC automatically settled all expiring S&P index options according to the expiration date of Saturday, December 16, 1989. OCC used the uncorrected closing index values to settle all expiring S&P index options. Due to the error, Lockwood alleges that the S&P 100 index was overstated by 0.15 and he lost $105. Lockwood claimed investors in S&P 500 index options suffered similar losses. Lockwood filed a class action on behalf of “all holders of long put options and all sellers of short call options on the S&P 100 or S&P 500 *** which were settled based on the closing index values for December 15, 1989, as reported by Standard & Poor’s,” claiming that the options holders could recover in contract as third-party beneficiaries of the license agreement between Standard & Poor’s and the CBOE. Are the members of the class action suit entitled to recover? Explain. Answer: Rights of Intended Beneficiary. . No. Lockwood's first allegation is that options investors, via their settlement agent the OCC, are third-party beneficiaries of the license agreement between Standard & Poor's and the CBOE because the license agreement makes OCC "a special recipient" of prompt notice of daily "closing index values." The New York Court of Appeals (who governs the interpretation of the license agreement) has explained that an intended third-party beneficiary may enforce a contract if he is the only party who can recover if the promisor breaches the contract or if the contract language indicates an intention to permit enforcement by the third party. [Citation.] Here, nothing in the express language of the license agreement indicates an intention to create a third-party beneficiary. Indeed, paragraph 15(a) explains that the "Agreement is solely and exclusively between the parties as presently constituted and shall not be assigned or transferred." Even assuming that OCC acts as a settlement agent for options investors, retention of a third party to assist in the performance by the promisee does not mean that such third parties are intended beneficiaries of the main contract. Lockwood's claim that he is the only party who can recover if the promisor breaches the agreement is likewise erroneous. Standard & Poor's and the CBOE are the only contracting parties and the CBOE can easily enforce its rights under the license agreement. In addition, paragraph 12(d) of the agreement precludes recovery of consequential damages, including lost profits, arising out of the license agreement. Thus, the express terms of the agreement indicate that the type of recovery Lockwood seeks was specifically excluded under the license agreement. Regardless, even if Lockwood were an intended third-party beneficiary to the agreement, the license agreement expressly disclaims any guarantee of "the accuracy and/or the completeness of any of the S & P Indexes or any data included therein." And again, the license agreement precludes recovery of consequential damages, including lost profits. 23. Potomac Electric Power Company (PEPCO) is an electric utility serving the metropolitan Washington, D.C., area. Panda-Brandywine, L.P. (Panda) is a “qualified facility” under the Public Utility Regulatory Policies Act of 1978. In August, 1991, PEPCO and Panda entered into a power purchase agreement (PPA) calling for (1) the construction by Panda of a new 230-megawatt cogenerating power plant in Prince George's County, Maryland; (2) connection of the facility to PEPCO's high-voltage transmission system by transmission facilities to be built by Panda but later transferred without cost to PEPCO; and (3) upon commencement of the commercial operation of the plant, for PEPCO to purchase the power generated by that plant for a period of twenty-five years. The plant was built at a cost of $215 million. The PPA is 113 pages in length, is single-spaced, and is both detailed and complex. It gave PEPCO substantial authority to review; influence; and, in some instances, determine important aspects of both the construction and operation of the Panda facility. Section 19.1 of the PPA provided that the agreement was not assignable and not delegable without the written consent of the other party, which consent could not be unreasonably withheld. In 1999, Maryland enacted legislation calling for the restructuring of the electric industry in an effort to promote competition in the generation and delivery of electricity. PEPCO's proposed restructuring involved a complete divestiture of its electric generating assets and its various PPAs, to be accomplished by an auction. The sale to the winning bidder was to be accomplished by an Asset Purchase and Sale Agreement (APSA) that included the PPA to which PEPCO and Panda were parties. Under the APSA the buyer was authorized to take all actions that PEPCO could lawfully take under the PPA with Panda. On June 7, 2000, Southern Energy, Inc. (SEI) was declared the winning bidder. On September 27, 2000, the Public Service Commission (PSC) entered an order declaring, among other things, that the provisions in the APSA did not constitute an assignment or transfer within the meaning of Section 19.1 of the Panda PPA, that PEPCO was not assigning “significant obligations and rights under the PPA,” that Panda would not be harmed by the transaction, and that the APSA did not “fundamentally alter” the contract between Panda and PEPCO. The PSC thus concluded that Panda's consent to the proposed APSA was not required. Panda disagreed. Is Panda correct? Explain. Answer: Delegation of Duties. Panda is correct. Through the APSA, PEPCO effectively and improperly delegated its duties under the PPA to SEI. Public Service Commission of Maryland v. Panda-Brandywine, L.P., 375 Md. 185, 825 A.2d 462 (Court of Appeals of Maryland, 2003). In a bilateral contract, each party ordinarily has both rights and duties—the right to expect performance from the other party to the contract and the duty to perform what the party has agreed to perform. Although both are often the subjects of transfer, the law does distinguish between them, using the term “assignment” to refer to the transfer of contractual rights and the term “delegation” to refer to the transfer of contractual duties. The Restatement (Second) of Contracts permits a contractual right to be assigned unless (1) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, (2) the assignment is forbidden by statute or is inoperative on grounds of public policy, or (3) assignment is validly precluded by contract. Section 19.1 of the PPA very clearly prohibits both the assignment of rights and the delegation of duties of performance, absent express written consent. The issue, then, is not whether PEPCO can make such an assignment or delegation but only whether it has, in fact, done so. The answer to that lies in the effect that the provisions of the APSA have on the contractual relationship between PEPCO and Panda. The APSA involves a great deal more than merely a resale of electricity purchased from Panda and even more than the effective substitution of one customer for another. Much of Panda's control over its own facility and business was subject to the approval and cooperation of PEPCO; indeed, to a large extent, the operation of the facility was, in many important respects, almost a joint venture. In agreeing to that kind of arrangement, Panda necessarily was relying on its perceptions of PEPCO's competence and managerial style. One does not ordinarily choose a business partner by auction or lottery, and there is no evidence that Panda did so in this case. Panda has “a substantial interest in having [PEPCO] perform or control the acts promised.” Under the APSA that control has been delegated irrevocably to SEI—a stranger to Panda—with the ability of SEI to delegate it to others. Virtually none of the rights and responsibilities transferred to SEI under the APSA are permitted under Section 19.1 of the PPA. Thus the APSA constitutes an assignment of rights and obligations under the PPA in contravention of Section 19.1 of that agreement and it is therefore invalid and unenforceable. ANSWERS TO “TAKING SIDES” PROBLEMS Pizza of Gaithersburg and The Pizza Shops (Pizza Shops) contracted with Virginia Coffee Service (Virginia) to install vending machines in each of their restaurants. One year later, the Macke Company (a provider of vending machines) purchased Virginia’s assets, and the vending machine contracts were assigned to Macke. Pizza Shops had dealt with Macke before but had chosen Virginia because they preferred the way it conducted its business. When Pizza Shops attempted to terminate their contracts for vending services, Macke brought suit for damages for breach of contract. (a) What arguments would support Pizza Shop’s termination of the contracts? (b) What arguments would support Macke’s suit for breach of contract? (c) Which side should prevail? Explain. Answer: (a) The Pizza Shop could argue that (i) when they contracted with Virginia, they relied on Virginia’s skill, judgment and reputation; (ii) the nature of the duties is personal in that they have a substantial interest in having Virginia perform the contract; (iii) they were justified in refusing to recognize Virginia’s delegation of its duties to Macke because there was a material difference between the performance of Virginia and that of Macke discharging them from their obligations under the contract. (b) Macke could argue that (i) the contract was not for personal services; (ii) the difference between the service the Pizza Shops received from Virginia and what they expected to get from Macke was not a material change in the performance of obligations under the agreements; and (iii) thus the delegation of duty by Virginia to Macke was permitted under the terms of the contract. (c) Macke should prevail. The Macke Company v. Pizza of Gaithersburg, Inc., 259 Md. 479, 270 A.2d 645 (1970). In the absence of a contrary provision—and there was none here—rights and duties under an executory bilateral contract may be assigned and delegated, subject to the exception that duties under a contract to provide personal services may never be delegated, nor rights be assigned under a contract where choice of person was part of the bargain. A contractual duty may be delegated, and the promisee cannot rescind the contract if the quality of the performance remains materially the same. Here, the original contract was for the installation, maintenance, and stocking of a vending machine. It involved either a license granted to Virginia by the Pizza Shops or a lease of a portion of their premises. It did not involve a contract for personal services. Since the quality of performance remained substantially the same under Macke, Virginia’s delegation of its duties was entirely permissible and enforceable. Contractual duties, unless otherwise stated, are delegable if the quality of performance remains materially the same. Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637