CH-17-19 Performance, Breach, and Discharge – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 17 to 19 Chapter 17 PERFORMANCE, BREACH AND DISCHARGE ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. A–1 Roofing Co. entered into a written contract with Jaffe to put a new roof on the latter’s residence for $1,800, using a specified type of roofing, and to complete the job without unreasonable delay. A–1 undertook the work within a week thereafter, but when all the roofing material was at the site and the labor 50 percent completed, the premises were totally destroyed by fire caused by lightning. A–1 submitted a bill to Jaffe for $1,200 for materials furnished and labor performed up to the time of the destruction of the premises. Jaffe refused to pay the bill and A–1 now seeks payment from Jaffe. Should A-1 prevail? Explain. Answer: Impossibility. Yes. Decision for A-1 Roofing Co. As a general rule, and in the absence of a provision to the contrary in the contract, if the act to be performed is necessarily dependent upon the continued existence of a specific thing, its destruction before the time of performance, without the fault of the promisor, will excuse nonperformance of the contract, unless such destruction could have been reasonably anticipated. The rule is based on an implied condition of the continued existence of a particular thing. However, the out-of-pocket expenses present a question as to whether restitution is appropriate. In the United States, courts have generally taken the view that when a contract is discharged by impossibility or frustration the parties must make restitution for the benefits conferred upon them. Sometimes, the concept of "benefit" is stretched to include expenses incurred in preparation for performance. There is increasing recognition that restitution, when employed to unwind a contract that cannot be performed, is concerned with equitable readjustment of the gains and losses sustained by the parties and not merely the redressing of unjust enrichment. 2. By contract dated January 5, Rebecca agreed to sell to Nancy, and Nancy agreed to buy from Rebecca, a certain parcel of land then zoned commercial. The specific intent of Nancy, which was known to Rebecca, was to erect a manufacturing plant on the land; and the contract stated that the agreement was conditioned upon Nancy’s ability to construct such a plant upon the land. The closing date for the transaction was set for April 1. On February 15, the city council rezoned the land from commercial to residential, which precluded the erection of the plant. As the closing date drew near, Nancy made it known to Rebecca that she did not intend to go through with the purchase because the land could no longer be used as intended. On April 1, Rebecca tendered the deed to Nancy, who refused to pay Rebecca the agreed purchase price. Rebecca brought an action against Nancy for breach of their contract. Can Rebecca enforce the contract? Answer: Impossibility. No, Rebecca cannot enforce the contract. Decision for Nancy. Since both parties entered into the sales contract with the purpose of erecting a manufacturing plant and the rezoning by the city council from commercial to residential thereby frustrated the expressed intent, the parties were discharged from their obligations under the contract. 3. The Perfection Produce Company entered into a written contract with Hiram Hodges for the purchase of 300 tons of potatoes to be grown on Hodge’s farm in Maine at a stipulated price per ton. Although the land would ordinarily produce 1,000 tons and the planting and cultivation were properly done, Hodges was able to deliver only 100 tons because an unprecedented drought caused a partial crop failure. Perfection accepted the 100 tons but paid only 80 percent of the stipulated price per ton. Hodges sued the produce company to recover the unpaid balance of the agreed price for the one hundred tons of potatoes accepted by Perfection. Perfection counterclaimed against Hodges for his failure to deliver the remaining two hundred tons. Who will prevail? Why? Answer: Impossibility. Decision in favor of Hodges upon (a) his claim for the unpaid balance and (b) the counterclaim of the Perfection Produce Company. Impossibility of performance may arise from physical causes and excuses performance and discharges both parties from their contractual duties. The impossibility is objective because only potatoes grown upon a particular farm may be delivered under the contract. The failure of the crop to produce more than 100 tons of potatoes absolved Hodges from liability for his failure to deliver to the Perfection Produce Company any additional potatoes. Although not required to accept the 100 tons of potatatoes, Perfection is liable for the contract price of the goods accepted. Hodges is, therefore, entitled to the damages claimed by it. Section 265 of the Restatement, Second, Contracts, pertinently provides Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. 4. On November 23, Sylvia agreed to sell to Barnett her Buick automobile for $7,000, delivery and payment to be made on December 1. On November 26, Barnett informed Sylvia that he wished to rescind the contract and would pay Sylvia $350 if Sylvia agreed. She agreed and took the $350 cash. On December 1, Barnett tendered to Sylvia $6,650 and demanded that she deliver the automobile. Sylvia refused and Barnett initiated a lawsuit. May Barnett enforce the original contract? Answer: Accord and Satisfaction. No, the original contract may not be enforced. Decision for Sylvia. The parties have entered into a valid accord and satisfaction which discharges the parties from their performance. Barnett, after entering into this accord and satisfaction, cannot now unilaterally reinstate the original contract. Section 281 of the Restatement, Second, Contracts, provides as follows: (1) An accord is a contract under which an obligee promises to accept a stated performance in satisfaction of the obligor's existing duty. Performance of the accord discharges the original duty. 5. Webster, Inc., dealt in automobile accessories at wholesale. Although it manufactured a few items in its own factory, among them windshield wipers, Webster purchased most of its inventory from a large number of other manufacturers. In January, Webster entered into a written contract to sell Hunter 2,000 windshield wipers for $4,900, delivery to be made June 1. In April, Webster’s factory burned to the ground and Webster failed to make delivery on June 1. Hunter, forced to buy windshield wipers elsewhere at a higher price, is now trying to recover damages from Webster. Will Hunter be successful in its claim? Answer: Impossibility. Yes. Decision for Hunter. This is not a case of impossibility of performance by Webster, Inc. Although Webster, Inc. may have expected to manufacture the windshield wipers in his factory the agreement did not require him to do so. This is not a case of commercial impracticability because the nonoccurrence of the subsequent event (the factory being in existence) was not a “basic assumption” made by both parties when entering into the contract. Windshield wipers purchased from other manufacturers would have served the purpose and were available since Hunter was able to buy them elsewhere. Had Webster, Inc. instead specifically contracted to manufacture the wipers in his factory and to sell them to Hunter, who contracted to buy, and thereafter Webster's factory was destroyed by fire, without his fault, the contract would be discharged. There would have been destruction of the specific means of performance, rendering performance impossible. In the problem, however, the fact that Webster's factory burned to the ground did not constitute destruction of the specific means or source of performance. 6. Erwick Construction Company contracted to build a house for Charles. The specifications called for the use of Karlene Pipe for all plumbing. Erwick, nevertheless, got a better price on Boynton Pipe and substituted the equally good Boynton Pipe for Karlene Pipe. Charles’s inspection revealed the change, and Charles now refuses to make the final payment. The contract price was for $200,000, and the final payment is $20,000. Erwick now brings suit seeking the $20,000. Will Erwick succeed in its claim? Answer: Material Breach. Judgment for Erwick Construction Company. Although Erwick deviated from the contract specifications, its conduct would be evaluated as to whether it constituted a material breach. The critical question is whether Charles received substantially what he had bargained for. Since the substitution of the comparable (“equally good”) pipe, which is a commodity, did not qualitatively alter the value of the house, there is no material breach. Charles is not entitled to a discharge of his obligations to perform the contract. Charles may recover any damages he sustained because of the substitution, but it seems unlikely there will have been any. 7. Green owed White $3,500, which was due and payable on June 1. White owed Brown $3,500, which was due and payable on August 1. On May 25, White received a letter signed by Green stating, “If you will cancel my debt to you, in the amount of $3,500, I will pay, on the due date, the debt you owe Brown, in the amount of $3,500.” On May 28, Green received a letter signed by White stating, “I received your letter and agree to the proposals recited therein. You may consider your debt to me canceled as of the date of this letter.” On June 1, White, needing money to pay his income taxes, made a demand upon Green to pay him the $3,500 due on that date. Is Green obligated to pay the money demanded by White? Answer: Substituted Contracts. White is not entitled to collect the money from Green because there has been a valid substitution of performance. Restatement, Second, Contracts, Section 278(1). White need not have accepted Green's offer, but upon choosing to accept it Green became discharged in accordance with the terms of the offer. Section 278, comment a. 8. By written contract, Ames agreed to build a house on Bowen’s lot for $165,000, commencing within ninety days of the date of the contract. Prior to the date for beginning construction, Ames informed Bowen that he was repudiating the contract and would not perform. Bowen refused to accept the repudiation and demanded fulfillment of the contract. Eighty days after the date of the contract, Bowen entered into a new contract with Curd for $162,000. The next day, without knowledge or notice of Bowen’s contract with Curd, Ames began construction. Bowen ordered Ames from the premises and refused to allow him to continue. Will Ames be able to collect damages from Bowen? Explain. Answer: Anticipatory Repudiation. Judgment for Bowen. An anticipatory repudiation constitutes a breach that discharges the nonrepudiating party’s duty to perform and permits her to bring suit immediately. Nonetheless, the nonbreaching party may wait until the time the performance is due, to see whether the repudiator will retract his repudiation and perform his contractual duties. A repudiator may retract the repudiation provided the retraction comes to the attention of the injured party before she materially changes her position in reliance on the repudiation or indicates to the other party that she considers the repudiation to be final. If the retraction is effective and the repudiator does perform, then there is a discharge by performance; if the repudiator does not perform, there is a material breach. Accordingly, Bowen will prevail since he materially changed his position in that he hired Curd to construct the house. 9. Judy agreed in writing to work for Northern Enterprises, Inc., for three years as superintendent of Northern’s manufacturing establishment and to devote herself entirely to the business, giving it her whole time, attention, and skill, for which she was to receive $72,000 per annum in monthly installments of $6,000. Judy worked and was paid for the first twelve months, when, through no fault of her own or Northern’s, she was arrested and imprisoned for one month. It became imperative for Northern to employ another, and it treated the contract with Judy as breached and abandoned, refusing to permit Judy to resume work on her release from jail. What rights, if any, does Judy have under the contract? Answer: Material Breach. None. Judy's arrest and imprisonment constituted a substantial breach of the contract, which justified Northern Enterprises, Inc., the employer, in treating the contract as abandoned and in employing another person in her place. In order to recover on the contract without full performance upon the ground that her employer refused to allow her to serve out her time, she must allege and prove her ability, readiness and an offer to perform. This, Judy cannot do, and she cannot recover beyond the services actually rendered. The fact that Judy was unable to perform her part of the contract by reason of causes which she could neither foresee nor control does not aid Judy. Where neither party is at fault, the absence of the employee from her employment, irrespective of the cause, for an unreasonable length of time, will authorize the employer in treating the contract as abandoned. Here, the time was unreasonable. Restatement, Second, Sections 265, 267. 10. The Park Plaza Hotel awarded its valet and laundry concession to Larson for a three-year term. The contract contained the following provision: “It is distinctly understood and agreed that the services to be rendered by Larson shall meet with the approval of the Park Plaza Hotel, which shall be the sole judge of the sufficiency and propriety of the services.” After seven months, the hotel gave a month’s notice to discontinue services based on the failure of the services to meet its approval. Larson brought an action against the hotel, alleging that its dissatisfaction was unreasonable. The hotel defended on the ground that subjective or personal satisfaction may be the sole justification for termination of the contract. Who is correct? Explain. Answer: Condition Precedent. Decision for Park Plaza Hotel on the assumption that its dissatisfaction with the services of Larson, while not reasonable, was nevertheless in good faith. The question is whether the test of dissatisfaction in a contract such as this, where the promise to perform is made expressly conditional on approval or satisfaction, is objective or subjective. If objective, the dissatisfaction must be reasonable. If subjective, it need only be genuine and in good faith and is not required to meet the standard of a reasonable person. This contract specifically provided that the services must meet the approval of the Hotel, who solely was to be the judge of its adequacy, and therefore was subjective. 11. Schlosser entered into an agreement to purchase a cooperative apartment from Flynn Company. The written agreement contained the following provision: This entire agreement is conditioned on Purchaser’s being approved for occupancy by the board of directors of the Cooperative. In the event approval of the Purchaser shall be denied, this agreement shall thereafter be of no further force or effect. When Schlosser unilaterally revoked her “offer,” Flynn sued for breach of contract. Schlosser claims the approval provision was a condition precedent to the existence of a binding contract and, thus, she was free to revoke. Decision? Answer: Condition Precedent. Judgment for Flynn Company. The critical question in this case is the legal effect of the contract provision. In this case the contract provision is a condition precedent to the duty to perform, but not a condition precedent to the creation of the contract since the agreement was formed through the mutual assent of the parties. Their intention was clear as evidenced by the writing. The contract to purchase was created without reliance on a prior conditional approval. Schlosser must perform the contract unless the required approval is denied. 12. Jacobs, owner of a farm, entered into a contract with Earl Walker in which Walker agreed to paint the buildings on the farm. As authorized by Jacobs, Walker acquired the paint from Jones with the bill to be sent to Jacobs. Before the work was completed, Jacobs without good cause ordered Walker to stop. Walker made offers to complete the job, but Jacobs declined to permit Walker to fulfill his contract. Jacobs refused to pay Jones for the paint Walker had acquired for the job. Explain whether Jones and Walker would be successful in an action against Jacobs for breach of contract? Answer: Prevention of Performance. Judgment for Jones and Walker. By her order to Walker to cease work and by refusing to permit either Walker or Jones to complete the work, which they were willing to do, Jacobs breached the contract and excused further performance on the part of Walker. Under the circumstances the law implies a promise on the one party not to prevent, hinder, or delay the performance of the other party. Under the facts, Walker acted as Jacob’s authorized agent in ordering the paint from Jones. Therefore, Jones was entitled to be paid by Jacobs for the value of the paint furnished and used upon Jacobs's barns and house. Walker was entitled to recover from Jacobs for the reasonable value of the work completed by Walker in accordance with the contract. Jacobs v. Jones, 161 Colo. 505, 423 P.2d 321 (1967). 13. On August 20, Hildebrand entered into a written contract with the city of Douglasville whereby he was to serve as community development project engineer for three years at an “annual fee” of $19,000. This salary figure could be changed without affecting the other terms of the contract. One of the provisions for termination of the contract was written notice by either party to the other at any time at least ninety days prior to the intended date of termination. The contract listed a substantial number of services and duties Hildebrand was to perform for the city; among the lesser duties were (a) keeping the community development director (Hildebrand’s supervisor) informed at all times of his whereabouts and how he could be contacted, and (b) attending meetings at which his presence was requested. Two years later, on September 20, by which time Hildebrand’s annual fee had risen to $1,915.83 per month, the city fired Hildebrand effective immediately, citing “certain material breaches . . . of the . . . agreement.” The city specifically charged that he did not attend the necessary meetings although requested to do so and seldom if ever kept his supervisor informed of his whereabouts and how he could be contacted. Will Hildebrand prevail in a suit against the mayor and city for damages in the amount of $5,747.49 because of the city’s failure to give him ninety days’ notice prior to termination? Answer: Substantial Performance. Yes, Hildebrand will prevail. The only way the city could repudiate the contract without giving proper notice is in response to a material breach or substantial failure to perform on the part of Hildebrand. An incidental breach, or one that does not defeat the object of the parties in forming the contract, does not warrant a termination. In order to trigger the right to terminate, "the act failed to be performed must go to the root of the contract." The two specific charges made against Hildebrand by the city neither alone nor collectively constitute substantial and fundamental noncompliance. Since Hildebrand substantially performed his duties under the contract, the city was obliged to give him ninety days' notice of termination. Hildebrand may recover damages for his actual contractual loss of three months' compensation. Mayor & City of Douglasville v. Hildebrand, 333 S.E.2d 674 (Ga. Ct. App. 1985). 14. Walker & Co. contracted to provide a sign for Harrison to place above his dry cleaning business. According to the contract, Harrison would lease the sign from Walker, making monthly payments for thirty-six months. In return, Walker agreed to maintain and service the sign at its own expense. Walker installed the sign in July, and Harrison made the first rental payment. Shortly thereafter, someone hit the sign with a tomato. Harrison also claims he discovered rust on its chrome and little spiderwebs in its corners. Harrison repeatedly called Walker for the maintenance work promised under the contract, but Walker did not respond immediately. Harrison then notified Walker that, due to Walker’s failure to perform the maintenance services, he held Walker in material breach of the contract. A week later, Walker sent out a crew, which did all of the requested maintenance services. Has Walker committed a material breach of contract? Explain. Answer: Material Breach. No. Judgment for Walker & Co. Walker did send a service crew a week after Harrison's telegram. A failure to perform a promise promptly is a material breach if time is of the essence; that is, if the parties have clearly indicated that a failure to perform by a stated time is material; otherwise, the aggrieved party may recover damages only for loss caused by the delay. While the delay may have been irritating to Harrison it provided Walker with the essence of what he contracted for and was not sufficient to constitute a material breach on Walker's part. Walker & Co. v. Harrison, 347 Mich. 630, 81 N.W. 2d 352 (1957). 15. Barta entered into a written contract to buy the K&K Pharmacy, located in a local shopping center. Included in the contract was a provision stating that “this Agreement shall be contingent upon Buyer’s ability to obtain a new lease from Landlord for the premises presently occupied by Seller. In the event Buyer is unable to obtain a lease satisfactory to Buyer, this Agreement shall be null and void.” Barta planned to sell “high-traffic” grocery items, such as bread, milk, and coffee, in order to attract customers to his drugstore. A grocery store in the shopping center, however, already held the exclusive right to sell grocery items. Barta, therefore, could not obtain a leasing agreement meeting his approval. Barta refused to close the sale. In a suit by K&K Pharmacy against Barta for breach of contract, who will prevail? Explain. Answer: Condition Precedent. Barta will prevail. Barta's obligation to perform under the contract is dependent upon a condition precedent, that is, an event which must first take place. Here, Barta was contractually bound to purchase K&K Pharmacy only if he first obtained a leasing agreement that was satisfactory to him. Note that according to these facts, Barta need only be honestly dissatisfied with the lease agreement. Assuming good faith, unless expressly provided for there is no requirement that Barta's dissatisfaction be reasonable. K&K Pharmacy, Inc. v. Barta, 222 Neb. 215, 382 N.W.2d 363 (1986). 16. Victor Packing Co. (Victor) contracted to supply Sun Maid Raisin Growers 1,800 tons of raisins from the current year’s crop. After delivering 1,190 tons of raisins by August, Victor refused to supply any more. Although Victor had until the end of the crop season to ship the remaining 610 tons of raisins, Sun Maid treated Victor’s repeated refusals to ship any more raisins as a repudiation of the contract. In order to prevent breaching its own contracts, Sun Maid went into the marketplace to “cover” and bought the raisins needed. Unfortunately, between the time Victor refused delivery and Sun Maid entered the market, disastrous rains had caused the price of raisins to skyrocket. May Sun Maid recover from Victor the difference between the contract price and the market price before the end of the current crop year? Answer: Anticipatory Repudiation. Sun Maid may bring suit immediately, and treat the anticipatory repudiation as if it were a breach. Sun Maid can protect itself by covering, and may recover from Victor the difference between the cost of cover (market price) and the contract price, plus incidental and consequential damages, less expenses saved due to the breach. Alternatively, Sun Maid could wait until the time for performance passes, and the anticipatory repudiation becomes in fact a breach, and then sue for damages. However, Sun Maid would then not be entitled to consequential damages it could have prevented by effectuating cover. See text under Remedies of the Buyer-Cover. Sun Maid Raisin Growers v. Victor Packing Co., 146 Cal.App.3d 787, 194 CalRptr. 612 (Cal.App. 5 Dist. 1983). 17. In May, Watts was awarded a construction contract, based on its low bid, by the Cullman County Commission. The contract provided that it would not become effective until approved by the state director of the Farmers Home Administration (now part of the U.S. Department of Agriculture Rural Development Office). In September, construction still had not been authorized and Watts wrote to the County Commission requesting a 5 percent price increase to reflect seasonal and inflationary price increases. The County Commission countered with an offer of 3.5 percent. Watts then wrote the commission, insisting on a 5 percent increase and stating that if this was not agreeable, it was withdrawing its original bid. The commission obtained another company to perform the project, and on October 14, informed Watts that it had accepted the withdrawal of the bid. Watts sued for breach of contract. Explain whether Watts will prevail and why or why not. Answer: Mutual Rescission. No, Watts will not prevail. Judgment for Cullman County. Watt's letter withdrawing his bid and the commission's letter accepting that withdrawal effectively rescinded any contract that might have existed. Parties to a contract may by mutual consent and without other consideration rescind the contract. Once the contract between Watts and Cullman County had been rescinded, Watts cannot recover damages for breach of contract. Watts Construction Company v. Cullman County, 382 So.2d 520 (Ala. S.C., 1980). 18. K & G Construction Co. was the owner of and the general contractor for a housing subdivision project. Harris contracted with the company to do excavating and earth-moving work on the project. Certain provisions of the contract stated that (a) K & G was to make monthly progress payments to Harris; (b) no such payments were to be made until Harris obtained liability insurance; and (c) all of Harris’s work on the project must be performed in a workmanlike manner. On August 9, a bulldozer operator, working for Harris, drove too close to one of K & G’s houses, causing the collapse of a wall and other damage. When Harris and his insurance carrier denied liability and refused to pay for the damage, K & G refused to make the August monthly progress payment. Harris, nonetheless, continued to work on the project until mid-September, when the excavator ceased its operations due to K & G’s refusal to make the progress payment. K & G had another excavator finish the job at an added cost of 1,$450. It then sued Harris for the bulldozer damage, alleging negligence, and for the $1,450 damages for breach of contract. Harris claims that K & G defaulted first, having no legal right to refuse the August progress payment. Did K & G default first? Explain. Answer: Concurrent Conditions/Material Breach. No, K & G did not default. Judgment for K & G Construction Co. Contractual obligations are either independent of each other or mutually dependent. They are independent if the parties intend that performance by each of them is in no way conditioned upon performance by the other. Failure of one party to perform its independent promise does not excuse the other's nonperformance. On the other hand, promises are concurrent conditions and mutually dependent if the parties intend performance by one to be conditioned upon performance by the other. A material breach of a mutually dependent promise by one party excuses the other's performance of his contractual obligations. The modern rule is that there is a presumption that mutual promises are concurrent and dependent, and are to be so regarded, whenever possible. Here, the bulldozer operator's negligent damage to the house was a material breach of Harris's promise to perform in a workmanlike manner. Under a reasonable interpretation of the circumstances and the contract, the progress payment was conditioned upon Harris's nonnegligent, workmanlike performance. Hence, the promises are concurrent and mutually dependent. K & G then had a right to refuse making the progress payment without canceling the contract, based upon Harris's negligence. 19. Mountain Restaurant Corporation (Mountain) leased commercial space in the ParkCenter Mall to operate a restaurant called Zac’s Grill. The lease specified that the lessee shall “at all times have a non exclusive and non revocable right, together with the other tenants and occupants of . . . the shopping center, to use the parking area . . . for itself, its customers and employees.”. Zac’s Grill was to be a fast-food restaurant where tables were anticipated to “turn over” twice during lunch. Zac’s operated successfully until parking close to the restaurant became restricted. Two other restaurants opened and began competing for parking spaces, and the parking lot would become full between 12:00 and 12:30 P.M. Parking, however, was always available at other areas of the mall. Business declined for Zac’s, which fell behind on the rent due to ParkCenter until finally the restaurant closed. Mountain claims that it was discharged from its obligations under the lease because of material breach. Is Mountain correct? Explain. Answer: Breach/Substantial Performance. No, Mountain was not discharged from its obligations. Judgment for ParkCenter Mall. Mountain Restaurant argues that the location of parking was very important because in a lunch-oriented business customers will not walk very far from their cars to a restaurant. The specific location of parking for Mountain Restaurant's customers was not stated in the lease. Rather, the relevant lease provision, Article V(A), provided that the lessee shall "at all times have a non exclusive and non revocable right, together with the other tenants and occupants of . . . the shopping center, to use the parking area . . . for itself, its customers and employees." Although Mountain Restaurant may have believed that it was extremely important to its business to have parking available right next to its location, the lease did not so provide. Thus, the fact that spaces in close proximity to the restaurant were generally not available during the lunch hour does not provide support for the claim that there was a material breach of the lease because the lease simply did not provide that parking in that area would be reserved for Mountain Restaurant's customers. 20. In late 2013 or early 2014, the plaintiff, Lan England, agreed to sell 258,363 shares of stock to the defendant, Eugene Horbach, for $2.75 per share, for a total price of $710,498.25. Although the purchase money was to be paid in the first quarter of 2014, the defendant made periodic payments on the stock at least through September 2014. The parties met in May of 2015 to finalize the transaction. At this time, the plaintiff believed that the defendant owed at least $25,000 of the original purchase price. The defendant did not dispute that amount. The parties then reached a second agreement whereby the defendant agreed to pay to the plaintiff an additional $25,000 and to hold in trust 2 percent of the stock for the plaintiff. In return, the plaintiff agreed to transfer the stock and to forego his right to sue the defendant for breach of the original agreement. In December 2016, the plaintiff made a demand for the 2 percent stock, but the defendant refused, contending that the 2 percent agreement was meant only to secure his payment of the additional $25,000. The plaintiff sued for breach of the 2 percent agreement. Prior to trial, the defendant discovered additional business records documenting that he had, before entering into the second agreement, actually overpaid the plaintiff for the purchase of the stock. The defendant asserts the plaintiff could not enforce the second agreement as an accord and satisfaction because (a) it was not supported by consideration, and (b) it was based upon a mutual mistake that the defendant owed additional money on the original agreement. Is the defendant correct in his assertions? Explain. Answer: Accord and Satisfaction. No, the defendant is not correct. An accord and satisfaction arises when the parties to a contract mutually agree that a performance different than that required by the original contract will be made in substitution of the performance originally agreed upon and that the substituted agreement calling for a different performance will discharge the obligation created under the original agreement. The elements of an accord and satisfaction include: (1) a bona fide dispute or uncertainty over an unliquidated amount; (2) a payment tendered in full settlement of the entire dispute; and (3) an acceptance of the payment. In addition, for an accord and satisfaction to have any legal effect, the elements of a contract, including consideration, must be present. It is clear that consideration for an accord may consist of a compromise of a bona fide dispute or uncertainty as to the amount actually owing. Moreover, it is not necessary for the dispute to be well-founded so long as it is in good faith. Thus, if the parties in good faith believe there is a disputed or uncertain claim, mere settlement of the amount due and acceptance of that amount constitutes the consideration necessary to support the contract. At the meeting in May, the parties both believed that there was a dispute as to the amount that had been paid. Although unfounded, the plaintiff asserted in good faith that he believed additional money was still owing. The defendant accepted this representation without dispute and accepted the plaintiff’s settlement proposal. Therefore, the settlement agreement is supported by consideration. The defendant is also not correct in his assertion that the accord and satisfaction is unenforceable because of a mutual mistake of fact. A mutual mistake occurs when both parties, at the time of contracting, share a misconception about a basic assumption or vital fact upon which they based their bargain. It is true that, when the settlement agreement was made, neither party was aware that defendant had already paid the original purchase agreement in full. However, this mistake did not go to the terms of the parties accord; rather, it merely demonstrates their accord was indeed a compromise of a bona fide dispute which was not necessarily well-founded, but was made in good faith. The accord and satisfaction accurately reflects the intent of the parties at the time it was entered. Therefore, as there was no mistake regarding a basic assumption underlying the accord and satisfaction, it is enforceable. 21. An artist once produced a painting now called The Plains of Meudon. For a while, the parties in this case thought that the artist was Theodore Rousseau, a prominent member of the Barbizon school, and that the painting was quite valuable. With this idea in mind, the Kohlers consigned the painting to Leslie Hindman, Inc., (Hindman), an auction house. Among other things, the consignment agreement between the Kohlers and Hindman defined the scope of Hindman, Inc.’s authority as agent. First, Hindman was obliged to sell the painting according to the conditions of sale spelled out in the auction catalog. Those conditions provided that neither the consignors nor Hindman made any warranties of authenticity. Second, the consignment agreement gave Hindman extensive and exclusive discretionary authority to rescind sales if in its “sole discretion” it determined that the sale subjected the company or the Kohlers to any liability under a warranty of authenticity. Despite having some doubts about its authenticity, Thune was still interested in the painting but wanted to have it authenticated before committing to its purchase. Unable to obtain an authoritative opinion about its authenticity before the auction, Leslie Hindman and Thune made a verbal agreement that Thune could return the painting within approximately thirty days of the auction if he was the successful bidder and if an expert then determined that Rousseau had not painted it. Neither Leslie Hindman nor anyone else at Hindman told the Kohlers about the questions concerning the painting or about the side agreement between Thune and Hindman. At the auction, Thune prevailed in the bidding with a high bid of $90,000, and he took possession of the painting without paying. He then sent it to an expert in Paris who decided that it was not a Rousseau. Thune returned the painting to Hindman within the agreed upon period. Explain whether the Kohlers would be successful in a lawsuit against either Hindman or Thune. Answer: Anticipatory Breach. The district court ruled that Hindman, Inc. and Thune were entitled to judgment on all of the Kohlers’ claims against them. Indeed, all of the Kohlers’ claims depend upon how the consignment agreement defined the scope of Hindman, Inc.’s authority as the Kohlers’ agent. If Hindman, Inc. acted at all times within its authority, the Kohlers cannot prevail on any of their claims. The district court focused on Paragraph 14 of the consignment agreement, which authorized Hindman, Inc. to rescind a sale when the company, in its “sole discretion,” determined that it or its consignor was subject to liability under a warranty of authenticity. The district court concluded that this grant of discretion allowed Hindman, Inc. to rescind a sale whenever it perceived the threat of such liability, notwithstanding the auction catalog’s emphatic disclaimers. Hindman, Inc. had the power to rescind or to make a conditional promise to rescind in side agreements with prospective buyers. Ultimately, for lack of objective criteria, we must conclude that Hindman, Inc.’s exercise of its authority is bounded only by its satisfaction as limited, of course, by good faith. Under the side agreement, Hindman, Inc. maintained Thune’s incentive to bid as if the painting were really a Rousseau; therefore it maximized the chances of a lucrative result for the auction. This was indeed an act of good faith, and it was made within the limits of Hindman, Inc.’s authority under the consignment agreement. The district court correctly ruled that Hindman, Inc. had not breached the consignment agreement. ANSWERS TO “TAKING SIDES” PROBLEMS Associated Builders, Inc., provided labor and materials to William M. Coggins and Benjamin W. Coggins, doing business as Ben & Bill’s Chocolate Emporium, to complete a structure on Main Street in Bar Harbor, Maine. After a dispute arose regarding compensation, Associated and the Cogginses executed an agreement stating that there existed an outstanding balance of $70,000 and setting forth the following terms of repayment: It is agreed that, two payments will be made by the Cogginses to Associated Builders as follows: Twenty Five Thousand Dollars ($25,000.00) on or before June 1, 2015, and Twenty Five Thousand Dollars ($25,000.00) on or before June 1, 2016. No interest will be charged or paid providing payments are made as agreed. If the payments are not made as agreed then interest shall accrue at 10% per annum figured from the date of default. It is further agreed that Associated Builders will forfeit the balance of Twenty Thousand Dollars and No Cents ($20,000.00) providing the above payments are made as agreed. The Cogginses made their first payment in accordance with the agreement. The second payment, however, was delivered three days late on June 4, 2013. Claiming a breach of the contract, Associated contended that the remainder of the original balance of $20,000, plus interest and cost, were now due. (a) What arguments would support Associated’s claim for $20,000? (b) What arguments would support the claim by the Cogginses that they were not liable for $20,000? (c) For what damages, if any, are the Cogginses liable? Explain. Answer: (a) Associated could argue that (i) time was of the essence; (ii) the late payment was a material breach of the accord; (iii) it could recover damages for either breach of the accord or the original contract; and (iii) thus it was entitled to $20,000 plus interest and costs. (b) The Cogginses could argue that (i) time was not of the essence; (ii) the three-day late payment was not a material breach of the accord; (iii) they were liable only for breach of the accord and not liable for breach of the original contract; and (iii) thus they at most were liable for interest for three days at the rate of 10% per annum. (c) Judgment for the Cogginses. Associated Builders, Inc. v. William M. Coggins et al., Supreme Judicial Court of Maine, 1999, 1999 ME 12, 722 A.2d 1278. “An accord ‘is a contract under which an obligee promises to accept a substituted performance in future satisfaction of the obligor’s duty.’” Settlement of a disputed claim is sufficient consideration for an accord and satisfaction. The above agreement was an accord. Satisfaction is the execution or performance of the accord. If the obligor breaches the accord, the obligee may enforce either the original duty or any duty pursuant to the accord. The obligor’s breach of the accord, however, must be material. The question, therefore, was whether the Cogginses’ late payment constituted a material breach of the accord. A material breach is a nonperformance of a duty that is so material and important as to justify the injured party in regarding the whole transaction as at an end. The Cogginses’ payment to Associated after a three-day delay was not a material breach and, therefore, satisfied the accord. By receiving the second and final payment of $25,000, Associated was not deprived of the benefit that it reasonably expected. Further, the Cogginses’ late payment was not made in bad faith. Finally, neither the purpose of the accord nor the language of the accord suggests that time was of the essence. Because the late payment was not a material breach of the accord, the Cogginses have complied with the agreement relieving them of further liability to Associated. Chapter 18 CONTRACT REMEDIES ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Edward, a candy manufacturer, contracted to buy 1,000 barrels of sugar from Marcia. Marcia failed to deliver and Edward was unable to buy any sugar in the market. As a direct consequence he was unable to make candies to fulfill unusually lucrative contracts for the Christmas trade. (a) What damages is Edward entitled to recover? (b) Would it make any difference if Marcia had been told by Edward that he wanted the sugar to make candies for the Christmas trade and that he had accepted lucrative contracts for delivery for the Christmas trade? Answer: Foreseeability of Damages. (a) Edward is entitled to recover monetary damages in compensation for such losses as are the usual, probable, ordinarily-to-be expected consequences of the breach itself. Hadley v. Baxendale, 9 Exchange 341 (1854). Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. Restatement, Second, Contracts, Section 351(1).Accordingly, Edward may recover the lost ordinary profits he would have made from the candy he could have produced from the 1,000 barrels of sugar. It is unlikely he could recover additional damages for the unusually large profits he would have made from the lucrative contracts for the Christmas trade. (b) Yes, it would make a difference. Edward would be entitled to recover damages for such losses, though unusual, as may fairly and reasonably be supposed to have been within the contemplation of the parties when they made the contract, provided such losses are neither uncertain in their nature nor remote as to their cause. Hadley v. Baxendale. Loss may be foreseeable as a probable result of a breach because it follows from the breach as a result of special circumstances, beyond the ordinary course of events, if the party in breach had reason to know of these circumstances. Restatement, Second, Contracts, Sect. 351 (2). 2. Daniel agreed that he would erect an apartment building for Steven for $12 million, and that Daniel would suffer a deduction of $12,000 per day for every day of delay. Daniel was twenty days late in finishing the job, losing ten days because of a strike and ten days because the material suppliers were late in furnishing him with materials. Daniel claims that he is entitled to payment in full (a) because the agreement as to $12,000 a day is a penalty and (b) because Steven has not shown that he has sustained any damage. Discuss each contention and decide. Answer: Liquidated Damages. (a) The contention that the agreement as to $12,000 a day is a penalty is not tenable. The provision is a modest liquidated damages provision. The agreed amount of damages is reasonable, considering the cost of the apartment building and that actual damages are not readily ascertainable. Restatement, Second, Contracts, Section 356. (b) Steven does not have to prove damages. One of the principal purposes of a liquidated damages provision is to obviate the necessity of proving damages. 3. Sharon contracted with Jane, a shirtmaker, for one thousand shirts for men. Jane manufactured and delivered five hundred shirts, which were paid for by Sharon. At the same time, Sharon notified Jane that she could not use or dispose of the other five hundred shirts and directed Jane not to manufacture any more under the contract. Nevertheless, Jane proceeded to make up the other five hundred shirts and tendered them to Sharon. Sharon refused to accept the shirts, and Jane then sued for the purchase price. Is she entitled to the purchase price? If not, is she entitled to any damages? Explain. Answer: Mitigation of Damages. Jane may not recover the purchase price, but she is entitled to recover such damages as she sustained not enhanced by her act in manufacturing the second lot of 500 shirts. When Sharon notified Jane that she could not use or dispose of the other 500 shirts and directed Jane to discontinue manufacturing them under the contract, Jane should have sought to minimize the damages. If completing manufacture mitigated damages, Jane is entitled to compensatory damages for the second lot. Jane “may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner." UCC, Section 2-704 (2). Comment 2 to this section states that "the seller is given express power to complete manufacture or procurement of goods for the contract unless the exercise of reasonable commercial judgment as to the facts as they appear at the time he learns of the breach makes it clear that such action will result in a material increase in damages. The burden is on the buyer to show the commercially unreasonable nature of the seller's action in completing manufacture.” There are not sufficient facts to determine whether Jane’s decision to complete manufacture minimized damages, but the burden is on Sharon to prove that Jane’s action were commercially unreasonable. 4. Stuart contracts to act in a comedy for Charlotte and to comply with all theater regulations for four seasons. Charlotte promises to pay Stuart $1,800 for each performance and to allow Stuart one benefit performance each season. It is expressly agreed “Stuart shall not be employed in any other production for the period of the contract.” Stuart and Charlotte, during the first year of the contract, have a terrible quarrel. Thereafter, Stuart signs a contract to perform in Elaine’s production and ceases performing for Charlotte. Charlotte seeks (a) to prevent Stuart from performing for Elaine and (b) to require Stuart to perform his contract with Charlotte. What result? Answer: Injunctions. (a) Injunction against Stuart's performing for Elaine would probably be granted if Elaine is a competitor of Charlotte and if Stuart's services are unique or extraordinary. Restatement, Second, Contracts, Section 367, Comment C. (b) Specific Performance. Specific performance will not be granted. Restatement, Second, Contracts, Section 367 provides that "a promise to render personal services will not be specifically enforced." Otherwise, this would allow for involuntary servitude. 5. Louis leased a building to Pam for five years at a rental of $1,000 per month. Pam was to deposit $10,000 as security for performance of all her promises in the lease, which was to be retained by Louis in case of any breach on Pam’s part. Pam defaulted in the payment of rent for the last two months of the lease. Louis refused to return any of the deposit, claiming it as liquidated damages. Pam sued Louis to recover $8,000 (the $10,000 deposit less the amount of rent due Louis for the last two months). What amount of damages should Pam be allowed to collect from Louis? Explain. Answer: Liquidated Damages. Decision for Pam. A liquidated provision will be enforced if it amounts to a reasonable forecast of the loss that may or does result from the breach. If, however, the sum agreed on as liquidated damages bears no reasonable relationship to the amount of probable loss, it is unenforceable as a penalty. By examining the substance of the provision, the nature of the contract, and the extent of probable harm that a breach may reasonably be expected to cause the promisee, the courts will determine whether the agreed amount is proper as liquidated damages or unenforceable as a penalty. If a liquidated damages provision is not enforceable, the injured party nevertheless is entitled to the ordinary remedies for breach of contract. The amount of $10,000 deposited as security for performance of all of Pam's covenants in the lease, to be retained by Louis in case of any breach on Pam's part, was a provision for a penalty rather than one for liquidated damages. For the slightest infraction of the lease by Pam she would forfeit the entire $10,000. This amount does not bear a rational relationship to such actual damages as might accrue in the event of any and all breaches of the contract, so it will not be enforced. Louis is limited to $2,000, for recovery of damages for breach of contract. The remaining $8,000 should be returned to Pam. 6. In which of the following situations is specific performance available as a remedy? (a) Mary and Anne enter into a written agreement under which Mary agrees to sell and Anne agrees to buy for $100 per share 100 shares of the 300 shares outstanding of the capital stock of the Infinitesimal Steel Corporation, whose shares are not listed on any exchange and are closely held. Mary refuses to deliver when tendered the $10,000. (b) Modifying (a) above, assume that the subject matter of the agreement is stock of the United States Steel Corporation, which is traded on the New York Stock Exchange. (c) Modifying (a) above, assume that the subject matter of the agreement is undeveloped farmland of little commercial value. Answer: Specific Performance. (a) Anne may obtain specific performance on this contract. Where shares of stock in a corporation have no market value and are not on the market for sale, money damages do not afford an adequate remedy for breach of contract for the sale of a part of these corporate shares and the purchaser may obtain specific performance of the contract. Hills v. McMunn, 232 Ill. 488, 83 N.E. 963. In accord, Restatement, Second, Contracts, Section 360. (b) Specific performance is not available on this contract. Specific performance is denied where the remedy at law is adequate. Money damages may be recovered in an action at law for breach of contract. Shares of U.S. Steel Corporation are readily available on the market. Therefore, the legal remedy is adequate. (c) Anne may obtain specific performance on this contract. A contract for the sale of land may be specifically enforced in equity. Land is unique, and one parcel of land is not the same as any other parcel. The lack of commercial value or the undeveloped condition of the land is immaterial. 7. On March 1, Joseph sold to Sandra fifty acres of land in Oregon that Joseph at the time represented to be fine black loam, high, dry, and free of stumps. Sandra paid Joseph the agreed price of $140,000 and took from Joseph a deed to the land. Sandra subsequently discovered that the land was low, swampy, and not entirely free of stumps. Sandra, nevertheless, undertook to convert the greater part of the land into cranberry bogs. After one year of cranberry culture, Sandra became entirely dissatisfied, tendered the land back to Joseph, and demanded from Joseph the return of the $140,000. On Joseph’s refusal to repay the money, Sandra brought an action at law against him to recover the $140,000. What judgment? Answer: Fraud. Judgment in favor of Joseph. Sandra was induced by fraudulent misrepresentations of material fact to purchase the 50 acres of land. Upon discovery of the fraud perpetrated upon her, Sandra had an election of remedies. She could have rescinded the contract and have sued to recover the $140,000 paid to Joseph upon tendering to Joseph a deed for the land or she could have retained the land and sued Joseph in tort for damages resulting from the fraud. Instead of rescinding the contract, Sandra affirmed the contract when she proceeded to convert the land into cranberry bogs for one year. Although not entitled to recover the purchase price paid to Joseph, Sandra can recover from Joseph in tort for her damages, assuming the statute of limitations has not barred the action. 8. James contracts to make repairs to Betty’s building in return for Betty’s promise to pay $12,000 on completion of the repairs. After partially completing the repairs, James is unable to continue. Betty refuses to pay James and hires another builder, who completes the repairs for $5,000. The building’s value to Betty has increased by $10,000 as a result of the repairs by James, but Betty has lost $500 in rents because of the delay caused by James’s breach. James sues Betty. How much, if any, may James recover in restitution from Betty? Answer: Restitution. Restitution is the act of returning to a party the consideration, or its value, that he gave to the other party. Restitution is available in several contractual situations including to a party in default. James may recover $4,500 in restitution from Betty: 9. Linda induced Sally to enter into a purchase of a home theater receiver by intentionally misrepresenting the power output to be seventy-five watts at rated distortion, when in fact it delivered only forty watts. Sally paid $450 for the receiver. Receivers producing forty watts generally sell for $200, whereas receivers producing seventy-five watts generally sell for $550. Sally decides to keep the receiver and sue for damages. How much may Sally recover in damages from Linda? Answer: Damages for Misrepresentation. Linda committed fraudulent misrepresentation. A minority of states allow the injured party to recover, under the “out-of-pocket” rule. The great majority of states, however, permit the intentionally defrauded party to recover, under the “benefit-of-the-bargain” rule. 10. Virginia induced Charles to sell Charles’s boat to Virginia by misrepresentation of material fact on which Charles reasonably relied. Virginia promptly sold the boat to Donald, who paid fair value for it and knew nothing concerning the transaction between Virginia and Charles. Upon discovering the misrepresentation, Charles seeks to recover the boat. What are Charles’s rights against Virginia and Donald? Answer: Voidable Contracts. Charles may not recover the boat from Donald who is a bona fide purchaser for value because the transaction between Virginia and Charles was voidable not void. Charles may recover damages for fraud from Virginia. 11. Felch was employed as a member of the faculty of Findlay College under a contract that permitted dismissal only for cause. He was dismissed by action of the President and Board of Trustees, which did not comply with a contractual provision for dismissal that requires a hearing. Felch requested the court to grant specific performance of the contract and require Findlay College to continue Felch as a member of the faculty and to pay him the salary agreed upon. Is Felch entitled to specific performance? Explain. Answer: Specific Performance/Personal Service Contract. Judgment for Findlay College. In general, specific performance is not available to enforce a provision in a contract for the performance of personal services requiring special knowledge, ability, experience, or the exercise of judgment, skill, taste, discretion, labor, tact, energy, or integrity, particularly where the performance of such services would be continuous over a long period of time. Equity will not grant specific performance of affirmative promises in a personal service contract on the grounds that (1) mischief is likely to result from enforced continuance of the relationship after it has become obnoxious to one of the parties, and (2) the enforcement of a decree requiring specific performance of such a contract would impose too great a burden on the courts. The refusal of affirmative specific enforcement in these cases is based in part upon the undesirability of compelling the continuance of personal association after disputes have arisen and confidence and loyalty are gone. Felch v. Findlay College, 119 Ohio App. 357, 200 N.E.2d 353 (1963). 12. Copenhaver, the owner of a laundry business, contracted with Berryman, the owner of a large apartment complex, to allow Copenhaver to own and operate the laundry facilities within the apartment complex. Berryman terminated the five-year contract with Copenhaver with forty-seven months remaining. Within six months, Copenhaver placed the equipment into use in other locations and generated at least as much income as he would have earned at Berryman’s apartment complex. He then filed suit, claiming that he was entitled to conduct the laundry operations for an additional forty-seven months and that, through such operations, he would have earned a profit of $13,886.58, after deducting Berryman’s share of the gross receipts and other operating expenses. Decision? Answer: Mitigation of Damages. Judgment in part for Copenhaver. Although Berryman is liable for the monetary loss sustained by Copenhaver, Copenhaver must exercise reasonable efforts in an attempt to minimize his damages. Copenhaver suffered no damages after the six-month period because all his equipment was in use in other locations and was generating at least as much income. Therefore, Copenhaver may recover only for the losses sustained during the six-month period. Copenhaver v. Berryman, 602 S.W.2d 540 (Tex. Civ. App. 1980). 13. Billy Williams Builders and Developers (Williams) entered into a contract with Hillerich under which Williams agreed to sell to Hillerich a certain lot and to construct on it a house according to submitted plans and specifications. The house built by Williams was defectively constructed. Hillerich brought suit for specific performance of the contract and for damages resulting from the defective construction and delay in performance. Williams argued that Hillerich was not entitled to have both specific performance and damages for breach of the contract because the remedies were inconsistent and Hillerich had to elect one or the other. Explain whether Williams is correct in this assertion. Answer: Election of Remedies. No, Williams is incorrect. Judgment for Hillerich. The remedies of specific performance and damages are not inconsistent in this case. Contracts for the sale of real estate are specifically enforceable in equity, and if the quantity of land owned by the seller is less than the quantity he has contracted to convey, the buyer may obtain specific performance to the extent the seller can transfer title and damages for the difference between the actual performance and such performance as would have fulfilled the terms of the contract, plus damages for delay in performance. There is no reason to distinguish between a deficiency in quantity (short acreage or lack of title) and deficiency of quality (defective construction). Billy Williams Builders & Developers, Inc. v. Hillerich, 446 S.W.2d 280 (Ky. 1969). 14. Developers under a plan approved by the city of Rye had constructed six luxury cooperative apartment buildings and were to construct six more. To obtain certificates of occupancy for the six completed buildings, the developers were required to post a bond with the city to assure completion of the remaining buildings. The developers posted a $100,000 bond upon which Public Service Mutual Insurance Company, as guarantor or surety, agreed to pay $200 for each day after the contractual deadline that the remaining buildings were not completed. After the contractual deadline, more than 500 days passed without completion of the buildings. The city claims that its inspectors and employees will be required to devote more time to the project than anticipated because it has taken extra years to complete. It also claims that it will lose tax revenues for the years the buildings are not completed. Should the city prevail in its suit against the developers and the insurance company to recover $100,000 on the bond? Explain. Answer: Liquidated Damages/Penalty Clause. No, the city will not prevail. Judgment for the insurance company. A contract may contain a liquidated damage provision, but the sum agreed upon must be a reasonable measure of the anticipated harm. Where, however, damages flowing from a breach are difficult to ascertain, a provision fixing the damages in advance will be upheld if the amount is a reasonable measure of the anticipated probable harm (Ward v. Hudson Riv. Bldg. Co., 125 N.Y. 230, 235, 26 N.E. 256, 257; Restatement, Contracts, s 339; 5 Corbin, Contracts, ss 1059, 1063). If, on the other hand, the amount fixed is grossly disproportionate to the anticipated probable harm or if there were no anticipatable harm, the provision will not be enforced. The amount of the bond was not a reasonable estimate of probable monetary harm or damage to the city but rather was a penalty. The harm which the city contends it would suffer is minimal and speculative. The effect on increased inspectorial services or on tax revenue is not likely to be substantial. There is nothing to show that either the sum of $200 per day or the aggregate amount of the bond bear any reasonable relationship to the pecuniary harm likely to be suffered or in fact suffered. Since the agreement to pay $200 a day was actually a penalty provision, the court will not enforce it. City of Rye v. Public Service Mutual Insurance Co., 34 N.Y.2d 470, 358 N.Y.S.2d 391, 315 N.E.2d 458 (1974). 15. Kerr Steamship Company sent a telegram at a cost of $26.78 to the Philippines through the Radio Corporation of America. The telegram, which contained instructions in unintelligible code for loading cargo on one of Kerr’s ships, was mislaid and never delivered. Consequently, the ship was improperly loaded and the cargo was lost. Kerr sued the Radio Corporation for the $6,675.29 in profits the company lost on the cargo because of the Radio Corporation’s failure to deliver the telegram. Should Kerr be allowed to recover damages from Radio? Explain. Answer: Foreseeability and Damages. Judgment for Kerr in the amount of $26.78, the cost of transmitting the telegram. The settled doctrine of this court confines the liability of a telegraph company for failure to transmit a message within the limits of the rule in Hadley v. Baxendale. Where the terms of the telegram disclose the general nature of the transaction which is the subject of the message, the company is answerable for the natural consequences of its neglect in relation to the transaction thus known or foreseen. On the other hand, where the terms of the message give no hint of the nature of the transaction, the liability is for nominal damages or for the cost of carriage if the tolls have been prepaid. Notice of the business, if it is to lay the basis for special damages, must be sufficiently informing to be notice of the risk. This coded message did not provide such notice. General damages in an action by the sender of the message and the carrier are not the same as damages in an action by the sender of the message against the receiver of the message. The carrier of the message has a duty to deliver the message and no more. Thus, the damages recoverable for breach of the duty to deliver the message can be no more than the value of the performance of that duty. The Radio Corporation is not in a position to measure accurately every sender's risk of loss and thus cannot be responsible for insuring lost profits for undelivered telegrams. Kerr Steamship Co. v. Radio Corporation of America, 245 N.Y. 284, 157 N.E. 140 (1927). 16. El Dorado Tire Company fired Bill Ballard, a sales executive. Ballard had a five-year contract with El Dorado but was fired after only two years of employment. Ballard sued El Dorado for breach of contract. El Dorado claimed that any damages due to breach of the contract should be mitigated because of Ballard’s failure to seek other employment after he was fired. El Dorado did not provide any proof showing the availability of comparable employment. Explain whether El Dorado is correct in its contention. Answer: Mitigation of Damages. Judgment for Ballard. The general rule is that an employee's damages for employer's breach of contract will be mitigated by the amount she would earn if she found similar employment immediately after termination. The burden of showing the availability of such employment, however, is of the breaching party. The defendant must raise the issue of mitigation and prove the availability of similar employment. This means that El Dorado could meet its burden of proof only by showing the availability of a managerial type position in the tire industry. Were the contrary true, the rule requiring the employer to prove the availability of similar employment would be meaningless. El Dorado did not meet this burden. Ballard v. El Dorado Tire Co., 512 F.2d 901 (5th Cir. 1975). 17. California and Hawaiian Sugar Company (C and H) is an agricultural cooperative in the business of growing sugarcane in Hawaii and transporting the raw sugar to its refinery in California for processing. Because of the seasonal nature of the sugarcane crop, availability of ships to transport the raw sugar immediately after harvest is imperative. After losing the services of the shipping company it had previously used, C and H decided to build its own ship, a Macababoo, which had two components, a tug and a barge. C and H contracted with Halter Marine to build the tug and with Sun Ship to build the barge. In finalizing the contract for construction of the barge, both C and H and Sun Ship were represented by senior management and by legal counsel. The resulting contract called for a liquidated damages payment of $17,000 per day that delivery of the completed barge was delayed. Delivery of both the barge and the tug was significantly delayed. Sun Ship paid the $17,000 per day liquidated damages amount and then sued to recover it, claiming that without the liquidated damages provision, C and H’s legal remedy for money damages would have been significantly less than that paid by Sun Ship pursuant to the liquidated damages provision. Decision? Answer: Liquidated Damages. The liquidated damages provision was valid. Although the actual damages sustained ($368,000) were less than the liquidated damages ($4,403,000), C and H introduced evidence of consequential damages from loss of charter revenues, which it alleged amounted to $3,732,000. These losses influenced the parties' agreement on the amount of liquidated damages. The Code provides that liquidated damages are considered reasonable in light of the anticipated or actual harm. Moreover, exact damages to C and H were impossible to calculate at the inception of the contract, and the liquidated damages provision had been adopted by the parties after an arms-length negotiation in which they were all represented by sophisticated representatives. California and Hawaiian Sugar Company v. Sun Ship, Inc. 18. Bettye Gregg offered to purchase a house from Head & Seeman, Inc. (seller). Though she represented in writing that she had between $15,000 and $20,000 in equity in another home that she would pay to the seller after she sold the other home, she knew that she did not have such equity. In reliance upon these intentionally fraudulent representations, the seller accepted Gregg’s offer and the parties entered into a land contract. After taking occupancy, Gregg failed to make any of the contract payments. The seller’s investigations then revealed the fraud. Head & Seeman then brought suit seeking rescission of the contract, return of the real estate, and restitution. Restitution was sought for the rental value for the five months of lost use of the property and the seller’s out-of-pocket expenses made in reliance upon the bargain. Gregg contends that under the election of remedies doctrine, the seller cannot both rescind the contract and recover damages for its breach. Is Gregg correct? Explain. Answer: Election of Remedies. No. Order reversed. The election of remedies doctrine bars a plaintiff from maintaining inconsistent theories or forms of relief. Its purpose is to prevent a double recovery for the same wrong. Under the doctrine, a defrauded party must choose either (1) to rescind, or (2) to affirm the contract and seek damages. This rule applies where the defrauded party is seeking benefit-of-the-bargain damages. It does not, however, prevent a defrauded party from rescinding and recovering "restorative" damages that put the defrauded party back in his position prior to the making of the contract. Rescission and restitutionary (restorative) damages are consistent remedies, not subject to election of remedies doctrine. Here, the restoration of the rental value and out-of-pocket expenses works consistently with rescission of the contract to restore Head & Seeman to its precontract position. There is no possibility of the corporation obtaining an inconsistent or double recovery. The election of remedies does not apply. Head & Seemann, Inc. v. Gregg, 104 Wis.2d 156, 311 N.W.2d 667 (1981). 19. Watson agreed to buy Ingram’s house for $355,000. The contract provided that Watson deposit $15,000 as earnest money and that “in the event of default by the Buyer, earnest money shall be forfeited to Seller as liquidated damages, unless Seller elects to seek actual damages or specific performance.” Because Watson did not timely comply with all of the terms of the contract, nine months after the Watson sale was to occur, Ingram sold the house to a third party for $355,000. Is Ingram entitled to Watson’s $15,000 earnest money as liquidated damages? Explain? Answer: Liquidated Damages. Yes. The trial court found that the earnest money “was clearly intended by both parties to be non-refundable” if Watson defaulted and determined that $15,000 was a reasonable forecast by Ingram and Watson of damages that would be incurred if Watson failed to complete the purchase. Liquidated damages clauses are upheld if the amount fixed is a reasonable forecast of just compensation for the harm that is caused by the breach and the harm is such that it is incapable or very difficult of ascertainment. Watson v. Ingram, 124 Wash.2d 845, 881 P.2d 247 (1994) 20. Real Estate Analytics, LLC (REA), a limited liability company, became interested in Theodore Tee Vallas’s 14.13-acre Lanikai Lane property located in Carlsbad, California. REA's primary goal in purchasing the property was to make a profit for its investors and the company. In March, REA and Vallas entered into a written agreement for Vallas to sell the property to REA. Under the agreement, the sales price was $8.5 million, with REA to pay an immediate $100,000 deposit, and then pay $2.9 million at closing. In return, Vallas agreed to finance the remaining $5.5 million, with the unpaid balance to be paid over a five-year period. On June 14, Vallas cancelled the contract. The next day REA brought a breach of contract action seeking specific performance. Explain whether REA is entitled to specific performance. Answer: Specific Performance. Yes, REA is entitled to specific performance. Real Estate Analytics, LLC v. Vallas, Court of Appeal, Fourth District, Division 1, California, 2008, 160 Cal.App.4th 463, 72 Cal.Rptr.3d 835; review denied (2008). To obtain specific performance after a breach of contract, a plaintiff must generally show the following: (1) the inadequacy of his legal remedy, (2) an underlying contract that is both reasonable and supported by adequate consideration, (3) the existence of a mutuality of remedies, (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce, and (5) a substantial similarity of the requested performance to that promised in the contract. In this case, the trial court refused to specifically enforce the contract based on its finding that the first element (inadequacy of legal remedy) was not satisfied because REA sought to purchase the property as an investment, and not for some particular use of the land. A damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts generally grant a plaintiff's request for specific performance. Most jurisdictions have rules requiring special treatment of land sale contracts, reflecting the enduring view that (1) each parcel of land is unique and therefore there can be no adequate replacement after a breach and (2) monetary damages are difficult to calculate after a party refuses to complete a land sales contract, particularly expectation damages. ANSWERS TO “TAKING SIDES” PROBLEMS Sanders agreed in writing to write, direct, and produce a motion picture on the subject of lithography (a method for printing using stone or metal) for the Tamarind Lithography Workshop. After the completion of this film, Four Stones for Kanemitsu, litigation arose concerning the parties’ rights and obligations under their agreement. Tamarind and Sanders resolved this dispute by a written settlement agreement that provided for Tamarind to give Sanders a screen credit stating: “A Film by Terry Sanders.” Tamarind did not comply with this agreement and failed to include the agreed-upon screen credit for Sanders. Sanders sued Tamarind seeking damages for breach of the settlement agreement and specific performance to compel Tamarind’s compliance with its obligation to provide the screen credit. (a) What arguments would support Sander’s claim for specific performance in addition to damages? (b) What arguments would support Tamarind’s claim that Sanders was not entitled to specific performance in addition to damages? (c) Which side’s arguments are most convincing? Explain. Answer: (a) Sanders could argue that (i) a jury’s damage award would not adequately compensate Sanders for future exhibitions of the film without Sanders’ screen credits, (ii) that an accurate assessment of damages would be far too difficult and require too much speculation, and (iii) that any future exhibitions might be deemed to be a continuous breach of contract and thereby create the danger of an untold number of lawsuits. It is only fair to give Sanders the agreed-upon credit that he deserved. (b) Tamarind could argue that (i) a jury’s damage award could adequately compensate Sanders for future exhibitions of the film without Sanders’ credits, and (ii) a jury might readily compute the advertising value of the screen credit. (c) Decision for Sanders granting specific performance. Tamarind Lithography Workshop, Inc. v. Sanders, Court of Appeal of California, Second District, 1983, 143 Cal.App.3d 571, 193 Cal.Rptr. 409. To obtain specific performance, Sanders must show (i) the inadequacy of his legal remedy, (ii) an underlying contract that is both reasonable and supported by adequate consideration, (iii) the existence of mutuality of remedies, (iv) contractual terms that are sufficiently definite, and (v) a substantial similarity of the requested performance to that promised in the contract. Sanders’s legal remedy is inadequate here because, first, an accurate assessment of damages for lost public acclaim is far too difficult and requires too much speculation; and, second, any future showings of the film might be deemed a further breach creating “the danger of an untold number of lawsuits.” The remedy of specific performance avoids these difficulties and provides Sanders with the contracted-for public acclaim. Because the other requisites for granting specific performance have been met, Sanders is entitled to a writ of specific performance requiring Tamarind to add a screen credit to the film. Chapter 19 RELATIONSHIP OF PRINCIPAL AND AGENT ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Parker, the owner of certain unimproved real estate in Chicago, employed Adams, a real estate agent, to sell the property for a price of $250,000 or more and agreed to pay Adams a commission of 6 percent for making a sale. Adams negotiated with Turner, who was interested in the property and willing to pay as much as $280,000 for it. Adams made an agreement with Turner that if Adams could obtain Parker’s signature to a contract to sell the property to Turner for $250,000, Turner would pay Adams a bonus of $10,000. Adams prepared and Parker and Turner signed a contract for the sale of the property to Turner for $250,000. Turner refuses to pay Adams the $10,000 as promised. Parker refuses to pay Adams the 6 percent commission. In an action by Adams against Parker and Turner, what is the judgment? Answer: Fiduciary Duty. Decision against Adams on both actions. Adams owes an overriding duty of utmost loyalty and good faith to Parker, his principal. An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. Restatement, Section 8.01. The problem presents a flagrant violation of Adams's duty in this regard when he agreed with Turner to attempt to obtain Parker's signature to a contract to sell the property to Turner for $250,000 when Turner was willing to pay $280,000 for it. Even though authorized to sell the property for $250,000 he was under a duty to obtain a higher price if possible or at least inform the principal of Turner's willingness to pay a higher price. Adams's agreement with Turner, for all practical purposes, made him the agent of Turner as well as of Parker. A disloyal agent cannot recover compensation from either party. If permitted to recover the $10,000 from Turner, he would be under the duty of a fiduciary to account for the full $10,000 to Parker. A principal is entitled to recover secret profits from a disloyal agent. 2. Perry employed Alice to sell a parcel of real estate at a fixed price without knowledge that David had previously employed Alice to purchase the same property for him. Perry gave Alice no discretion as to price or terms, and Alice entered into a contract of sale with David on the exact terms authorized by Perry. After accepting a partial payment, Perry discovered that Alice was employed by David and brought an action to rescind. David resisted on the ground that Perry had suffered no damage because Alice had been given no discretion and the sale was made on the exact basis authorized by Perry. Discuss whether Perry will prevail. Answer: Fiduciary Duty. Decision in favor of Perry. Although Alice had no discretion as to price or terms with respect to the sale of Perry's real estate she was representing two principals; she was a dual agent. In such cases, the interests of one of the principals are likely to suffer, particularly where, as in the problem, the agent represents both the buyer and the seller. Therefore, Alice has breached her fiduciary to both Perry and David. Upon discovery of the double or dual agency either of the principals may repudiate the contract made in their behalf by the common agent. If the contract has been performed, either party may have the transaction set aside. The agent is not entitled to compensation from either party. It appears that neither Perry nor David knew of the double agency. If one of the principals did not know that Alice was also the agent of the other party to the contract he has the absolute right to rescind the transaction upon learning the truth. It is not necessary for the principal to show any injury or intent to deceive. 3. Packer owned and operated a fruit cannery in Southton, Illinois. He stored a substantial amount of finished canned goods in a warehouse in East St. Louis, Illinois, owned and operated by Alden, in order to have goods readily available for the St. Louis market. On March 1, he had 10,000 cans of peaches and 5,000 cans of apples in storage with Alden. On the day named, he borrowed $5,000 from Alden, giving Alden his promissory note for this amount due June 1, together with a letter authorizing Alden, in the event the note was not paid at maturity, to sell any or all of his goods in storage, pay the indebtedness, and account to him for any surplus. Packer died on June 2 without having paid the note. On June 8, Alden told Taylor, a wholesale food distributor, that he had for sale, as agent of the owner, 10,000 cans of peaches and 5,000 cans of apples. Taylor said he would take the peaches and would decide later about the apples. A contract for the sale of 10,000 cans of peaches for $6,000 was thereupon signed “Alden, agent for Packer, seller; Taylor, buyer.” Both Alden and Taylor knew of the death of Packer. Delivery of the peaches and payment were made on June 10. On June 11, Alden and Taylor signed a similar contract covering the 5,000 cans of apples, delivery and payment to be made June 30. On June 23, Packer’s executor, having learned of these contracts, wrote Alden and Taylor stating that Alden had no authority to make the contracts, demanding that Taylor return the peaches, and directing Alden not to deliver the apples. Discuss the correctness of the contentions of Packer’s executor. Answer: Termination of Agency: Death. Packer's executor is incorrect as to the first contract for the sale of the peaches, but correct as to the second contract for the sale of the apples. A power given as security “is a power to affect the legal relations of its creator that is created in the form of a manifestation of actual authority and held for the benefit of the holder or a third person.” Restatement, Section 3.12. A power given as security creates neither a relationship of agency nor actual authority, although the power enables its holder to affect the legal relations of the creator of the power. Restatement, Section 3.12, comment b. The power arises from a manifestation of assent by its creator that the holder of the power may, for example, dispose of property or other interests of the creator. The Restatement’s definition includes, but is more extensive than, the rule in some states regarding an agency coupled with an interest, in which the holder (agent) has a security interest in the power conferred upon him by the creator (principal). For example, an agency coupled with an interest would arise where an agent has advanced funds on behalf of the principal and the agent’s power to act is given as security for the loan. Unless otherwise agreed, a power given as security may not be revoked. In addition, the incapacity of the creator or of the holder of the power does not terminate the power. Nor will the death of the creator terminate the power, unless the duty for which the power was given terminates with the death of the creator. Restatement, Section 3.13(2). A power given as security is terminated by an event that discharges the obligation secured by it or that makes execution of the power illegal or impossible. Restatement, Section 3.13(1). Thus, in the example above, when the creator repays the loan, the power is terminated. Packer's grant of authority to Alden to sell the canned goods was an agency coupled with an interest of the agent in the subject matter. Alden had an interest in the prospective proceeds of the execution of the agency in that he could pay himself therefrom the debt owed to him. He also had an interest in the subject matter of the agency, the canned goods, in that he had possession thereof. Since the interest was not only in the proceeds but also in the subject matter he had a true "agency coupled with an interest" and it was irrevocable even by the death of the principal. The result is different with respect to the second contract for the apples. A power given as security is terminated by an event that discharges the obligation secured by it. Restatement, Section 3.13(1). Alden, as a result of the concluded sale of the peaches, had $6,000 which more than covered the indebtedness to him. He therefore had no further interest in the proceeds of the sale of the apples even though he still had possession thereof. At the time he made the contract to sell the apples, he no longer had an agency coupled with an interest, and hence, no agency because the death of the principal terminated the agency. 4. Harvey Hilgendorf was a licensed real estate broker acting as the agent of the Hagues in the sale of eighty acres of farmland. The Hagues, however, terminated Hilgendorf’s agency before the expiration of the listing contract when they encountered financial difficulties and decided to liquidate their entire holdings of land at one time. Hilgendorf brought this action for breach of the listing contract. The Hagues maintain that Hilgendorf’s duty of loyalty required him to give up the listing contract. Are the Hagues correct in their assertion? Answer: Termination of Agency by Revocation. No, the Hagues are not correct. Judgment for Hilgendorf. Since agency is a consensual relationship, a principal has the power to terminate an agency that is not coupled with an interest even though the term of the agency has not yet expired. But without a legal reason for doing so, the principal does not have the right to terminate an unexpired agency contract and may subject himself to liability for doing so. Although an agent's duty of loyalty does require him to place the principal's interests first in dealing with third parties, in the contract of agency itself between the agent and the principal each is acting in his own behalf. The Hagues' financial difficulties did not give them the legal right to terminate the agency relationship, and Hilgendorf was under no duty to relinquish his role as their agent simply because the principal encountered financial problems. Therefore, Hilgendorf may recover damages for breach of the listing contract. Hilgendorf v. Hague, 29 N.W.2d 272 (1980) 5. Palmer made a valid contract with Ames under which Ames was to sell Palmer’s goods on commission from January 1 to June 30. Ames made satisfactory sales up to May 15 and was about to close an unusually large order when Palmer suddenly and without notice revoked Ames’s authority to sell. Can Ames continue to sell Palmer’s goods during the unexpired term of her contract? Answer: Termination of Agency: Revocation of Authority. No. A principal may revoke an agent’s authority at any time by notifying the agent. Restatement, Section 3.10. If, however, such revocation constitutes a breach of contract, the agent may recover damages from the principal. Although Palmer did not have the right to terminate the agency before June 30, he had the power. Since the authority of an agent is based upon the consent of the principal, the agency is terminated upon the withdrawal of such consent. Therefore, upon Palmer's revocation of Ames's authority to sell, Ames no longer had the actual authority to sell Palmer's goods. Ames, however may sue Palmer and recover damages for breach of the agency contract. 6. Piedmont Electric Co. gave a list of delinquent accounts to Alexander, an employee, with instructions to discontinue electric service to delinquent customers. Among those listed was Todd Hatchery, which was then in the process of hatching chickens in a large, electrically heated incubator. Todd Hatchery told Alexander that it did not consider its account delinquent, but Alexander nevertheless cut the wires leading to the hatchery. Subsequently, Todd Hatchery recovered a judgment of $5,000 in an action brought against Alexander for the loss resulting from the interruption of the incubation process. Alexander has paid the judgment and brings a cause of action against Piedmont Electric Co. What may he recover? Explain. Answer: Duties of Principal to Agent: Indemnification/Reimbursement. Judgment for Alexander. In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent’s actual authority. Restatement, Section 8.14 In collecting the accounts and discontinuing service Alexander was acting within his actual authority. A principal is under a duty to indemnify and reimburse his agent for expenses incurred by or resulting from authorized acts of the agent if not illegal or not known by the agent to be wrongful. Accordingly, Alexander has a right of reimbursement from Piedmont Electric Co. for $5,000. 7. In October 2012, Black, the owner of the Grand Opera House, and Harvey entered into a written agreement to lease the opera house to Harvey for five years at a rental of $300,000 a year. Harvey engaged Day as manager of the theater at a salary of $1,175 per week plus 10 percent of the profits. One of Day’s duties was to determine the amounts of money taken in each night and, after deducting expenses, to divide the profits between Harvey and the manager of the particular attraction playing at the theater. In September 2017 Day went to Black and offered to rent the opera house from Black at a rental of $375,000 per year, whereupon Black entered into a lease with Day for five years at this figure. When Harvey learned of and objected to this transaction, Day offered to assign the lease to him for $600,000 per year. Harvey refused and brought an appropriate action against Day. Should Harvey recover? If so, on what basis and to what relief is he entitled? Answer: Fiduciary Duty. Decree in favor of Harvey. An agent owes the principal a duty of loyalty which includes an obligation not to compete. During the agency relationship an agent must not compete with his principal or act on behalf or otherwise assist any of the principal’s competitors. Restatement, Section 8.04. An agent may not use or disclose confidential information obtained in the course of the agency for his own benefit or those of a third party. Restatement, Section 8.05(2). In this case Day engaged in business activity with Black, and this activity would be characterized as being in conflict with the interests of Day's principal, Harvey. 8. Timothy retains Cynthia, an attorney, to bring a lawsuit upon a valid claim against Vincent. Recently enacted legislation has shortened the statute of limitations for this type of legal action. Cynthia fails to make herself aware of this new statute. Consequently, she files the complaint after the statute of limitations has run. As a result, the lawsuit is dismissed. What rights, if any, does Timothy have against Cynthia? Answer: Duties of Agent to Principal: Duty of Diligence. Judgment would be for Timothy assuming that a lawyer acting reasonably would have had opportunity to discover the revised statute of limitations period. Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08. 9. Wilson engages Ruth to sell Wilson’s antique walnut chest to Harold for $2,500. The next day, Ruth learns that Sandy is willing to pay $3,000 for Wilson’s chest. Ruth nevertheless sells the chest to Harold. Wilson then discovers these facts. What are Wilson’s rights, if any, against Ruth? Answer: Duty to Inform. An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11. An agent who breaches this duty is subject to liability to the principal for loss caused the principal by the agent’s breach and may also be subject to termination of the agency relationship. Moreover, if the agent’s breach of this duty constitutes a breach of the contract between the agent and the principal, the agent is also liable for breach of contract. However, if Ruth has reason to believe that Wilson desired only to sell the chest to Harold at the agreed upon price, then she fulfilled the terms of the agency. The problem may be interpreted either way. 10. Morris is a salesperson for Acme, Inc., a manufacturer of household appliances. Morris receives a commission on all sales made and no further compensation. He drives his own automobile, pays his own expenses, and calls on whom he pleases. While driving to make a call on a potential customer, Morris negligently collides with Hudson. Hudson sues Acme and Morris. Who should be held liable? Answer: Nature of Agency. A principal is liable for the torts committed by an employee within the scope of his employment but ordinarily is not liable for torts committed by an independent contractor. The critical question in this case is whether Morris is an employee of Acme or is an independent contractor. Agents who are not employees are generally referred to as independent contractors, although the Third Restatement does not use this term. In these cases, although the principal has the right of control over the agent, the principal does not control the manner and means of the agent’s performance. Acme had no control over Morris since Morris made the decision as to which customers to see, as well as driving his own car. Therefore, Morris is most likely an independent contractor and therefore Acme would not be liable to Hudson. Hudson would, however, be successful in a suit against Morris since persons are responsible for their own negligent conduct. 11. Sierra Pacific Industries purchased various areas of timber and six other pieces of real property, including a ten-acre parcel on which five duplexes and two single-family units were located. Sierra Pacific requested the assistance of Joseph Carter, a licensed real estate broker, in selling the nontimberland properties. It commissioned him to sell the property for an asking price of $850,000, of which Sierra Pacific would receive $800,000 and Carter would receive $50,000 as a commission. Unable to find a prospective buyer, Carter finally sold the property to his daughter and son-in-law for $850,000 and retained the $50,000 commission without informing Sierra Pacific of his relationship to the buyers. After learning of these facts, Sierra Pacific brought an action against Carter. To what relief, if any, is Sierra Pacific entitled? Answer: Fiduciary Duty of Agent. Sierra Pacific is entitled to relief based on Carter’s breach of his fiduciary duty. An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. Restatement, Section 8.03. An agent also has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11 An agent must refrain from dual representation in a transaction unless he obtains the consent of both principals after full disclosure. Under most circumstances, then, if the agent is related to the buyer in a way that suggests a reasonable possibility that the agent himself could be acquiring an interest in the property, the relationship is a material fact that must be disclosed. Therefore, Sierra Pacific may recover the $50,000 commission paid to Carter plus any actual and proximately caused loss on the price it received for the property. Sierra Pacific Industries v. Carter, 104 Cal.App.3d 579, 163 Cal.Rptr. 764 (1980). 12. Murphy, while a guest at a motel operated by the Betsy-Len Motor Hotel Corporation, sustained injuries from a fall allegedly caused by negligence in maintaining the premises. At that time, Betsy-Len was under a license agreement with Holiday Inns, Inc. The license contained provisions permitting Holiday Inns to regulate the architectural style of the buildings as well as the type and style of the furnishings and equipment. The contract, however, did not grant Holiday Inns the power to control the day-to-day operations of Betsy-Len’s motel, to fix customer rates, or to demand a share of the profits. Betsy-Len could hire and fire its employees, determine wages and working conditions, supervise the employee work routine, and discipline its employees. In return, Betsy-Len used the trade name “Holiday Inns” and paid a fee for use of the license and Holiday Inns’ national advertising. Murphy sued Holiday Inns, claiming Betsy-Len was its agent. Is Murphy correct? Answer: Creation of Agency. Decision for Holiday Inns. No. Betsy-Len is not the agent of Holiday Inns. At issue is whether the terms of the license agreement satisfied the level of control necessary to establish a principal-agent relationship. In this case, the regulatory provisions included regulations on the architectural style of the buildings and the type and style of furnishings and equipment, but did not give the defendant control over the day-to-day operations of Betsy-Len's motel and, therefore, did not constitute control within the definition of agency. Murphy v. Holiday Inns, Inc., 219 S.E.2d 874 (1975). 13. Tube Art was involved in moving a reader board sign to a new location. Tube Art’s service manager and another employee went to the proposed site and took photographs and measurements. Later, a Tube Art employee laid out the exact size and location for the excavation by marking a four-by-four square on the asphalt surface with yellow paint. The dimensions of the hole, including its depth of six feet, were indicated with spray paint inside the square. After the layout was painted on the asphalt, Tube Art engaged a backhoe operator, Richard F. Redford, to dig the hole. Redford began digging in the early evening hours at the location designated by Tube Art. At approximately 9:30 P.M., the bucket of Redford’s backhoe struck a small natural gas pipeline. After examining the pipe and finding no indication of a break or leak, he concluded that the line was not in use and left the site. Shortly before 2:00 A.M. on the following day, an explosion and fire occurred in the building serviced by that gas pipeline. As a result, two people in the building were killed, and most of its contents were destroyed. Massey and his associates, as tenants of the building, brought an action against Tube Art and Richard Redford for the total destruction of their property. Will the plaintiffs prevail? Explain. Answer: Other Legal Relationships: Employment vs. Independent Contractor. Yes, Massey will prevail. A number of factors may be taken into account in determining whether one who performs services for another is an employee or an independent contractor. The crucial consideration is "the extent of control which, by the agreement, the master may exercise over the details of the work." An employee is subject to the employer's control or right of control regarding the employee's physical conduct in performing the services. Independent contractors are not subject to such control or right of control. In this case, Redford was essentially self-employed, was free to work for other contractors, and chose the time of day to do the assigned work. Tube Art, however, not only had the right to control Redford's activities, but it did control them. Specifically, it exercised control over the most important decisions associated with the project: the size and location of the hole. Redford simply dug the hole in accordance with the placement and dimensions dictated by Tube Art. Redford was an employee of Tube Art, and Tube Art is therefore responsible for his actions. Massey v. Tube Art Display, Inc., 15 Wn. App. 782, 551 P.2d 1387 (1976). 14. Brian Hanson sustained a paralyzing injury while playing in a lacrosse match between Ohio State University and Ashland University. Hanson had interceded in a fight between one of his teammates and an Ashland player, William Kynast. Hanson grabbed Kynast in a bear hug, but Kynast threw Hanson off his back. Hanson’s head struck the ground, resulting in serious injuries. An ambulance was summoned, and after several delays, Hanson was transported to a local hospital where he underwent surgery. Doctors determined that Hanson suffered a compression fracture of his sixth spinal vertebrae. Hanson, now an incomplete quadriplegic, subsequently filed suit against Ashland University, maintaining that because Kynast was acting as the agent of Ashland, the university was therefore liable for Kynast’s alleged wrongful acts . Was Kynast an agent of Ashland? Answer: Creation of Agency. No. The relationship of principal and agent exists only when one party exercises the right of control over the actions of another and those actions are directed toward the attainment of an objective which the former seeks. William Kynast attended Ashland University, received no scholarship or compensation, voluntarily became a member of the university's lacrosse team for which games no attendance fee is charged. Kynast purchased his own equipment and received instruction from a coach while preparing and playing such games but was not otherwise controlled by the coach and participated in the game as a part of his total educational experience while attending school.Kynast and Ashland have a relationship typical of most students attending a university. A university such as Ashland offers classroom instruction in a great variety of subjects, as well as optional participation in events such as school clubs and sports. These offerings are designed to expand and enrich the overall educational experience. The student pays a fee and agrees to abide by the university's rules. In exchange, the university provides the student with a worthwhile education. This relationship does not constitute a principal-agent relationship. The student is a buyer of education rather than an agent. Hanson v. Kynast, 494 N.E.2d 1091 (1986). 15. Tony Wilson was a member of Troop 392 of the Boy Scouts of America (BSA) and of the St. Louis Area Council (Council). Tony went on a trip with the troop to Fort Leonard Wood, Missouri. Five adult volunteer leaders accompanied the troop. The troop stayed in a building that had thirty-foot aluminum pipes stacked next to it. At approximately 10:00 p.m., Tony and other scouts were outside the building, and the leaders were inside. Tony and two other scouts picked up a pipe and raised it so that it came into contact with 7200-volt power lines that ran over the building. All three scouts were electrocuted, and Tony died. His parents brought a suit for wrongful death against the Council, claiming that the volunteer leaders were agents or servants of the Council and that it was vicariously liable for their negligence. The Council filed a motion for summary judgment, arguing as follows: the BSA chartered local councils in certain areas, and councils in turn granted charters to local sponsors such as schools, churches, or civic organizations. Local councils did not administer the scouting program for the sponsor, did not select volunteers, did not prescribe training for volunteers, and did not direct or control the activities of troops. Troops were not required to get permission from local councils before participating in an activity. Are the troop leaders agents of the Council? Explain. Answer: Other Legal Relationships: Employment vs. Independent Contractor. No. Under the doctrine of respondeat superior an employer is liable for those negligent acts or omissions of his employee which are committed within the scope of his employment. Liability based on respondeat superior requires some evidence that a master-servant relationship existed between the parties. The test to determine if respondeat superior applies to a tort is whether the person sought to be charged as master had the right or power to control and direct the physical conduct of the other in the performance of the act. If there was no right to control, there is no liability; for those rendering services but retaining control over their own movements are not servants. The relationship of servant and master begins only when the person charged as master has the right to direct the method by which the master's service is performed. Whether a party is liable under the doctrine of respondeat superior depends on the facts and circumstances in evidence in each particular case and no single test is conclusive of the issue of the party's interest in the activity and his right of control. In the instant action, Council neither controlled the actions of the troop leaders nor ran the program at Fort Leonard Wood. There was no vicarious liability on the part of Council for the leaders' actions while on the trip to Fort Leonard Wood. The trial court did not err in granting Council's motion for summary judgment. 16. Hunter Farms contracted with Petrolia Grain & Feed Company, a Canadian company, to purchase a large supply of the farm herbicide Sencor from Petrolia for resale. Petrolia learned from the U.S. Customs Service that the import duty for the Sencor would be 5 percent but that the final rate could be determined only upon an inspection of the Sencor at the time of importation. Petrolia forwarded this information to Hunter. Meanwhile, Hunter employed F. W. Myers & Company, an import broker, to assist in moving the herbicide through customs. When customs later determined that certain chemicals in the herbicide, not listed on its label, would increase the customs duty from $30,000 to $128,000, Myers paid the additional amount under protest and turned to Hunter for indemnification. Hunter refused to pay Myers, claiming that Myers breached its duty of care as an import broker in failing to inform Hunter that the 5 percent duty rate was subject to increase. Myers brought an action against Hunter, arguing that it was not employed to give advice to Hunter on matters of importation. Explain whether Myers had the duty to inform Hunter. Answer: Duty of Diligence/Duty to Inform. Myers must show that the customs of the industry or profession is that importers bear no special duty to advise the importer unless requested to do so. They essentially draft papers to facilitate the process. Finally, Myers needs to prove that he had no information regarding the increased duty and thus had fulfilled his duty of disclosure to Hunter. In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent’s actual authority. Restatement, Section 8.14. On the other hand, subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08. Moreover, an agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent’s duties to the principal. Restatement, Section 8.11. F.W. Myers & Company v. Hunter Farms, 319 N.W.2d 186 (1982). 17. Danny Del Pilar sustained injuries when his car collided with a delivery van painted yellow—the widely recognized DHL color—and displaying the DHL name and logo. The truck was driven by a driver wearing a DHL uniform and laden with packages destined for DHL customers. The van was owned not by DHL, but by Johnny Boyd, a driver for Silver Ink, Inc., a local company that was responsible at the time for picking up, sorting, and delivering all DHL packages in metropolitan Jacksonville, Duval County, Florida. Boyd, working for Silver Ink on the DHL contract, was shuttling DHL packages when the accident occurred. DHL's agreement with Silver Ink essentially delegated to Silver Ink the responsibility to service DHL customers in the Jacksonville area. The contract identified Silver Ink as an “independent contractor” and provided that “the manner and means by which Contractor performs the services shall be at Contractor's sole discretion and control and are Contractor's sole responsibility.” The agreement also, however, recited an exhaustive and detailed list of procedures that Silver Ink employees were to follow in processing, picking up, and delivering packages and contained a provision under which Silver Ink was required to indemnify DHL in the event Silver Ink lost or damaged packages bound for DHL's customers. The agreement gave either party the power to terminate in the event of the other party's breach. Silver Ink employees were contractually required to “wear a DHL uniform” Silver Ink was required to submit to unannounced operational inspections and audits at DHL's sole discretion and was required to maintain a fleet of delivery vans operated in DHL livery, designed and placed on the vehicles in strict accordance with specifications established by DHL. Silver Ink's operational hub was co-located with DHL's Jacksonville facility, and DHL employees monitored and reviewed Silver Ink operations on a daily basis. Danny Del Pilar sued DHL for his personal injuries arising from the auto accident. DHL argued that Silver Ink is an independent contractor for whose alleged negligence DHL is not vicariously liable. Explain whether Silver Ink is an independent contractor as a matter of law. Danny Del Pilar sued DHL for his personal injuries arising from the auto accident. DHL argued that Silver Ink is an independent contractor for whose alleged negligence DHL is not vicariously liable. Explain whether Silver Ink is an independent contractor as a matter of law. Answer: Employment Relationship v. Independent Contactor. The trial court erred in concluding, as a matter of law, that Silver Ink was DHL's independent contractor. Whether a person working on behalf of another is an agent or an independent contractor “is a question of fact … not controlled by descriptive labels employed by the parties themselves.” A particularly significant factor in the determination of status is “the degree of control exercised by the employer or owner over the agent. More particularly, it is the right of control, and not actual control, which determines the relationship between the parties.” In most cases, the terms of a contract between the parties is a pertinent index of the principal's right of control and should factor heavily into the inquiry, “unless other provisions of the agreement, or the parties' actual practice, demonstrate that it is not a valid indicator of status [or] … belie the creation of the status agreed to by the parties.” In that case, “the actual practice and relationship of the parties should control.” 18. Sheree Demming—a real estate investor in the business of acquiring properties in the Bloomington, Indiana area for remodeling, renovation, leasing, and sale—engaged Cheryl Underwood's professional services as a realtor to buy and sell properties on multiple occasions between July 2012 and April 2017. In 2012, Demming became particularly interested in purchasing two properties owned by Marion and Frances Morris and managed by realtor Julie Costley. The properties, however, were not listed for sale. Underwood made an offer to Costley on Demming's behalf in the fall of 2012. After the offer was rejected, Underwood approached Costley every few months to inquire whether the properties were available for purchase. However, unknown to Demming, Underwood became interested in purchasing the properties for herself after she acquired a neighboring property in May 2016. In February 2017, Demming again instructed Underwood to inquire into the availability of the properties. Accordingly, Underwood asked Costley to contact Mrs. Morris, whose husband had recently died. Costley agreed to contact Mrs. Morris but expressed doubt as to Mrs. Morris’ willingness to sell. The next day, Underwood told Demming that the properties were not for sale. A few days later, Costley contacted Mrs. Morris, who instructed Costley to request that anyone interested in purchasing the properties tender a written offer. When Costley informed Underwood that Mrs. Morris was willing to entertain an offer, Underwood did not relay this information to Demming. Instead, on March 30, 2017, Underwood and a partner purchased the property. Explain what rights, if any, Demming has against Underwood. Answer: Fiduciary Duty. Demming has alleged sufficient facts to go to trial to prove that (1) Underwood was acting as her agent, (2) Underwood had breached her fiduciary duty, and (3) Demming was entitled to have a constructive trust in her favor imposed on the property. This case problem is based on Demming v. Underwood, 943 N.E.2d 878, Indiana Court of Appeals (2011). Because the trial court concluded that no agency relationship existed between Demming and Underwood as a matter of law, it did not reach the issue of breach. On appeal, however, the Defendants argue that even if there is a genuine issue of material fact as to whether a common law agency relationship existed, Underwood did not breach her fiduciary duty to Demming because at the time of the alleged breach, the purposes of the agency had already been satisfied. Specifically, the Defendants assert that the scope of the alleged agency was limited to the services to which Demming consented, which they claim consisted only of Underwood making isolated inquiries into whether the Properties were available, and that the agency was fulfilled once Underwood accurately reported that the Properties were not for sale. We disagree. First, Demming argues that the evidence most favorable to her supports an inference that Underwood reported inaccurate or misleading information to Demming regarding the availability of the Properties. Demming testified in her deposition that she told Underwood to contact Costley and that Underwood told her the next day that the Properties were not for sale. However, Costley testified in her deposition that when she spoke to Underwood, she expressed doubt as to whether Mrs. Morris would be willing to sell, but nevertheless agreed to contact Mrs. Morris to inquire. It was not until a few days later that Costley spoke to Mrs. Morris and learned that she was willing to entertain offers. Thus, the evidence supports an inference that Underwood told Demming that the Properties were not for sale before receiving an answer from Costley. While Underwood may have sincerely believed at that time that Mrs. Morris would not sell the Properties, her representation to Demming was incomplete, and therefore misleading. Accordingly, even assuming that the agency relationship was limited to Underwood making a single inquiry regarding the Properties and reporting what she learned to Demming, a genuine issue of material fact exists as to whether Underwood breached the fiduciary duty arising from that agency relationship. Even if Underwood reported accurate information to Demming, the Defendants construe the scope of the alleged agency too narrowly. It is clear that the reason Demming repeatedly instructed Underwood to contact Costley regarding the Properties' availability over a period of more than four years is that Demming desired to purchase the Properties. Demming instructed Underwood to "stay on it" because she believed that Mrs. Morris would be willing to sell in the near future. These facts, when taken together, support an inference that Underwood was Demming's agent not only for the purposes of making a few, isolated contacts with Costley regarding the Properties, but for the broader purpose of actually acquiring the Properties. ANSWERS TO “TAKING SIDES” PROBLEMS Western Rivers Fly Fisher (Western) operates under license of the U.S. Forest Service as an “outfitter,” a corporation in the business of arranging fishing expeditions on the Green River in Utah. Michael D. Petragallo is licensed by the Forest Service as a guide to conduct fishing expeditions but cannot do so by himself, because the Forest Service licenses only outfitters to float patrons down the Green River. Western and several other licensed outfitters contact Petragallo to guide clients on fishing trips. Because the Forest Service licenses only outfitters to sponsor fishing expeditions, every guide must display on the boat and vehicle he uses the insignia of the outfitter sponsoring the particular trip. Petragallo may agree or refuse to take individuals Western refers to him, and Western does not restrict him from guiding expeditions for other outfitters. Western pays Petragallo a certain sum per fishing trip and does not make any deductions from his compensation. Petragallo’s responsibilities include transporting patrons to the Green River, using his own boat for fishing trips, providing food and overnight needs for patrons, assisting patrons in fly fishing, and transporting them from the river to their vehicles. Robert McMaster contacted Western and arranged for a fishing trip for him and two others. Jaeger was a member of McMaster’s fishing party. McMaster paid Western, which set the price for the trip, planned the itinerary for the McMaster party, rented fishing rods to them, and arranged for Petragallo to be their guide. When Petragallo met the McMaster party, he answered affirmatively when the plaintiff asked him if he worked for Western. Petragallo provided his own vehicle and boat and supplied the food, equipment, and gasoline for the trip. Both the vehicle and the boat had signs bearing Western’s identification and logo. While driving the McMaster party back to town at the conclusion of the fishing trip, Petragallo lost control of his vehicle and got into an accident, injuring Jaeger. (a) What arguments could Jaeger make for claiming that Petragallo was an employee of Western? (b) What arguments could Western make for claiming that Petragallo was an independent contactor? (c) Which side should prevail? Answer: (a) Jaeger argues that Petragallo was Western’s employee, and, thus, Western is liable for Petragallo’s actions. Jaeger could argue that Western has control over Petragallo through its advertising and arranging of fishing expeditions. Although Petragallo may refuse to guide patrons, Western apparently contacts Petragallo only after Western has planned the fishing trip, without involving him, and may provide him with a set itinerary. Also, Forest Service licensing regulations place Western in a position of having the ultimate right to control Petragallo’s work as, without solicitations from Western and other outfitters, Petragallo would be prohibited completely from conducting fishing expeditions. (b) Western contends Petragallo was never its employee and instead is an independent contractor for whose conduct Western is not liable as a matter of law. Western engages Petragallo to guide particular fishing trips, for a set sum, allowing him to conduct the trips in his own discretion. Petragallo may even choose to refuse to guide patrons Western has referred to him. Western’s actions appear to involve setting up the parameters of a fishing trip and place “only minimal restrictions or controls” upon Petragallo. Moreover, although Petragallo must operate under Western’s license, as required by the Forest Service, Western does not control the manner in which Petragallo conducts fishing trips. Apparently, once Western sets up a fishing trip and engages Petragallo as a guide, it relies upon and expects Petragallo to use his own discretion in doing everything else to ensure that patrons have an enjoyable experience, including using his own expertise, vehicle, boat, and equipment. Finally, because Forest Service licensing regulations prohibit an individual river guide from conducting tours unless sponsored by an outfitter, it may be argued that, if Petragallo is subject to any control, it is by the Forest Service, not Western. (c) The facts of this case, relative to whether Petragallo is Western’s employee or an independent contractor, do not point only to a single conclusion. In general, an employee is one who is hired and paid a salary, a wage, or at a fixed rate to perform the employer’s work as directed by the employer and who is subject to a comparatively high degree of control in performing those duties. In contrast, an independent contractor is one who is engaged to do some particular project or piece of work, usually for a set total sum, who may do the job in his own way, subject to only minimal restrictions or controls and who is responsible only for its satisfactory completion. Factors a court may consider in determining the nature of the relationship include (1) whatever agreements exist concerning the right of direction and control over the employee, whether express or implied; (2) the right to hire and fire; (3) the method of payment—whether in wages or fees, as compared with payment for a complete job or project; and (4) the furnishing of the equipment. None of these factors separately is controlling. In applying the above factors and standards, the court concluded that determining the nature of Petragallo’s relationship with Western is a factual issue inappropriate for summary judgment. Jaeger v. Western Rivers Fly Fisher, United States District Court, 1994, 855 F.Supp. 1217 Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637