Question I
(50 of 100 points; Suggested Time: One Hour)
On November 20, 1997, an agreement was signed between our client, Metals Corporation (M) and Venture Capital Corporation (V). The agreement called for V to provide M with $9 million to finance exploration and mining of gold on M’s properties in exchange for 30% of the net profit made from the sale of gold extracted from M’s properties. At the time of the agreement, there was no production of gold from those properties, although M had already spent over $7 million in exploration and development and the market value of the properties is approximately $21 million.
The agreement also created in V an option to increase its share of net profits from 30% to 49% by contributing an additional $6 million. That option could be exercised at any time between the date of signing of the agreement (November 20, 1997) and February 1, 1998.
The initial $9 million was to be paid to M by V in six payments of $1.5 million, one payment to be made every six months beginning on January 5, 1998 with the last payment due on June 30, 2000.
Yesterday, December 10, 1997, our client’s President received a call from the President of V. The President of V requested an extension in the period during which the option could be exercised. He wanted M to extend the expiration date of V’s option to increase V’s share by paying an additional $6 million from February 1 to May 1, 1998. The President of V pointed out that even before the November 20 agreement, V had been an important financial contributor to M in time of financial need and that it was appropriate for M to be willing to express its gratitude by extending this option period as requested by V. The President of V argues that recent declines in the world price of gold had made its task of deciding whether to increase its position in M’s mining efforts more difficult than it had anticipated when, on November 20, it had agreed to a February 1 limit on the length of its option.
The President of M is considering various responses to this request. While the ultimate judgment will rest on business considerations, the President has asked us to consider legal issues, if any, arising out of the following alternative positions that he could take in response to V’s request. His suggested alternatives are all influenced by a concern on his part that if he does not respond affirmatively to V’s requested extension, V may not perform its promise to deliver $1.5 million on January 5, 1998. V is insisting on an immediate response from M.
Alternative 1: Agree to an extension of the option in exchange for the payment by V of $200,000 on January 5, 1998, as a payment in addition to the $9 million already promised by V;
Alternative 2 Agree to an extension of the option in exchange for V’s agreement to make the second payment of $1.5 million on April 1, 1998 instead of on June 30, 1998, the date specified by the current agreement;
Alternative 3 Agree to an extension of the option in exchange for V’s promise to pay $10 on January 5, 1998, as a payment in addition to the $9 million already promised by V.
In thinking about M’s legal position under all of these alternatives, the President of M has asked us to consider what M’s position would be if M simply agreed to the extension without any other change in the November 20 agreement. Here is his hypothetical question: suppose that M agreed to an extension of the option as requested by V. Suppose that by March 15, 1998, V has not yet exercised the option, but gold production looks as though it will be large and profitable so the deal of an additional $6 million in exchange for an additional 19% interest in net mining profit no longer looks like a good deal for M. Could M then withdraw the extension of the option?
Please consider each of the alternatives as well as the President of M’s hypothetical question. In each case, provide an analysis of legal issues raised by the alternative (and the hypothetical facts) and describe the legal arguments you would make in behalf of M. Please include in your analysis the legal arguments you would anticipate in V’s attorneys response to your arguments in the event that conflict between M and V resulted in litigation.
Question II
(50 of 100 points; Suggested Time: One Hour)
You are an associate in a law firm which has been asked for legal advice by Bernie Buyer. Mr. Buyer has told us the following story.
Some months ago, Bernie Buyer was pleased when he saw at a Home Show in Springfield, Massachusetts, a model log home which the manufacturer stated was prefabricated in a factory in Springfield and could be delivered anywhere in Massachusetts and set on an appropriate foundation. The price that Rollalog Corporation, the manufacturer was asking, $50,000, seemed about right to Bernie and the log home could satisfy his desire to put up a house on some land he owned in the Berkshire hills of Western Massachusetts. Bernie wasn’t yet sure whether he wanted the house to use himself for vacations, or to use as a rental property or to sell. But Bernie had owned the land for several years and was eager to have a house on it. After several visits back to the area at the Home Show where the house was being displayed, Bernie signed a contract to purchase one of Rollalog’s log homes for $50,000, which included the cost of delivery and setting on a foundation. He paid $5,000 to Rollalog as a down payment, the balance to be paid after delivery of the house on to a foundation to be supplied by Bernie.
Immediately after arranging for this purchase, Bernie took the drawings for the foundation, supplied by Rollalog, to Doze Construction Company, a local excavation contractor, which agreed to construct a concrete foundation in accordance with the plans given them by Bernie. The contract called for Bernie to pay to Doze Construction $3000 for construction of the foundation.
Doze Construction completed the foundation within the agreed upon time. Two weeks later, the log home was brought to the site by Rollalog’s crew. However, when they set the log cabin on the foundation, it was clear that the foundation was five feet longer than the log home. As far as Bernie has been able to determine, the Rollalog sales representative at the Home Show had by mistake given him the foundation drawings for a larger model than the $50,000 home that had been on display and that Bernie had contracted to buy. Since the log home was sitting firmly on three foundation walls, it was not in danger of collapse in the short term. But it was clear to Bernie, and to Rollalog’s construction crew as well, that something would have to be done to provide foundation wall support under the fourth side of the log home. Rollalog has offered to pour a foundation wall under the fourth wall of the log home in full satisfaction of any claim that Bernie might have against them for their salesperson’s error. However, it was too cold to pour the additional foundation wall and that work would have to wait until Spring. That delay would mean that the house would not be ready for occupancy until sometime in the Summer. Bernie had hoped to be able either to use it, rent it, or sell it in early Spring. Early Spring is the season when most summer rentals and most home sales take place in the Berkshires.
Bernie is extremely unhappy at this situation. He wants Rollalog to remove the log home and he has investigated the possibility of having another contractor build a home on the foundation. The cost of that construction would be $75,000. That would be more expensive, but it would give him a somewhat larger house and, most important, the work could be completed before the normal sale and rental season begins.
Rollalog believes that its offer to pour a new foundation should satisfy Bernie; it will not undertake that work without an agreement by Bernie to accept that arrangement in full satisfaction of any claim that Bernie has against Rollalog. In the alternative, Rollalog is willing to remove the log home, but it will not refund Bernie’s $5,000 deposit. The agreement between Rollalog and Bernie recites:
“In the event that, for any reason other than the nonconformity of the log home to the sample inspected by the buyer, the buyer refuses to pay the balance due, Rollalog shall retain, not as a penalty but as liquidated damages, the down payment paid upon the signing of this agreement.”
Bernie believes, and your investigation of fact supports this view, that Rollalog will probably be able to resell the log house immediately to another buyer for $50,000.
Your senior partner has told you that her research suggests that there are serious questions about whether, if this matter were to be the subject of litigation, the court would apply Article 2 of the Uniform Commercial Code or the common law. Since the house is prefabricated and can be moved, it could be characterized as a good. On the other hand, construction of homes is ordinarily dealt with by the application of common law principles and in this contract the delivery and “installation” of the prefabricated house were important service components of the contract. Because of this doubt, you will need to discuss Bernie’s possible remedies under both the common law and the Uniform Commercial Code. In so doing, you should assume that Rollalog has breached the contract by delivering a building that did not fit on a foundation that was erected in accordance with plans that it supplied Bernie. You must also anticipate the arguments that Rollalog will advance in responding to Bernie and in defense of its retention of the $5,000 down payment.