(50 of 100 points; Suggested Time: One Hour)
Artists Against AIDS (AAA), a charitable, nonprofit organization dedicated to raising funds for the development of medical treatments for persons with AIDS and for research leading to the prevention and cure of AIDS, obtains most of its funds by sponsoring two dinners each year, one in New York City in January and one in Los Angeles in April. The cost of dinner is set at $1000 for each person attending and both dinners are well attended each year. In addition to paying for the dinner, guests are invited to fill out pledges at their table and to participate in an auction (described below). In the past three years, AAA has raised $900,000 (in 1996), $950,000 (in 1997) and $1,000,000 (in 1998). However during 1999, while both dinners were well attended, AAA raised only $650,000. The explanation for this diminished income, in the view of AAA, lies in the following story which you have been told by the Chairperson of AAA who has sought our law firm’s legal advice.
Each of the last six years, the Chairperson has told us, there has been an auction held at the dinner. The successful bidder wins the right to hang in their home for one week a work of art by a well-known artist. Each year prior to the dinner, AAA approaches an artist with a request that they make available one of their works of art to be “auctioned” at the next dinner. The identity of the artist chosen is always kept a secret until the dinner. In November 1998, the Chairperson asked John Brush, an illustrator who has become famous for his covers for Hip Magazine, to provide a painting for the January dinner in New York City. Brush agreed to do so. The understanding, of course, was that the auctioned painting would only hang for one week in the home of the successful bidder and that AAA would provide the cost of transportation and insurance both from and back to Brush’s studio in New York City. Artists have agreed to this arrangement for the last six years of AAA’s existence, presumably both to make a contribution to AAA’s important work, but also to enjoy the personal publicity produced by their providing the art for auction. About a week before the dinner, Brush called the Chairperson and said that he didn’t have anything ready yet, but that AAA should set up a canvas behind curtains on the stage of the hall where the dinner was to be held and that he would come in at some point and paint something for the dinner/auction. The Chairperson agreed reluctantly to this arrangement and immediately had such a canvas set up on a large easel behind the curtain of the hall. In front of the easel was a sign with John Brush’s name on it. Brush, however, never showed up and the canvas was completely blank at the time of the dinner.
The auction was always held just after dessert was served. Since Brush provided no painting, the Chairperson had decided that about all she could do was to announce right after dinner that there would be no auction that night. The stage manager of the evening, however, did not know of this change and when the Chairperson stood at the podium after dinner to announce there would be no auction, the stage manager had the curtain opened. Of course all that the dinner guests saw was a blank canvas. Some members of the audience concluded that this was some sort of trick being played either by AAA or by John Brush and they became extremely angry. The Chairperson believes that that hostility was responsible for fewer pledges left at the table and, of course, for the loss of the anticipated auction price, whatever that may have turned out to be had Brush produced a work for auction.
The negative publicity for AAA also, in the judgment of the Chairperson, had a negative impact on the sale of tickets for the Los Angeles dinner in April. Although there was an auction of a work produced by a well-known artist (not Brush), the evening’s proceeds were well below prior Los Angeles AAA dinners.
The Chairperson wants to know whether AAA has any rights against Brush. If the answer is yes, the Chairperson wants to know what damages might be sought against Brush. Although Brush’s income as an artist is limited, he is the son of the founder of a major United States toy manufacturer and has inherited substantial wealth. In analyzing AAA’s situation and composing the arguments you would make for AAA, please also set out the legal arguments you would expect Brush’s attorneys to make. Please confine your analysis to issues of the law of contracts raised by the facts told us by the Chairperson. Other lawyers in the firm are researching available tort law theories.
Question II
(50 of 100 points; Suggested Time: One Hour)
Our client, Oats Sales Company (hereafter referred to as Oats), is in the business of buying oats from farmers and selling the oats to companies who process the oats into food products like cereals and breads. In January 1999, Oats signed a two-year contract to sell cereals to General Cereals, Inc. (hereafter referred to as Cereals), a newly formed company whose business plan was to become a major seller of oat-based cereals in the mid-Atlantic and New England regions of the United States. The contract stated that Oats would be the exclusive source from which Cereals would buy oats. It stated that, by the 15th of each month, Cereal would order oats from Oats. The quantity ordered, it was agreed, would depend upon Cereal’s requirements for oats. Of course this, in turn, depended upon the amount of cereal sold by Cereals. The contract contained an estimate that each month during the first year Cereals would probably be ordering 100 bushels of oats and that each month during the second (and final) year of the contract, Cereals would probably be ordering 150 bushels of oats. The price to be paid by Cereals was set at $100 per bushel for the first year and $110 per bushel for the second year of the contract.
Simultaneously with the signing of the contract, Cereals ordered and shortly thereafter Oats delivered 100 bushels of oats. Both parties hoped that Cereals would have great success with its new line of oat-based cereals.
Unfortunately, Cereals found that marketing a new cereal was more difficult than it had anticipated. By June 1999, Cereals had lost a considerable amount of money. Their monthly orders for oats had dropped from their first 100 bushels of oats to 50 bushels. Both companies were, of course, disappointed but still hopeful. By November 1999, however, unpaid creditors of Cereals had forced Cereals into bankruptcy. Two hundred bushels of oats that had been delivered by Oats to Cereals were unpaid for. While the outcome of the bankruptcy is not clear, Cereals has considerable assets in the form of machinery for the production of cereal, and while creditors are not likely to recover all that Cereals owes them, Oats believes that there are enough assets to cover a high percentage of the moneys owed by Cereals. Oats therefore wishes to pursue possible recoveries against Cereals in the bankruptcy proceedings. The law applicable in such proceedings to any claims made by Oats against Cereals would be the same as the law that would be applicable in state court. The state whose rules would govern has typical common law contract rules. The jurisdiction has also adopted Article 2 of the Uniform Commercial Code.
In our review of the relationship between Oats and Cereals, we have learned that in March of 1999, when both Oats and Cereals still expected great sales for Cereals' products, Oats stated to Cereals that it, Oats, wanted all of its buyers of oats to include in their advertising and packaging representations about the nutritional and health aspects of eating oats. In that conversation, Oats specifically asked Cereals to include in its advertising a representation about the health benefits of eating products made from oats. Accordingly, at the cost of $10,000 to Cereals, Cereals revised its cereal box so that it now contains the following statement displayed prominently on the box: “This cereal is made from oats. In a low fat diet, whole grain foods made from oats may reduce the risk of heart disease.” Before approving the new box design, Cereals showed the proposed design to Oats and Oats expressed its delight with the design and its gratitude to Cereals.
Your task is to provide Oats with an analysis of its claims against Cereals and of any claim which Cereals (through the Trustee in Bankruptcy acting for Cereals) can make against Oats. In providing this analysis, please include the responses you would make to Cereals' arguments and the responses that you would expect Cereals to make to your arguments.