Spring Term 2000 Examination

Spring 2000

Question 1

(40 of 120 points; Suggested Time: One Hour)

In 1988, your client Everett Green purchased land which has on it a spring out of which flows large quantities of sweet-tasting pure water. Green purchased the land because of its natural beauty, but he became aware almost immediately after purchasing the land of the potential commercial value of the spring. That potential increased dramatically during the early 1990s with the increased demand for and consumption of bottled spring water in the United States. In 1994, Green entered into an agreement with Pump and Bottle (PAB) Company. PAB agreed to pump water from the spring on Green’s land to its nearby bottling facilities. The agreement stated that PAB would pump and bottle 1 million gallons of water a year for ten years. The contract provided for an initial base price for the first year, to increase by ten percent at the beginning of each succeeding year. This annual increase was based upon the market trends over the five years that preceded the agreement. In 1992, when the agreement was signed, it seemed likely that the trend of the preceding five years would continue because people distrusted municipal water supplies and had increasingly adopted the practice of buying and consuming bottled water.

The agreement and its pricing term worked well for the first three years of the agreement. However, in the fourth year, a dramatic breakthrough was achieved in the technology for treating municipal drinking water. This led to a cheap, effective, and completely safe means of purifying public water supplies. Water districts across the country implemented it quickly. The demand for bottled water dropped significantly as people realized that they no longer had to pay steep prices for something they could get for pennies from their water faucets. Gradually at first, and then rapidly, the demand for bottled water declined. By the middle of the fifth year of the agreement, the price paid for pumping and bottling equalled or exceeded the net value to Green of the bottled water. By the beginning of the sixth year, the cost of pumping and bottling each bottle had reached twice the price that Green could sell the bottle for. Furthermore, Green could not sell at any price 1 million gallons of water each year. Green believes the trend will continue and that both the market for bottled water and the price at which bottled water can be sold will continue to decline.

May Green cancel its contract with PAB? If so, on what basis? What arguments would you expect PAB’s attorney to make in arguing that Green is bound to the contract with PAB for the remainder of the ten year contractual period?

Question 2

(50 of 120 points; Suggested Time: 1 ¹/₄Hours)

Paul Play conceived of and designed a purple dinosaur toy which looked very much like the television character named Barney. He realized that he would need to secure a license from the company owning the intellectual property rights to Barney, but was certain that a license would be available both because the Barney figure had been licensed to others and because his particular toy carried out nicely the themes and values which characterized the TV Barney figure. Paul’s idea was that his toy Barney would talk in response to his owner’s statements. For example, if a child said “I love you Barney,” the Barney figure would respond, “I love you too.” While Paul had designed the robotics elements (Barney could walk and could avoid walking into objects like walls or chairs), he did not have the skill to design the computer required to do speech recognition and appropriate response. For this purpose he sent an e-mail to Bill Gateway. Bill is a skilled computer designer and programmer who had, Paul knew, been working on a variety of speech-recognition projects. In his offer, Paul said he would pay Bill $100,000 for the design and assemblage of 10 talking Barney figures which Paul could then use to demonstrate the figure to distributors and retailers of toys. The marketing of toys is quite seasonal in character. Most toys are purchased by distributors and retailers for sale during the Christmas buying period. Decisions about which toys are going to be purchased and marketed are made in the previous March. Paul’s offer contained a provision stating that Bill would design the necessary computer and program and assemble the 10 sample Barney toys by the end of February.

When Bill received the offer from Paul by e-mail in January, he was in the midst of another voice recognition project which also required voice recognition by robotics engine assemblers for a company which built tractors. The challenge was to develop a computer that would recognize commands in a noisy environment and then carry out the command. As in the Barney toy, the challenge was to develop the computer software’s ability to respond appropriately where the statements made to the computer were both in a noisy environment and would not necessarily involve a fixed phrase. Bill made no response to Paul’s e-mail, but he now included in his research on speech and acoustics the challenge of machine “hearing” and responding to a child’s voice which could come from any direction (unlike the tractor assembly project in which the command would be made directly into a microphone attached to the machine). He worked during January and February on both projects. By the middle of February, he believed he had reached the point at which he could begin assembling a working model of Barney which would meet Paul’s specifications.

During this same period, Paul was negotiating with the company which owned the Barney figure. While they were not opposed to the toy as described by Paul, the cost of the licensing fee which they demanded would have, in Paul’s opinion, made it unlikely that the toy could be manufactured and sold profitably. As he was deciding what to do about this problem, Paul received an e-mail from Bill:

This job is more difficult and more costly than I expected. I will be able to make five of these figures for the $100,000 that you quoted to me, but not ten. I will have the five ready to show by the end of this month (February) as you requested. Please tell me where you want them delivered.

Paul

Paul then e-mailed this response to Bill:

Thanks for your e-mail, Bill. The licensing never came through from the Barney people so I am not going ahead with the project. Don’t bother making the five figures. I look forward to getting together with you in another, I hope more profitable project, in the future.

Bill

Paul has now received a letter from Bill’s attorney stating that unless Paul pays him $100,000 by the end of May, they will institute legal action against Paul. Please advise Paul about the probable legal arguments that will be advanced by Bill against Paul and of the responses that you would make to these arguments. It is by no means clear whether a court will apply UCC Article 2 to this transaction. If you believe that the arguments under Article 2 and the common law may be different, you should explain how and present both Article 2 and common law arguments.

Question 3

(30 of 120 points; Suggested Time: 45 minues)

Sue owned a piece of land in a fast-growing suburb. Malls, Inc., a developer of shopping malls, was interested in the possibility of building a mall on Sue’s land. Determining the feasibility of constructing a mall requires both careful study of the economic potential of the project and also investigation of whether adequate funds could be raised from investors. In 1998, Malls, Inc. entered into negotiations with Sue to acquire an option to purchase her land. Malls believed that it could conduct the necessary studies and assemble the necessary investors for the project within one year. On December 1, 1998, it proposed buying a year’s option under which Malls would pay Sue $10,000 for a one year option to buy the property for $2 million dollars. This was the relevant part of the option contract:

Malls hereby agrees to pay Sue $10,000 for the year’s option, payable on the signing of this agreement. If Malls wishes to exercise its option to purchase the property, it is required by not later than November 30, 1999, to deliver to Sue written notice of its intention to exercise the option.

At the signing of the contract, Malls paid Sue the promised $10,000 and began its feasibility study. By June 1999 the study was completed at a cost of $300,000. It showed the project to be worth doing and Malls began to solicit investors. After a great deal of effort, it finally managed to raise the necessary capital by late November 1999. On November 29, 1999, it mailed written notice to Sue exercising its option to purchase the land. The letter was delayed in the mail and not received until December 1.

Sue had wanted to escape the contract with Malls because the value of the property had increased since December 1998 due to general changes in the real estate market in her area. She would now be able to sell the property for at least $2.5 million. She therefore rejected the exercise of the option on the basis that it was received after the expiration of the option period.