Grading Form

Contracts Law 503 Section 1 May 5, 2006
Spring Term 2006 Final Examination
Professor Howard Kalodner

Leah Lively was planning her first vacation in many years. She was going to go white water rafting down the Colorado River. It was a two week trip, and she planned every detail of it carefully. By January, every arrangement had been made: travel, hotel and meals. She had only one concern, and that was the weather. She was afraid that in April, the only time that she could make the trip, the weather might be cold and rainy. She felt that poor weather would ruin this carefully planned and long awaited vacation.

One month before she was to leave home on her vacation, she saw an advertisement in a travel magazine. the advertisement said:

DO NOT LET INCLEMENT WEATHER RUIN
YOUR TWO WEEK VACATION! INSURE WITH US. IF IT IS NOT SUNNY, WE PAY, ALL FOR $100. CALL NOW!

VACATION INSURANCE COMPANY, 1-800-999-9999.

Leah called the telephone number provided in the advertisement and told the person who answered her call that she wished to insure the weather on her vacation, giving that person information about where and when she was going. The next day Leah received in the mail a form from Vacation Insurance Company. The form was entitled “Application for Insurance Against Inclement Weather.” Leah glanced at it briefly, assuring herself that her name was spelled correctly on the form and that the form correctly stated her destination and the dates of her vacation. She also read the first paragraph of the form which stated:

This policy insures against inclement weather.

Leah signed the form, and placed it, together with a check in the amount of $100.00, the insurance premium, in an envelope provided. She also enclosed a letter to the insurance company which stated:

I am sure you can see how important it is to me that I have two sunny weeks for this vacation and how relieved I feel that if I do not have sunny weather, at least I will not have lost any money.

Three weeks later, Leah left on her vacation. The weather was nice when she left home, but that was the last sun she saw for two weeks. A fierce and unusual Spring snowstorm struck Colorado. After that, the weather was grey and cold for two weeks. The water was so rough on the river that all rafting was prohibited. Leah sat in her hotel room for two weeks feeling quite miserable, thinking only that at least the insurance would reimburse her for all of her travel costs.

After she returned home, she sent a letter to the company together with some newspaper clippings describing the storm and the weather during her two-week stay in Colorado. She included all of her receipts for her costs of transportation, hotel and meals. She received back the following letter which she has brought to you for your analysis:

Dear Ms. Lively,

We are in receipt of your letter of April 26. Our records show that you applied for insurance coverage for your vacation in Colorado. Our records also show that we never accepted your application for insurance. You will recall that the policy form we sent to you recited in its last paragraph, ‘This policy will become effective when it is accepted by the President of Vacation Insurance Company.’ I never accepted your policy application.

Furthermore, the insurance you applied for, in paragraph 5(a) defining the scope of insurance against risks, stated as follows: ‘Inclement weather is hereby defined as hurricanes, floods and earthquakes.’ The information you sent us about the weather you experienced makes it clear that no covered event took place.

Since we did not accept your application for insurance, we are enclosing your $100 with this letter.

We look forward to providing you with our excellent vacation insurance policies in the future.

Yours for Happy Vacations,

Lawrence DeTour,
President
Vacation Insurance Company

Please advise Leah Lively about her claim against Vacation Insurance Company for reimbursement of her vacation costs. Discuss also Vacation Insurance Company’s responses to the arguments you will make on Leah’s behalf.

Question 2
(40 points - Suggested Time: One Hour)

You have been asked by Samuel Buyer to advise him about a difficult situation in which he finds himself. Samuel Buyer had contracted with Discount Meats Corporation for the delivery of meat to his home over a two year period. Under the contract, Discount would provide a freezer to Buyer in exchange for Buyer’s agreeing to buy $1,000.00 in meat during the two year period following delivery of the freezer. The freezer would become the property of the buyer at the end of the two year period. The contract recited that each week Discount would notify buyer of the following week’s choices and prices. Buyer signed the contract and also signed a promissory note to Discount Meats in the amount of $1,000. The contract states that:

On condition that buyer satisfactorily performs his contract obligation to buy $1,000 in meat during a period of two years from this date, Discount will release Buyer from the obligations of this note. Any breach by Buyer will permit Discount to cancel the contract. Upon cancellation of the contract by Discount, the promissory note for $1,000 will become payable immediately.

The only representation about the meat to be offered by Discount Meats under the contract is found in paragraph 2. It stated that “The prices charged for the meat will be at or below prevailing supermarket meat department prices in Buyer’s neighborhood.” Prior to signing, Buyer told Discount’s sales personnel that he very much enjoyed eating chicken, lamb and veal, but that he ate very little beef. Discount’s sales personnel assured Buyer that there would be no difficulty in satisfying those preferences.

The freezer was delivered immediately after the signing of the note and contract, but Buyer has had difficulty in ordering from Discount. In two of the first four weeks after the contract was signed, there was nothing on Discount Meat’s price list except chicken thighs (a part of the chicken that Buyer does not particularly like) and beef. The beef selection was quite extensive, but Buyer, as he had told Discount’s sales personnel, eats very little beef. The result was that buyer ordered very little meat from Discount during that first month. At the end of that month, Buyer received a letter warning him that if his purchases continued at that level, he would not have purchased the $1,000 in meat which he was obliged to buy under the contract. Buyer, the very next week, ordered $100 worth of meat from Discount, only to find that half of it arrived spoiled and not suitable for eating. Buyer sent back the spoiled meat and he has not yet made any payment on Discount’s $100 charge for that shipment.

Discount has now sent Buyer a letter terminating the contract and demanding payment by Buyer of the $1,000 promissory note.

Buyer has come to you for advice. He says he is dissatisfied both with the selection and with the quality of Discount’s meat. He has done some investigation of freezer prices, and has found an identical model freezer at a store downtown for $350. Buyer would like to return the freezer and forget about the whole deal.

Please review with Buyer his rights and liabilities. This may be considered an installment contract. You should, therefore, consider UCC 2-612 in addition to other provisions of Article 2.

Question 3
(40 points - Suggested Time: One Hour)

Alice Able owns and operates a successful machine tool business in Springfield, Massachusetts. She is an inventor who holds several patents for devices used in the manufacturing of machine tools. In 2005, her business had gross sales of $1,000,000 and a net profit after all expenses of $250,000. The machine tools she manufactures are, for the most part, purchased by automobile and airplane manufacturers both in the United States and in other countries. These tools are used in factories in many countries as part of ”robotic” manufacturing, manufacturing in which machines work on an assembly line doing tasks which used to require human workers.

In the Spring of 2006, Alice Able was approached by one of her larger customers, Burt Bice, who expressed interest in buying Alice Able’s business. The initial offer made by Burt Bice was to purchase Alice Able’s business for $10,000,000. Alice Able was reluctant to consider sale of her business, but it was an attractive offer and she said she would consider it. She said that she wanted time to think about it and that she wanted to know more details about the transaction, including such questions as whether the purchase would be for cash or a combination of cash and stock in Burt Bice’s company. She also wondered whether she could continue to play an active role in the design of new machine tools and how she would be compensated for that work. Burt Bice suggested that they sign a letter of intent so that they could continue their discussions for whatever time that might take. They wrote out and both signed the following:

We, Alice Able and Burt Bice, agree that we will continue our discussions about the purchase of Alice Able’s company, including all of its assets and liabilities, by Burt Bice for $10,000,000 and that Alice Able will not offer her company for sale to any other entity during those discussions.

Within a few weeks after signing this agreement, Alice Able and Burt Bice had agreed on the financial terms of the deal. They agreed that Alice Able would receive $5,000,000 in cash and the remainder in stock in Burt Bice’s company. They agreed that the number of shares of stock transferred to her would be based on the market price of the stock on the day the purchase agreement would be signed. However, when Alice Able raised the question of her continuing to work on the design and manufacture of machine tools, Burt Bice refused to discuss the matter, arguing that it was not a negotiable point and that it was against his company policy to make any contractual employment or independent contractor contracts with owners of companies whose assets his company purchased. Alice Able became quite angry about the position taken by Burt Bice on this issue, and she refused to meet with Burt Bice to continue discussions about the deal. Within a month after this event, she received an offer from Carl Clark to acquire her company for $8,000,000. Carl Clark made it clear that if they purchased Alice Able’s company, it would become a division of Carl Clark which she could continue to manage as long as she wished. Carl Clark offered her an annual salary of $250,000 plus 15% commission on sales of any machine tools which she designed while employed by Carl Clark. Alice Able was very pleased with these arrangements. She notified Burt Bice that their negotiations were at an end. Burt Bice was angered by Alice Able’s withdrawal from the deal. That anger was aggravated by the fact that Carl Clark is a competitor of Burt Bice and Carl Clark’s purchase of Alice Able’s company could do serious economic injury to Burt Bice.

Alice Able has now received a letter from Burt Bice’s attorney stating that Alice Able was in breach of the agreement she had made with Burt Bice and demanding that she refrain from selling her company to Carl Clark and that she resume her negotiations with Burt Bice. Alice Able has asked you to analyze her legal situation. Please consider arguments you can make on her behalf. You should also consider the arguments you must anticipate will be made by Burt Bice’s attorneys in support of their demands.

END OF EXAMINATION