BLAW Exam 1 Textbook Problems

A Question of Ethics—Promissory Estoppel. Claudia Aceves borrowed from U.S. Bank to buy a home. Two years later, she could no longer afford the monthly payments. The bank notified her that it planned to foreclose on her home. (Foreclosure is a process that allows a lender to repossess and sell the property that secures a loan.) Aceves filed for bankruptcy. The bank offered to modify Aceves's mortgage if she would forgo bankruptcy. She agreed. Once she withdrew the filing, however, the bank fore- closed. (a) Could Aceves succeed on a claim of promissory estoppel? Why or why not? (b) Did Aceves or U.S. Bank behave unethically? Discuss.

(a) The elements of promissory estoppel are (1) a promise, (2) the promisee's justifiable reliance on the promise, (3) reliance of a substantial and definite character, and (4) justice better served by the enforcement of the promise. In the facts of this problem, under a theory of promissory estoppel, Aceves's best strategy is to argue that the bank's promise to work with her in modifying the loan was enforceable, that she relied on the promise by forgoing bankruptcy protection, that the bank breached its promise by foreclosing on her home, and that justice would be better served by allowing her to stay in her home and work out a modified schedule of payments with the bank. In the actual case on which this problem is based, the court concluded that the bank promised to work on a loan modification if Aceves did not seek relief in bankruptcy, Aceves reasonably relied on this promise when she withdrew her filing, and this decision allowed the bank to foreclose on the property. (b) As for unethical behavior, U.S. Bank clearly misrepresented it was willing to forgo foreclosure while expediting foreclosure proceedings. The bank apparently never intended to work with Aceves to modify her loan. It promised to do this only to convince her to forgo bankruptcy proceedings so that the bank could foreclose on the property. The elements of fraud are similar to the elements of promissory estoppel, with the additional requirements that a false promise be made and that the promisor know of the falsity when making the promise. It is easy to view this conduct as unethical. Acts that support claims for promissory estoppel and fraud, as occurred in these facts, are patently unethical. A lapse of ethics in Aceves's conduct is less clear. She may have overextended herself in taking on this mortgage to buy this house. That the mortgage payments became unaffordable for her less than two years into the loan indicates that she may have fooled herself at the inception of the loan into thinking that she could afford it at all. If that was the circumstance, she may have been motivated by greed or she may have fallen victim to self-deception, either of which are arguably unethical. She might have been better situated if she had bought a less expensive home under a more affordable loan.

A Question of Ethics—Remedies. On a weekday, Tamara Cohen, a real estate broker, showed a town- house owned by Ray and Harriet Mayer to Jessica Seinfeld, the wife of comedian Jerry Seinfeld. On the weekend, when Cohen was unavailable because her religious beliefs prevented her from working, the Seinfelds revis- ited the townhouse on their own and agreed to buy it. The con- tract stated that the "buyers will pay buyer's real estate broker's fees." [Cohen v. Seinfeld, 15 Misc.3d 1118(A), 839 N.Y.S.2d 432 (Sup. 2007)] (See Equitable Remedies.) (a) Is Cohen entitled to payment even though she was not available to show the townhouse to the Seinfelds on the weekend? Explain. (b) What obligation do parties involved in business deals owe to each other with respect to their religious beliefs? How might the situation in this case have been avoided?

(a) Both parties filed motions for summary judgment. The court granted Cohen's motion and issued a judgment of liability against the Seinfelds for breach of contract. The court denied the Seinfelds' motion, in which they had contended that Cohen was not a licensed broker—she was. The court reasoned, "[T]he evidence clearly indicates that [Cohen] served as the Seinfelds' real estate broker. Indeed, she located several townhouses at Galistino's request, showed the premises in question to Galistino and Jessica Seinfeld on [Friday} February 11, 2005, and made arrangements to have the Seinfelds see the premises the following week." The court emphasized, "[T]he contract clearly provided that the sellers would pay Sanchez's brokers fees and the buyers (the Seinfelds) would pay the buyers' broker's fees. These facts . . . establish that there was a co-brokerage agreement whereby plaintiff would receive one half of the broker's fee. The only real issue here, as far as the Court is concerned, is whether the broker's fee was five or six percent." Thus "[t]he matter will proceed to trial on the issue of whether the broker's fee was five or six percent." In other words, the court determined that Cohen was entitled to the full amount of her fee and that the Seinfelds were liable to pay it. The court did not comment on Cohen's unavailability on Friday evenings and Saturdays. It would seem, however, that the court did not interpret Cohen's temporary unavailability due to her religious practices as any more significant than any party's scheduling conflicts would be with respect to any business deal. (b) It does not seem unreasonable that parties in business transactions should respect each other's religious beliefs. It does seem, however, that a party owes a concomitant duty to inform others, when necessary, of those beliefs and what their practice may involve. This would seem especially to be warranted when, as in the Cohen case, none of the other parties indulged in the same practices. One step that the parties in this case might have taken to avoid their conflict would have been to communicate more clearly. Cohen, for example, could have set out in writing the details of what she expected from any completed transaction. She also could have been more emphatic in explaining to the Seinfelds that her religious practices limited her availability for showing properties. The Seinfelds could then have explained that they wanted a representative who would be more available, and the parties could have made different arrangements. These other arrangements might have involved a substitute broker, or some other temporary representative, who would have been acceptable to Cohen, just as the Seinfelds used Galistinos and Liebling as their representatives.

A Question of Ethics—Agreement to Arbitrate. Nellie Lumpkin, who suffered from various illnesses, including dementia, was admitted to the Picayune Convalescent Center, a nursing home. Because of her mental condition, her daughter, Beverly McDaniel, filled out the admissions paperwork and signed the admissions agreement. It included a clause requiring parties to submit to arbitration any disputes that arose. After Lumpkin left the center two years later, she sued, through her husband, for negligent treatment and malpractice during her stay. The center moved to force the matter to arbitration. The trial court held that the arbitration agreement was not enforceable. The center appealed. [Covenant Health & Rehabilitation of Picayune, LP v. Lumpkin, 23 So.3d 1092 (Miss.App. 2009)] (See Alter- native Dispute Resolution.) (a) Should a dispute involving medical malpractice be forced into arbitration? This is a claim of negligent care, not a breach of a commercial contract. Is it ethical for medical facilities to impose such a requirement? Is there really any bargaining over such terms? Discuss fully. (b) Should a person with limited mental capacity be held to an arbitration clause agreed to by the next of kin who signed on behalf of that person? Why or why not?

(a) This is very common, as many hospitals and other health-care provides have arbitration agreements in their contracts for services. There was a valid contract here. It is pre- sumed in valid contracts that arbitration clauses will be upheld unless there is a violation of public policy. The provision of medical care is much like the provision of other services in this regard. There was not evidence of fraud or pressure in the inclusion of the arbitration agreement. Of course there is concern about mistreatment of patients, but there is no reason to believe that arbitration will not provide a professional review of the evidence of what transpired in this situation. Arbitration is a less of a lottery that litigation can be, as there are very few gigantic arbitration awards, but there is no evidence of systematic discrimination against plaintiffs in arbitration compared to litigation, so there may not be a major ethical issue. (b) McDaniel had the legal capacity to sign on behalf of her mother. Someone had to do that because she lacked mental capacity. So long as in such situations the contracts do not contain terms that place the patient at a greater disadvantage than would be the case if the patient had mental capacity, there is not particular reason to treat the matter any differently.

Voluntary Consent. Discuss whether either of the following contracts will be unenforceable on the ground that voluntary consent is lacking: (a) Simmons finds a stone in his pasture that he believes to be quartz. Jenson, who also believes that the stone is quartz, contracts to purchase it for $10. Just before delivery, the stone is discovered to be a diamond worth $1,000. (See Mistakes.) (b) Jacoby's barn is burned to the ground. He accuses Gold- man's son of arson and threatens to have the prosecutor bring a criminal action unless Goldman agrees to pay him $5,000. Goldman agrees to pay. (See Duress.)

(a) Simmons and Jenson have made a bilateral mistake. The issue is whether the mistake involves the identity of the stone (quartz versus diamond) or the value of the stone ($10 versus $1,000). Because both parties were mistaken as to the true character of the subject matter, the contract can be rescinded by either. Had either party known that the stone was some type of gem, then even though its exact nature was unknown (diamond), the mistake would be one of value, not fact, and the contract would not be rescindable. (b) A contract entered into through a threat of criminal prosecution is generally held to be made under duress and is voidable, regardless of whether Goldman's son is guilty of arson. Such is the case here.

A Question of Ethics—Covenants Not to Com- pete. Brendan Coleman created and marketed Clinex, a soft- ware billing program. Later, Retina Consultants, P.C., a medical practice, hired Coleman as a software engineer. Together, they modified the Clinex program to create Clinex-RE. Coleman signed an agreement to the effect that he owned Clinex, Retina owned Clinex-RE, and he would not market Clinex in competition with Clinex-RE. After Coleman quit Retina, he withdrew funds from a Retina bank account and marketed both forms of the software to other medical practices. At trial, the court entered a judgment enjoining (preventing) Coleman from marketing the software that was in competition with the software he had developed for Retina Con- sultants. The court also obligated Coleman to return the funds taken from the company's bank account. Coleman appealed. (a) Should the court uphold the noncompete clause? If so, why? If not, why not? (b) Should the court require Coleman to return the funds he withdrew from the company's accounts? Discuss fully. (c) Did Coleman's behavior after he left the company influ- ence the court's decision? Explain your answer.

(a) The appellate court did not uphold the non-compete clause because it was invalid and unenforceable because it contained no time or territorial limitations. (b) Quite clearly, Coleman had converted funds that were in a joint account that the company and Coleman had used. Therefore, it was reasonable for the court to require return of these funds. (c) In spite of the fact that the non-compete clause in the software agreement was unenforceable, Coleman's unethical behavior upon leaving the company's employ probably was a convincing factor in both the trial and the reviewing courts' decisions.

A Question of Ethics—Mistake. On behalf of BRJM, LLC, Nicolas Kepple offered Howard Engelsen $210,000 for a parcel of land known as lot five on the north side of Barnes Road in Stonington, Connecticut. Engelsen's company, Output Systems, Inc., owned the land. Engelsen had the lot surveyed and obtained an appraisal. The appraiser determined that the property was 3.0 acres in size. It thus could not be subdivided because it did not meet the town's minimum legal requirement of 3.7 acres for sub- division. The appraiser then valued the property at $277,000. Engelsen responded to Kepple's offer of $210,000 with a counter- offer of $230,000, which Kepple accepted. On May 3, 2002, the parties signed a contract. When Engelsen refused to go through with the deal, BRJM filed a suit in a Connecticut state court against Output, seeking specific performance and other relief. The defendant asserted the defense of mutual mistake on at least two grounds (a) In the counteroffer, Engelsen asked Kepple to remove from their contract a clause requiring written confirmation ofthe availability of a "free split," which meant that the property could be subdivided without the town's prior approval. Kepple agreed. After signing the contract, Kep- ple learned that the property was not entitled to a free split. Would this circumstance qualify as a mistake on which the defendant could avoid the contract? Discuss. (b) After signing the contract, Engelsen obtained a second appraisal that established the size of lot five as 3.71 acres, which meant that it could be subdivided, and valued the property at $490,000. Can the defendant avoid the contract on the basis of a mistake in the first appraisal? Explain.

(a) The court held that the contract was void due to mutual mistake and issued a judgment in the defendant's favor. The lower court determined, among other things, that a mutual mistake of fact existed as to the divisibility of lot five—in other words, that the property was entitled to a free split. BRJM appealed this ruling to a state intermediate appellate court, which reversed the lower court's judgment and remanded the case for a new trial. The appellate court explained that a mutual mistake requires a mutual misunderstanding between the contracting parties as to a material fact and "effects a result that neither intended." The court acknowledged that both parties were mistaken about the availability of a free split for lot five. But the court reasoned that "this mistake was not material to their bargain. . . . [T]he necessity of obtaining prior approval did not render the property incapable of being subdivided; rather, the only consequence was that Kepple would have to file an application with the [town] and undergo the approval process in order to subdivide the property. Additionally, any claim that a free split was material to the parties' agreement is fatally undermined by the fact that the parties did not include a provision to this effect in their agreement." The clause that mentioned a free split had been removed from their contract on Engelsen's request. Besides, "the fact that it was later determined that approval would be necessary in order to subdivide the property adversely affected the plaintiff, as purchaser, not the defendant, as seller. The defendant cannot seek to invalidate the agreement by asserting the defense of mutual mistake on this basis because the defendant is not the party adversely affected by the mistake." (b) As noted in the answer to the previous question, the court held that the contract was void due to mutual mistake and issued a judgment in the defendant's favor. The court found in part the existence of a mutual mistake in the parties' reliance on an inaccurate appraisal that resulted in a below market purchase price for the property. On BRJM's appeal, the state intermediate court reversed this judgment and remanded the case for a new trial. The appellate court pointed out that "necessary for a finding of mutual mistake is that both parties relied on the same mistaken information in entering into a contract." In this case "the mistake in establishing a below market purchase price for the property was a unilateral one made by Engelsen, acting on behalf of the defendant, in reliance on the inaccurate appraisal." The court reasoned, "[T]he appraisal inaccurately valued the property as a result of appraiser error with respect to the size of the property and whether it could be subdivided. The mistakes of the appraiser, made while acting on behalf of the seller, and the seller's subsequent reliance thereon cannot be imputed to the plaintiff, as purchaser. There was no evidence . . . that Kepple, acting on behalf of the plaintiff, relied on the appraisal. The evidence, in fact, supports the opposite conclusion, that Engelsen, acting on behalf of the defendant, obtained the appraisal in order to ascertain the value of the property and subsequently relied on the appraisal's inaccurate valuation in establishing the purchase price." Engelsen reviewed the appraisal before signing the contract, but Kepple had no similar opportunity. The appraisal itself stated that it "was intended to be used solely by [Engelsen] as an estimate of market value." Kepple was not given a copy and there was no evidence that he was otherwise "privy to the information on which the appraisal was based or that he relied on the appraised value in accepting the counteroffer."

A Question of Ethics—Conditions. King County, Washington, hired Frank Coluccio Construction Co. (FCCC) to act as general contractor for a public works project involving the construction of a small utility tunnel under the Duwamish Waterway. FCCC hired Donald B. Murphy Contractors, Inc. (DBM), as a subcontractor. DBM was responsible for constructing an access shaft at the east- ern end of the tunnel. Problems arose during construction, includ- ing a "blow-in" of the access shaft that caused it to fill with water, soil, and debris. FCCC and DBM incurred substantial expenses from the repairs and delays. Under the project contract, King County was supposed to buy an insurance policy to "insure against physical loss or damage by perils included under an 'All-Risk' Builder's Risk policy." Any claim under this policy was to be filed through the insured. King County, which had general property damage insurance, did not obtain an all-risk builder's risk policy. For the losses attributable to the blow-in, FCCC and DBM sub- mitted builder's risk claims, which the county denied. FCCC filed a suit in a Washington state court against King County, alleging, among other claims, breach of contract. (a) King County's property damage policy specifically excluded, at the county's request, coverage of tunnels. The county drafted its contract with FCCC to require the all- risk builder's risk policy and authorize itself to "sponsor" claims. When FCCC and DBM filed their claims, the county secretly colluded with its property damage insurer to deny payment. What do these facts indicate about the county's ethics and legal liability in this situation? (b) Could DBM, as a third party to the contract between King County and FCCC, maintain an action on the con- tract against King County? Discuss. (c) All-risk insurance is a promise to pay on the "fortuitous" (accidental) happening of a loss or damage from any cause except those that are specifically excluded. Payment usually is not made on a loss that, at the time the insur- ance was obtained, the claimant subjectively knew would occur. If a loss results from faulty workmanship on the part of a contractor, should the obligation to pay under an all-risk policy be discharged? Explain.

(a) The court issued a judgment in FCCC's favor, ruling that it was entitled to an award of $1,501,426.21, including interest, for the damage caused by the blow-in and the reasonable cost of its repair, and $324,417.58 for attorneys' fees and litigation costs. King County appealed to a state intermediate appellate court, which affirmed the lower court's judgment. The appellate court reiterated the findings of the lower court: the general property damage insurance policy expressly excluded tunnels at King County's request, King County drafted the project contract that required the county to obtain an "All Risk Builder's Risk" policy, the county failed to obtain the required policy, and the county denied the contractors' builder's-risk claims for the losses due to the blow-in. "[T]he trial court's conclusion of law that 'King County breached its contractual obli- gation to provide All Risk Builder's Risk insurance coverage for the Project, including the interests of FCCC and DBM,' is supported by the trial court's findings of fact. There was no error." The appellate court also cited the finding that King County did not act in good faith or deal fairly with respect to FCCC and DBM's claims for builder's risk coverage. In assuming the respon- sibilities to procure the proper insurance and to "promote and sponsor" all-risk builder's risk claims, but then denying these claims, "the County elected and pursued a course intended only to protect the County's position and interests, to the detriment of FCCC and DBM. . . . King County was dishonest in fact and precluded FCCC from receiving the full benefit of performance under the Project contract by falsely representing that it had procured an all-risk policy for the Project . . . , by failing to adjust the builder's risk claims in good faith, and by colluding with [the general property damage insurer] to avoid coverage. Such behavior plainly contravened King County's duties of good faith and fair dealing, which exist to promote faithfulness to an agreed common purpose and consistency with the justified expectations of the other party." (b) DBM filed a suit in a Washington state court against King County, alleging breach of contract and other claims. The court dismissed the complaint, and on DBM's appeal, a state intermediate appellate court affirmed the dismissal. The appellate court held that DBM was not a third-party beneficiary to the project contract between King County and FCCC. DBM could not maintain an action on the King County-FCCC contract because DBM was not an intended third party beneficiary to it. An intended third-party beneficiary can be specifically designated in the contract, or it may be considered an intended beneficiary if it has the right to control the details of performance or the performance is rendered directly to it. Arguably, the par- ties to the project contract intended any subcontractors to benefit from the all-risk insurance clause, but the court held that this was not the case here. The subcontractor was only an incidental third-party beneficiary, and an incidental beneficiary does not have a right to sue to enforce a contract as a third party. After the judgment against DBM in its suit against King County to recover for the loss due to the blow-in, DBM filed a suit in a Washington state court against FCCC for breach of the sub- contract. In a settlement, FCCC agreed to "sponsor and pass through" DBM's claim against King County under the all-risk builder's risk insurance policy. (c) To recover under an "all risk" insurance policy, the determination of whether a loss is "fortuitous" has three parts, all in relation to the time at which the policy was issued: (1) the loss must not have been certain to occur; (2) the loss must not have been reasonably foreseeable; and (3) the parties' perception of the risk must be considered. It could be argued that faulty workmanship cannot constitute an "accident" within the mean- ing of a typical "all risk builder's risk" policy. But courts have held such policies to cover damages that poor workmanship causes. For example, risks that courts have determined to be covered "accidents" within the meaning of such policies include water damage resulting from the removal of a roof and from the mislocation of a house on a lot. Courts have also held that expenses in- volved in replacing broken pipe and repairing leaking collars improperly installed by a contractor's employees are covered. Even the negligence of a party unrelated to the contractor has not worked to deny coverage in all cases. All risk builder's risk policies vary considerably. To be certain to avoid payment for losses or damage due to faulty workmanship, a policy should expressly state that it excludes such liabil- ity. Because there was no all-risk builder's risk policy in this case, there was no contract language for the court to construe and apply. With respect to the fortuity of the loss, the appellate court stated, "The most critical finding of fact is the trial court's determination that it would be pure speculation as to why or how" the events that caused the blow-in occurred. "[N]o witness was in a position to explain with any rea- sonable probability why" it happened.

A Question of Ethics—Exceptions to the Writing Requirement. Madeline Castellotti was the sole shareholder of Whole Pies, Inc., which owns John's Pizzeria in New York City. Her other assets included a 51 percent interest in a real estate partnership, a residence on Staten Island, and various bank accounts. When Madeline's son, Peter Castellotti, was going through a divorce, Madeline wanted to prevent Peter's then-wife Rea from benefiting from any of Madeline's assets. With this purpose in mind, she removed Peter from her will, leaving her daughter Lisa Free as the sole beneficiary. Lisa orally agreed to provide Peter with half of the income generated by the assets after their mother's death if his divorce was still pending and to transfer half of the assets after the divorce was final. In reliance on those promises, Peter agreed to pay the property taxes for the estate. Madeline died and Peter paid the taxes, but Lisa reneged on the deal. Peter filed a suit in a New York state court against his sister to recover. (a) Should the court enforce the promise? On what legal theory? (b) If the court enforces the promise, should Rea get a share of what Peter and his mother and sister were "hiding"? Discuss.

(a) Yes, the court should enforce Lisa's promise to transfer half of the income generated by her mother's assets before her death and half of those assets after her death to Lisa's brother Peter. The facts in the circumstances described in this problem satisfy the requirements for a cause of action based on a theory of promissory estoppel.An oral contract that is otherwise unenforceable under the Statute of Frauds may be enforced on a theory of promissory estoppel. In that circumstance, a court will prevent a promisor from refusing to comply with the terms of a deal that, for example, is not evidenced in writing. The requirements for the application of this theory include the following: A clear, definite promise. The promisor's expectation that the promisee will rely on the promise. The promisee's reasonable reliance on the promise, as shown by he or she taking some action or refraining from acting.4. Reliance on the part of the promise that is definite and results in substantial detriment.5. Enforcement of the promise to avoid injustice. In this problem, Madeline Castellotti's son Peter was going through a divorce from his then- wife Rea. Madeline wanted to prevent Rea from benefiting from any of Madeline's assets, so she removed Peter from her will. This left her daughter Lisa Free as sole beneficiary. Lisa orally agreed to provide Peter with half of the income generated by the assets after their mother's death if his divorce was still pending, and to transfer half of the assets to him after the divorce was final. In reliance on those promises, Peter agreed to pay the property taxes for the estate. Madeline died and Peter paid the taxes, but Lisa backed out on the deal. These facts meet all the requirements for an action based on a theory of promissory estoppel. There was an unambiguous promise by Lisa to provide Peter with half of the income generated by the assets during the pendency of Peter's divorce, and to transfer half of the assets on the finality of the divorce. Peter reasonably and detrimentally relied on those promises by paying the property taxes for Madeline's estate, suffering damages. The only way to avoid injustice to Peter would be to enforce Lisa's promise—otherwise, Lisa would be allowed to keep all of the assets and Peter would suffer the loss of the funds that paid the estate's taxes. In the actual case on which this problem is based, in Peter's suit against his sister to recover half of the assets of their mother's estate, Lisa asserted that the Statute of Frauds barred his claim. The court dismissed the complaint. A state intermediate appellate court reversed on the basis of the theory of promissory estoppel. (b) Peter's failure to disclose his ultimate right to receive half of the assets of Madeline's estate in the future could have impacted the financial issues in his divorce from Rea. Rea would not have been entitled to a simple half of Peter's share—an inheritance is generally considered to be a spouse's separate property. But if Rea had known that Peter would later receive half of Madeline's estate, she might have sought, and might have been granted, more financial assets in the divorce proceeding. For example, any award by the court of spousal maintenance and child support might have been greater. It might be noted that there is nothing illegal about Madeline's act of changing her will or the agreement between Peter and Lisa with respect to the distribution of Madeline's assets. Madeline was free to leave her property to whomever she pleased, and the siblings were free to enter into an agreement to redistribute that inheritance. There is no statute, rule, or regulation violated by the siblings' agreement. There is also no indication that Peter fraudulently concealed or transferred any property owned by him or titled in his name, either before or during his divorce from Rea. The assets that might be alleged to have been "hidden"—half of the shares in Whole Pies, the real estate partnership, the house on Staten Island, and the bank accounts—were never in Peter's possession. At best, there is a claim that Peter attempted to delay the receipt of his half of the estate, which he was never legally entitled to in the first place, and did not disclose this potential revenue source to Rea.

Renee Beaver started racing go-karts competitively in 2016, when she was fourteen. Many of the races required her to sign an exculpatory clause to participate, which she or her parents regularly signed. In 2018, right before her sixteenth birthday, Renee participated in the annual Elkhart Grand Prix, a series of races in Elkhart, Indiana. During the event in which she drove, a piece of foam padding used as a course barrier was torn from its base and ended up on the track. A portion of the padding struck Beaver in the head, and another portion was thrown into oncoming traffic, causing a multikart collision during which she sustained severe injuries. Beaver filed an action against the race organizers for - nizers argued that she must have signed one to enter the race, but even if she had not signed one, her actions showed negligence. The race organizers could not locate the exculpatory clause that Beaver had supposedly signed. The orga her intent to be bound by its terms. Using the information presented in the chapter, answer the following questions. 1. Did Beaver have the contractual capacity to enter a contract with an exculpatory clause? Why or why not? 2. Assuming that Beaver did, in fact, sign the exculpatory clause, did she later disaffirm or ratify the contract? Explain. 3. Now assume that Beaver stated that she was eighteen years old at the time she signed the exculpatory clause. How might this affect her ability to disaffirm or ratify the contract? 4. If Beaver did not actually sign the exculpatory clause, could a court conclude that she impliedly accepted its terms by participating in the race? Why or why not?

1A. Capacity Yes, she could enter the contract but as a minor could later disaffirm it. A minor can enter into any contract an adult can, provided that that contract is not one prohibited by law for minors (such as the sale of alcoholic beverages). A contract entered into by a minor is voidable at the option of that minor. To avoid a contract, a minor need only manifest an intention not to be bound by it. The minor avoids the contract by disaffirming it. In Beaver's case, even if she did enter into a contract with an exculpatory clause, she could avoid the contract later by disaffirming it. 2A. Disaffirmance or ratification She disaffirmed it by filing a suit against the race organizers. A minor may disaffirm a contract at any time by expressing an intent in words or conduct not to be bound. Filing a suit would certainly indicate an intent not to be bound. If Beaver had reached the age of eighteen a reasonable time before attempting to disaffirm, however, she could be held to have impliedly ratified the contract. 3A. Age of majority Beaver's misrepresentation of age would not usually affect her right to disaffirm the contract. In some jurisdictions, the minor would not even be liable for the tort of fraudulent misrepresentation, because such a judgment might force the minor to perform the contract. In other jurisdictions, a minor who has misrepresented his or her age can be bound by a contract under certain circumstances, such as when the contract has been executed, and the minor cannot return the consideration received. Nevertheless, misrepresentation of age generally does not affect the ability of a minor to disaffirm a contract. 4A. Implied contract Exculpatory clauses found in certain types of agreements, such as those relating to property leases and employment, are typically not enforced. They may be enforced when the parties seeking enforcement are not involved in businesses considered important to the public interest. Businesses such as health clubs, amusement parks, and golf-cart concessions frequently use exculpatory clauses to limit their liability for patrons' injuries. In the case of a go-kart race, which is not vital to the public interest, it would be fair to assume that an exculpatory clause would be enforced. If Beaver knew about the clause and did not indicate that she did not agree with it, she might be considered by a court to have accepted its terms.

Val's Foods signs a contract to buy 1,500 pounds of basil from Sun Farms, a small organic herb grower, as long as an independent organization inspects the crop and certifies that it contains no pesticide or herbicide residue. Val's has a contract with several restaurant chains to supply pesto and intends to use Sun Farms' basil in the pesto to fulfill these contracts. While Sun Farms is preparing to harvest the basil, an unexpected hailstorm destroys half the crop. Sun Farms attempts to purchase additional basil from other farms, but it is late in the season, and the price is twice the normal - market price. Sun Farms is too small to absorb this cost and immediately notifies Val's that it will not fulfill the con tract. Using the information presented in the chapter, answer the following questions. 1. Suppose that the basil does not pass the chemical-residue inspection. Which concept discussed in the chapter might - tions to Val's? Why or why not?4. Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties agree that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement called? Debate This . . . The doctrine of commercial impracticability should be abolished. allow Val's to refuse to perform the contract in this situation?2. Under which legal theory or theories might Sun Farms claim that its obligation under the contract has been dis - 3. Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil charged by operation of law? Discuss fully. anywhere. Nevertheless, Sun Farms is able to ship only 1,475 pounds. to was. Would this fulfill Sun Farms obligationtions to Val's? Why or why not?4. Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties agree that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement called?

1A. ConditionThe appropriate concept would be discharge by failure of a condition. Under the contract, Val's does not have to perform (pay) unless the basil meets the stated condition (that it pass an inde- pendent inspection for chemical residue). Because the basil did not pass inspection, Val's is not obligated to perform. This condition of the contract would be precedent rather than subsequent or concurrent: the basil must pass the inspection before Val's is obligated to buy. 4 UNIT THREE: CONTRACTS AND E-CONTRACTS 2A. Destruction of the subject matterThe theory of commercial impracticability can excuse parties from their performance obligations when the performance becomes much more difficult or expensive than originally contemplated at the time the contract was formed. For this doctrine to be invoked, the anticipated performance must be extremely difficult or costly. Sun Farms' inability to purchase basil from other sources at twice the normal market price meets this requirement: doing so would bankrupt Sun Farms. 3A. Substantial performanceSubstantial performance is good faith performance that does not vary greatly from the contract and confers the same benefits as promised in the contract. Sun Farms acted in good faith and shipped as much chemical-free basil as it could obtain, which was only 25 pounds less than the contracted amount. A court would likely find that it had substantially performed its obligation to Val's. 4A. NovationThis is a novation—an agreement between the contracting parties to substitute a third party for one of the original parties. Under a novation, the new contract extinguishes the old contract and discharges the obligations of the prior party to the contract.

Chelene had been a caregiver for Marta's eighty-year-old mother, Janis, for nine years. Shortly before Janis passed away, Chelene convinced her to buy Chelene's house for Marta. The elderly woman died before the papers were signed, however. Four months later, Marta used her inheritance to buy Chelene's house without having it inspected. The house was built in the 1950s, and Chelene said it was in "perfect condition." Nevertheless, one year after the purchase, the basement started leaking. Marta had the paneling removed from the basement walls and discovered that the walls were bowed inward and cracked. Marta then had a civil engineer inspect the basement walls, and he found that the cracks had been caulked and painted over before the paneling was installed. He concluded that the "wall failure" had existed "for at least thirty years" and that the basement walls were "structurally unsound." Using the information presented in the chapter, answer the following questions. 1. Can Marta avoid the contract on the ground that both parties made a mistake about the condition of the house? Explain. 2. Can Marta sue Chelene for fraudulent misrepresentation? Why or why not? What element or elements might be lacking? 3. Now assume that Chelene knew that the basement walls were cracked and bowed and that she had hired someone to install paneling before she offered to sell the house. Did she have a duty to disclose this defect to Marta? Could a court find that Chelene's silence in this situation constituted misrepresentation? Explain. 4. Can Marta obtain rescission of the contract based on undue influence? If the sale to Janis had been completed before her death, could Janis have obtained rescission based on undue influence? Explain.

1A. Mistake Yes, if both parties were ignorant of the fact of the structure, there may be grounds for rescinding the contract. If there is a bilateral (mutual) mistake of material fact, such as structural soundness, then the parties did not know what they were really bargaining for and the contract could be rescinded. 2A. Fraudulent misrepresentation Anybody can file suit for anything; carrying the day in court is another matter. In the sale of an old house, the buyer has an obligation to have it inspected by a professional. A seller may very well not know of structural problems. Chelene is a caregiver, not a structural engineer. Unless Marta can show that Chelene put up the paneling to hide the wall problem, she is unlikely to have much of a case. 3A. Duty to disclose Chelene appears to have lied because she said the house was in perfect condition and she covered up a known problem. Chelene knew of the problem, lied about it, and covered it up. That appears to be misrepresentation by deception. Chelene was not silent because she said the house was in "perfect condition" when she knew the basement was a mess. 4A. Undue influence Yes, Chelene was in a position of "trust" for years, which allowed her to take advantage of Marta for personal gain. Marta made the deal on her own behalf. A buyer has some obligation to inspect property; Chelene's statements may reflect how she felt about the house, but any house more than 50 years old will have problems, so Marta was negligent. Had the sale been to Janis, it would be worthy of more inspection, as she was frail, did not need the house, and was in Chelene's care. Undue influence could arise there.

Kyle Bruno enters a contract with X Entertainment to be a stuntman in a movie. Bruno is widely known as the best motorcycle stuntman in the business, and the movie to be produced, Xtreme Riders, has numerous scenes involving high-speed freestyle street-bike stunts. Filming is set to begin August 1 and end by December 1 so that the film can be released the following summer. Both parties to the contract have stipulated that the filming must end on time to capture the profits from the summer movie market. The contract states that Bruno will be paid 10 percent of the net proceeds from the movie for his stunts. The contract also includes a liquidated damages provision, which specifies that if Bruno breaches the contract, he will owe X Entertainment $1 million. In addition, the contract includes a limitation-of-liability clause stating that if Bruno is injured during filming, X Entertainment's liability is limited to nominal damages. Using the information presented in the chapter, answer the following questions. 1. One day, while Bruno is preparing for a difficult stunt, he gets into an argument with the director and refuses to perform any stunts at all. Can X Entertainment seek specific performance of the contract? Why or why not? 2. Suppose that while performing a high-speed wheelie on a motorcycle, Bruno is injured by the intentionally reck - less act of an X Entertainment employee. Will a court be likely to enforce the limitation-of-liability clause? Why or why not? 3. What factors would a court consider to determine whether the $1 million liquidated damages provision constitutes valid damages or is a penalty? 4. Suppose that there was no liquidated damages provision (or the court refused to enforce it) and X Entertainment breached the contract. The breach caused the release of the film to be delayed until after summer. Could Bruno seek consequential (special) damages for lost profits from the summer movie market in that situation? Explain.

1A. Specific performanceThe contract between Bruno and X Entertainment is a personal-service contract, and courts are normally reluctant to grant specific performance of contracts for personal services. To order a party to perform personal services against his or her will amounts to a type of involuntary servitude, which is contrary to the public policy (expressed in the Thirteenth Amendment). Also, the courts do not want to monitor such contracts. 2A. Limitation-of-liability clauseIn light of Bruno's status in the stunt industry, the clause would likely be enforced. When an exculpatory clause for negligence is contained in a contract made between parties who have roughly equal bargaining positions, the clause usually will be enforced. Besides, his presumed experience and knowledge suggest that he likely carries his own insurance. 3A. Liquidated damages or penaltyTo determine whether a provision is for liquidated damages or for a penalty, a court asks (1) at the time the contract was formed, was it apparent that damages would be difficult to estimate in the event of a breach, and (2) was the amount set as damages a reasonable estimate of the potential damages and not excessive. If the answer to both questions is yes, the provision normally will be enforced. If either answer is no, the provision will normally not be enforced. 4A. Consequential damagesWhen consequential damages are awarded, compensation is given only for those injuries that a defendant could reasonably have foreseen as a probable result of the usual course of events following a breach. If the injury complained of is outside the usual and foreseeable course of events, the plaintiff must show specifically that the defendant had reason to know the facts and foresee the injury. In other words, to recover consequential damages, a breaching party must know (or have reason to know) in advance of the breach that special circumstances will cause the nonbreaching party to suffer an additional loss. Thus, if X Entertainment breached the contract with Bruno with the knowledge that it would delay the release of the film and result in lost summer profits, Bruno may collect consequential damages.

Evelyn Vollmer orally agreed to loan Danny Lang $150,000 to make an investment in a local nightclub. The loan was - to be repaid from the profits received from the investment. Their agreement was never memorialized in writing, how ever. Eighteen months later, Lang had paid only $15,000 on the loan from the profits from the business. Vollmer filed a lawsuit alleging breach of contract. Using the information presented in the chapter, answer the following questions. Lang claimed that repayment of the loan would "almost certainly" take over a year and that his agreement with Vollmer was therefore unenforceable because it was not in writing. Is he correct? Explain. Suppose that a week after Vollmer gave Lang the funds, she sent him an e-mail containing the terms of their loan agreement with her named typed at the bottom. Lang did not respond to the e-mail. Is this sufficient as a writing under the Statute of Frauds? Assume that at trial the court finds that the contract falls within the Statute of Frauds. Further assume that the state in which the court sits recognizes every exception to the Statute of Frauds discussed in the chapter. What exception provides Vollmer with the best chance of enforcing the oral contract in this situation? Suppose that at trial, Lang never raises the argument that the parties' agreement violates the Statute of Frauds, and the court rules in favor of Vollmer. Then Lang appeals and raises the Statute of Frauds for the first time. What exception can Vollmer now argue?

1A. Statute of FraudsNo, he is not correct. Even if it is unlikely that the nightclub would earn enough profits to pay the entire loan off within a year, it is possible. The test for determining whether an oral contract is enforceable under the one-year rule is whether performance is possible within that time, not whether it is likely. Only when performance is objectively impossible during the one-year period does the contract fall within the Statute of Frauds. 2A. WritingNo. Although an e-mail would constitute a writing, it still must be signed by the party against whom enforcement is sought (Lang). Because the e-mail was from Vollmer and not signed by Lang, it is not a sufficient writing. If, however, Lang had responded to the e-mail and typed his name at the bottom of his response, it would likely be sufficient. 3A. Part performanceIn this situation, Vollmer best argument to enforce the contract is partial performance. Lang had been making payments on the loan from the Nightclubs profits, which shows that there was an agreement to make payments on the loan from the profits. 4A. AdmissionAdmission. She can argue that by not raising the defense of Statute of Frauds in the trial, Lang essentially admitted to the existence of the contract.

Greg contracts to build a storage shed for Haney, who pays Greg in advance, but Greg completes only half the work. Haney pays Ipswich $500 to finish the shed. If Haney sues Greg, what will be the measure of recovery?

A nonbreaching party is entitled to his or her benefit of the bargain under the contract. Here, the innocent party is entitled to be put in the position she would have been in if the contract had been fully performed. The measure of the benefit is the cost to complete the work ($500). These are compensatory damages.

Discharge by Agreement. Junior owes creditor Iba $1,000, which is due and payable on June 1. Junior has been in a car accident, has missed a great deal of work, and con- sequently will not have the funds on June 1. Junior's father, Fred, offers to pay Iba $1,100 in four equal installments if Iba will discharge Junior from any further liability on the debt. Iba accepts. Is this transaction a novation or an accord and satisfaction? Explain.

A novation exists when a new, valid contract expressly or impliedly discharges a prior contract by the substitution of a party. Accord and satisfaction exists when the parties agree that the original obligation can be discharged by a substituted performance. In this case, Fred's agreement with Iba to pay off Junior's debt for $1,100 (as compared to the $1,000 owed) is definitely a valid contract. The terms of the contract substitute Fred as the debtor for Junior, and Junior is definitely discharged from further liability. This agreement is a novation.

Legality. Sue Ann Apolinar hired a guide through Arkansas Valley Adventures, LLC, for a rafting excursion on the Arkansas River. At the outfitter's office, Apolinar signed a release that detailed potential hazards and risks, including "overturning," "unpredictable currents," "obstacles" in the water, and "drowning." The release clearly stated that her signature discharged Arkansas Valley from liability for all claims arising in connection with the trip. On the river, while attempting to maneuver around a rapid, the raft capsized. The current swept Apolinar into a logjam where, despite efforts to save her, she drowned. Her son, Jesus Espinoza, Jr., filed a suit in a federal district court against the rafting company, alleging negligence. What are the arguments for and against enforcing the release that Apolinar signed? Discuss.

An exculpatory clause releases a party from liability for injury or damage. A court may refuse to enforce an exculpatory clause when the parties are seen to possess unequal bargaining power— in a case involving an employment contract, for example. A business that offers non-essential services is not considered to be at a relative advantage in bargaining strength, so anyone contracting for its services is thought to do so voluntarily, making an exculpatory clause potentially enforceable as a part of the deal. This is especially likely if the clause is unambiguous and conspicuous. In this problem, Apolinar hired a guide through Arkansas Valley Adventures for a rafting trip on the Arkansas River. She signed a document that purported to release Arkansas Valley from liability for claims arising in connection with the trip. On a rapid on the river, the raft capsized. Apolinar was swept by the current into a logjam where she drowned. Her son filed a suit in a federal district court against the rafting company, alleging negligence. In support of enforcing the release in this set of circumstances, Arkansas Valley was engaged in non-essential services—recreational rafting on the Arkansas River. This indicated that the company had no relative advantage in bargaining over the exculpatory clause. The release set out some of the risks and hazards, and clearly stated a signature discharged the business from liability for all claims arising in connection with the trip. Against the enforcement of the release, it might be argued that the clause was not sufficiently clear or conspicuous, and that Apolinar had no choice but to agree to it or forego the trip. In the actual case on which this problem is based, the rafting company filed a motion for summary judgment, arguing that the release Apolinar signed shielded it from liability. The court granted the motion. The U.S. Court of Appeals for the Tenth Circuit affirmed. "Colorado allows private parties to assume some of the risks associated with their recreational pursuits." And the release "was fairly entered into and clear in its terms."

Debate This . . . The concept of caveat emptor ("let the buyer beware") should be applied to all sales, including those of real property.

Buyers of personal and real property should take responsibility for obtaining enough information about what they are buying so that they are not "surprised" after the purchase. In the case of real property, buyers should pay for thorough inspections, rather than relying on the honesty of the real property seller. For consumer goods, there is sufficient competition in the marketplace to guarantee that only in exception situations will producers sell defective goods to their customers. Reputation and repeat business are valuable. Actions by supplier that lessen either of these factors will suffer. Not everyone can be a quality expert. Caveat emptor has no place in the modern consumer society. Products are just too complicated for the average consumer to know whether they are defective and perhaps dangerous. As for real property, if a seller willfully hides a costly-to-repair defect from the buyer, the latter should be able to sue for redress. Information is expensive to obtain, for both personal and real property. Buyers should be able to rely on statements made by sellers.

Under what circumstances might a judge rely on case law to determine the intent and purpose of a statute? (See Sources of American Law.)

Case law includes courts' interpretations of statutes, as well as constitutional provisions and administrative rules. Statutes often codify common law rules. For these reasons, a judge might rely on the common law as a guide to the intent and purpose of a statute.

Debate This . . . Many countries have eliminated the Statute of Frauds except for sales of real estate. The United States should do the same.

Certainly, unfair situations arise concerning the enforceability of contracts or contract modifications because they were not evidenced by a writing or record. By eliminating the defense provided by the Statute of Frauds, there would be fewer unjust decisions that are based on the lack of a writing or record. In contrast, the requirement of a writing or record for certain contracts to be enforceable does avoid the "she said, I said" arguments that could be used after the fact when a simple oral contract was made. In other words, unjust judicial decisions are avoided, too, if the Statute of Frauds is a requirement before certain contracts can be enforced.

Business Case Problem with Sample Answer— Consideration. Citynet, LLC, established an employee incentive plan "to enable the Company to attract and retain experienced individuals." The plan pro- vided that a participant who left Citynet's employ- ment was entitled to "cash out" his or her entire vestedbalance.(Whenanemployee'srightstoaparticularben- efit become vested, they belong to that employee and cannot be taken away. The vested balance refers to the part of an account that goes with the employee if he or she leaves the company.) When Citynet employee Ray Toney terminated his employ- ment, he asked to redeem his vested balance, which amounted to $87,000.48. Citynet refused, citing a provision of the plan that limited redemptions to no more than 20 percent annually. Toney filed a suit in a West Virginia state court against Citynet, alleging breach of contract. Citynet argued that the plan was not a contract but a discretionary bonus over which Citynet had sole discretion. Was the plan a contract? If so, what was the consideration?

Citynet's employee incentive plan was an offer for a unilateral contract. A Citynet employee who stayed on the job when he or she was under no obligation to do so could be considered to have accepted Citynet's offer and to have provided sufficient consideration to make the offer a binding and enforceable promise. Consideration has two elements—it must consist of something of legal value and must provide the basis for the bargain between the parties. A unilateral contract involves a promise in return for performance. The promisor becomes bound to the contract when the promisee performs—or, in many cases, begins to perform—the act. Both the promise and the performance have legal value. Here, Citynet set up an employee incentive plan "to attract and retain experienced individuals." The plan provided that a participant who left Citynet's employ could "cash out" his or her entire vested balance. When Ray Toney terminated his employment and asked to redeem his vested balance, however, Citynet refused. But Toney had long stayed on the job when he did not have to. This was sufficient consideration to make Citynet's offer under the incentive plan a binding and enforceable contract with Toney. In the actual case on which this problem is based, a West Virginia state court issued a judgment in Toney's favor. The West Virginia Supreme Court of Appeals affirmed, on the reasoning and principles stated above.

Debate This . . . The doctrine of commercial impracticability should be abolished.

Contracts are not made to be broken, even if that is a popular saying. Contracts are made to be respected. Those who seek to avoid their contractual obligations by using the excuse of commercial impracticability, if successful, reduce the certain of contractual obligations and end up hurting the commercial society in which we all live. Sometimes, a contract cannot be fulfilled through no fault of one of the parties. That is why the principle of commercial impracticability was created. If one party, usual a seller of goods or services, cannot perform because in so doing, that party would lose large sums and maybe go out of business, the courts should step in an allow that party to avoid the contract.

Covenants Not to Compete. A famous New York City hotel, Hotel Lux, is noted for its food as well as its luxury accommodations. Hotel Lux contracts with a famous chef, Chef Perlee, to become its head chef at $30,000 per month. The contract states that should Perlee leave the employment of Hotel Lux for any reason, he will not work as a chef for any hotel or restaurant in New York, New Jersey, or Pennsylvania for a period of one year. During the first six months of the con- tract, Hotel Lux heavily advertises Perlee as its head chef, and business at the hotel is excellent. Then a dispute arises between the hotel's management and Perlee, and Perlee terminates his employment. One month later, he is hired by a famous New Jersey restaurant just across the New York state line. Hotel Lux learns of Perlee's employment through a large advertisement in a New York City newspaper. It seeks to enjoin (prevent) Perlee from working in that restaurant as a chef for one year. Discuss how successful Hotel Lux will be in its action.

Contracts in restraint of trade are usually illegal and unenforceable. An exception to this rule applies to a covenant not to compete that is ancillary to certain types of business contracts in which some fair protection is deemed appropriate (such as in the sale of a business). The covenant, however, must be reasonable in terms of time and area to be legally enforceable. If either term is excessive, the court can declare that the restraint goes beyond what is necessary for reasonable protection. In this event, the court can either declare the covenant illegal or it can reform the covenant to make the terms of time and area reasonable and then enforce it. Suppose the court declares the covenant illegal and unenforceable. Because the covenant is ancillary and severable from the primary contract, the primary contract is not affected by such a ruling. In the case of Hotel Lux, the primary contract concerns employment; the covenant is ancillary and desirable for the protection of the hotel. The time period of one year may be considered reasonable for a chef with an international reputation. The reasonableness of the three-state area restriction may be questioned, however. If it is found to be reasonable, the covenant probably will be enforced. If it is not found to be reasonable, the court could declare the entire covenant illegal, allowing Perlee to be employed by any restaurant or hotel, including one in direct competition with Hotel Lux. Alternatively, the court could reform the covenant, making its terms reasonable for protecting Hotel Lux's normal customer market area.

Capacity. Joanne is a seventy-five-year-old widow who survives on her husband's small pension. Joanne has become increasingly forgetful, and her family worries that she may have Alzheimer's disease (a brain disorder that seri- ously affects a person's ability to carry out daily activities). No physician has diagnosed her, however, and no court has ruled on her legal competence. One day while she is out shopping, Joanne stops by a store that is having a sale on pianos and enters into a fifteen-year installment contract to buy a grand piano. When the piano arrives the next day, Joanne seems con- fused and repeatedly asks the delivery person why a piano is being delivered. Joanne claims that she does not recall buying a piano. Explain whether this contract is void, voidable, or valid. Can Joanne avoid her contractual obligation to buy the piano? If so, how?

Contracts made by mentally incompetent persons can be void, voidable, or valid. The chief circumstance on which this status depends is whether a court has judged a person incompetent. A contract is void if a court has previously determined that a person is mentally incompetent and has appointed a guardian for the person. A contract is voidable, and may be disaffirmed, if a court has not previously judged a person to be incompetent but the person is, in fact, incompetent at the time of contracting. If the contract is ratified, it is valid. A contract is also valid if, at the time of contracting, an otherwise mentally incompetent person (not so judged by a court) has a lucid interval or understand the nature and effect of entering into the contract. In this problem, Joanne most likely falls into the second category—her buying an expensive piano on a limited budget and repeated questioning of the delivery person seems to indicate incompetence. She has not yet apparently disaffirmed the contract, however. If she does, and it is determined that she is incompetent, the store's best defense might be that she was experiencing a lucid interval at the time of the purchase.

Ready Foods contracts to buy two hundred carloads of frozen pizzas from Stealth Distributors. Before Ready or Stealth starts performing, can the parties call off the deal? What if Stealth has already shipped the pizzas?

Contracts that are executory on both sides—contracts on which neither party has performed—can be rescinded solely by agreement. Contracts that are executed on one side—contracts on which one party has performed—can be rescinded only if the party who has performed receives consideration for the promise to call off the deal. Thus, in this question, if neither party starts to perform, the deal can be rescinded solely by agreement. If Speedy already shipped the pizzas, however, the contract can be rescinded only if Speedy receives consideration to call off the deal.

Adhesion Contracts. David Desgro hired Paul Pack to inspect a house that Desgro wanted to buy. Pack had Desgro sign a standard-form contract that included a twelve- month limit for claims based on the agreement. Pack reported that the house had no major problems, but after Desgro bought it, he discovered issues with the plumbing, insula- tion, heat pump, and floor support. Thirteen months after the inspection, Desgro filed a suit in a Tennessee state court against Pack. Was Desgro's complaint filed too late, or was the contract's twelve-month limit unenforceable? Discuss.

Desgro's complaint was filed too late—the contract's twelve-month limit was enforceable. Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other or otherwise impose limitations on claims and disputes. Many businesses use such contracts. Life insurance policies, residential leases, loan agreements, and employment agency contracts are often standard-form contracts. To avoid enforcement of the contract or of a particular clause, a plaintiff normally must show that the contract or particular term is unconscionable. In this problem, Pack had Desgro sign a standard-form contract that included a twelve- month limit for claims based on the agreement. But this standard-form contract was not an unconscionable adhesion contract because Desgro did not have to take it or leave it, nor was he forced to agree to its terms to get the house inspected. He might have bargained with Pack over the terms. Or he might have simply contacted another inspection service to do the work. Thus, Desgro was bound to the terms of the contract with Pack, including the twelve-month limit on claims based on the agreement. In the actual case on which this problem is based, the court issued a judgment in Pack's favor, and a state intermediate appellate court affirmed, on the basis of the twelve-month limit.

Standard-Form Contracts. David Desgro hired Paul Pack to inspect a house that Desgro wanted to buy. Pack had Desgro sign a standard-form contract that included a twelve-month limit for claims based on the agreement. Pack reported that the house had no major problems, but after Des- gro bought it, he discovered issues with the plumbing, insu- lation, heat pump, and floor support. Thirteen months after the inspection, Desgro filed a suit in a Tennessee state court against Pack. Was Desgro's complaint filed too late, or was the contract's twelve-month limit unenforceable? Discuss

Desgro's complaint was filed too late—the contract's twelve-month limit was enforceable. Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other or otherwise impose limitations on claims and disputes. Many businesses use such contracts. Life insurance policies, residential leases, loan agreements, and employment agency contracts are often standard-form contracts. To avoid enforcement of the contract or of a particular clause, a plaintiff normally must show that the contract or particular term is unconscionable. In this problem, Pack had Desgro sign a standard-form contract that included a twelve- month limit for claims based on the agreement. But this standard-form contract was not an unconscionable adhesion contract because Desgro did not have to take it or leave it, nor was he forced to agree to its terms to get the house inspected. He might have bargained with Pack over the terms. Or he might have simply contacted another inspection service to do the work. Thus, Desgro was bound to the terms of the contract with Pack, including the twelve-month limit on claims based on the agreement. In the actual case on which this problem is based, the court issued a judgment in Pack's favor, and a state intermediate appellate court affirmed, on the basis of the twelve-month limit.

Fraudulent Misrepresentation. Grano owns a forty-room motel on Highway 100. Tanner is interested in purchasing the motel. During the course of negotiations, Grano tells Tanner that the motel netted $30,000 during the previous year and that it will net at least $45,000 the next year. The motel books, which Grano turns over to Tanner before the purchase, clearly show that Grano's motel netted only $15,000 the previous year. Also, Grano fails to tell Tan- ner that a bypass to Highway 100 is being planned that will redirect most traffic away from the front of the motel. Tan- ner purchases the motel. During the first year under Tanner's operation, the motel nets only $18,000. At this time, Tan- ner learns of the motel's previous low profits and the planned bypass. Tanner wants Grano to return the purchase price. Dis- cuss fully Tanner's probable success in getting his funds back.

Four basic elements are necessary to prove fraud, thus rendering a contract voidable: (1) an intent to deceive, usually with knowledge of the falsity; (2) a misrepresentation of material facts; (3) a reliance by the innocent party on the misrepresentation; and (4) usually damage or injury caused by the misrepresentation. Statements of events to take place in the future or statements of opinions are generally not treated as representations of fact. Therefore, even though the prediction or opinion may turn out to be incorrect, a contract based on this type of statement would remain enforceable. Grano's statement that the motel would make at least $45,000 next year would probably be treated as a prediction or opinion; thus, one of the elements necessary to prove fraud—misrepresentation of facts—would be missing. The statement that the motel netted $30,000 last year is a deliberate falsehood (with intent and knowledge). Grano's defense will be that the books in Tanner's possession clearly indicated that the figure stated was untrue, and therefore Tanner cannot be said to have purchased the motel in reliance on the falsehood. If the innocent party, Tanner, knew the true facts, or should have known the true facts because they were available to him, Grano's argument will prevail. Lastly, the issue centers on Grano's duty to tell Tanner of the bypass. Ordinarily, neither party in a nonfiduciary relationship has a duty to disclose facts, even when the information might bear materially on the other's decision to enter into the contract. Exceptions are made, however, when the buyer cannot reasonably be expected to discover the information known by the seller, in which case fairness imposes a duty to speak on the seller. Here, the court can go either way. If the court decides there was no duty to disclose, deems the prediction of future profits to be opinion rather than a statement of fact, and also decides there was no justifiable reliance by Tanner because the books available to Tanner clearly indicated Grano's profit statement for the last year to be false, then Tanner cannot get his money back on the basis of fraud.

Specific Performance. In which of the following situations would specific performance be an appropriate rem- edy? Discuss fully. (a) Thompson contracts to sell her house and lot to Cousteau. Then, on finding another buyer willing to pay a higher pur- chase price, she refuses to deed the property to Cousteau. (b) Amy contracts to sing and dance in Fred's nightclub for one month, beginning May 1. She then refuses to perform. (c) Hoffman contracts to purchase a rare coin owned by Erik- son, who is breaking up his coin collection. At the last minute, Erikson decides to keep his coin collection intact and refuses to deliver the coin to Hoffman. (d) ABC Corp. has three shareholders: Panozzo, who owns 48 percent of the stock; Chang, who owns another 48 percent; and Ryan, who owns 4 percent. Ryan contracts to sell her 4 percent to Chang. Later, Ryan refuses to transfer the shares to Chang.

Generally, the equitable remedy of specific performance will be granted only if two criteria are met: monetary damages (under the situation) must be inadequate as a remedy, and the subject matter of the contract must be unique. (a) In the sale of land, the buyer's contract is for a specific piece of real property. The land under contract is unique, because no two pieces of real property have the same legal description. In addition, money damages would not compensate a buyer adequately, as the same land cannot be purchased elsewhere. Specific performance is an appropriate remedy. (b) The basic criteria for specific performance do not apply well to personal-service contracts. If the identical service contracted for is readily available from others, the service is not unique, and monetary damages for nonperformance are adequate. If, however, the services are so personal that only the contract party can perform them, the contract meets the test of uniqueness; but the courts will refuse to decree specific performance if (1) the enforcement of specific performance requires involuntary servitude (prohibited by the Thirteenth Amendment to the U.S. Constitution), or (2) it is impractical to attempt to force meaningful performance by someone against his or her will. In the case of Amy and Fred, specific performance is not an appropriate remedy. (c) A rare coin is unique, and monetary damages for breach are inadequate, as Hoffman cannot obtain a substantially identical substitute in the market. This is a typical case in which specific performance is an appropriate remedy. (d) The key issue here is that this is a closely held corporation. Therefore, the stock is not available in the market, and the shares become unique. The uniqueness of these shares is enhanced by the fact that if Ryan sells her 4 percent of the shares to Chang, Chang will control the corporation. Because of this, monetary damages for Chang are totally inadequate as a remedy. Specific performance is an appropriate remedy.

Damages. Robert Morris was a licensed insurance agent working for his father's independent insurance agency when he contacted Farmers Insurance Exchange in Alabama about becoming a Farmers agent. According to Farmers' com- pany policy, Morris was an unsuitable candidate due to his relationship with his father's agency. But no Farmers repre- sentative told Morris of this policy, and none of the docu- ments that he signed expressed it. Farmers trained Morris and appointed him its agent. About three years later, however, Farmers terminated the appointment for "a conflict of interest because his father was in the insurance business." Morris filed a suit in an Alabama state court against Farmers, claiming that he had been fraudulently induced to leave his father's agency to work for Farmers. If Morris was successful, what type of damages was he most likely awarded? What was the measure of damages? Discuss.

If Morris succeeds in the action against his former employer for fraudulently inducement, he is most likely to be awarded compensatory damages. Plaintiffs are awarded compensatory damages to compensate for actual losses. The goal is to make the plaintiffs whole and place them in the same positions that they would have been in if the damage had not occurred. In this problem, Morris was working for his father's insurance agency when he contacted Farmers Insurance Exchange about becoming its agent. Farmers trained Morris and gave him an appointment as an agent. But three years later, Farmers terminated the appointment for "a conflict of interest because his father was in the insurance business." Farmers had never informed Morris that according to its company policy he was unsuitable to serve as its agent due to his relationship with his father's agency. These circumstances constitute a case of fraud—the company's silence on its policy was an intentional misrepresentation of a material fact on which Morris reasonably relied to his detriment. Morris's injury consisted of the "opportunities" that he had lost by becoming an agent for Farmers—selling insurance policies out of his father's agency—and this would be the measure of the damages to which he is entitled. He might prove the amount of the lost commissions on those sales by showing what he sold during that same period for Farmers. In the actual case on which this problem is based, a jury awarded Morris $600,000 in compensatory damages, and the court entered a judgment on the verdict. The Alabama Supreme Court affirmed. Morris's measure of damages was based on "the opportunities he had lost by becoming a Farmers agent."

18-1. Conditions of Performance. The Caplans con- tract with Faithful Construction, Inc., to build a house for them for $360,000. The specifications state "all plumbing bowls and fixtures . . . to be Crane brand." The Caplans leave on vacation, and during their absence, Faithful is unable to buy and install Crane plumbing fixtures. Instead, Faithful installs Kohler brand fixtures, an equivalent in the industry. On completion of the building contract, the Caplans inspect the work, discover the substitution, and refuse to accept the house, claiming Faithful has breached the conditions set forth in the specifications. Discuss fully the Caplans' claim.

If the specifications are considered to be express conditions to the Caplans' acceptance and pay- ment under the contract, Faithful must perform fully—that is, must install Crane brand plumbing fixtures—to recover the contract price. Until Faithful does so, the Caplans are not obligated to any performance. If, however, the specifications are merely promises (implied conditions), justice and fairness require only substantial, rather than full, performance for the Caplans' obligation to become absolute. This does not mean that Faithful has not committed a breach. Faithful is liable for any damages that can be proved to have resulted from its less than full performance. In this case, the specifications were stated not as express conditions but as mere promises (implied conditions). To avoid the harsh result of the Caplans having a house on their lot without having to pay Faithful, the courts would require only that Faithful prove substantial performance. Be- cause Kohler brand is equivalent to Crane brand by industry standards, the substantial perfor- mance test has been met, and the Caplans are obligated to accept and pay. Whether they can deduct any damages from the contract price for the less than full performance will depend on proof that they suffered monetary damages.

Business Case Problem with Sample Answer— Unconscionable Contracts or Clauses.Geographic Expeditions, Inc. (GeoEx), which guided climbs up Mount Kilimanjaro, required climbers to sign a release to participate in an expedition. The form mandated the arbitration of any dispute in San Francisco and limited damages to the cost of the trip. GeoEx told climbers that the terms were nonnegotiable and were the same as terms imposed by other travel firms. Jason Lhotka died on a GeoEx climb. His mother filed a suit against GeoEx. GeoEx sought arbitration. Was the arbitration clause uncon- scionable? Why or why not?

In this case, the agreement that restricted the buyer's options for resolution of a dispute to arbitration and limited the amount of damages was both procedurally and substantively unconscionable. Procedural unconscionability concerns the manner in which the parties enter into a contract. Substantive unconscionability can occur when a contract leaves one party to the agreement without a remedy for the nonperformance of the other. Here, GeoEx told customers that the arbitration terms in its release form were nonnegotiable and that climbers would encounter the same requirements with any other travel company. This amounted to procedural unconscionability, underscoring the customers' lack of bargaining power. The imbalance resulted in oppressive terms, with no real negotiation and an absence of meaningful choice. Furthermore, the restriction on forum (San Francisco) and the limitation on damages (the cost of the trip)—with no limitation on GeoEx's damages—amounted to substantive unconscionability. In the actual case on which this problem is based, the court ruled that the agreement was unconscionable.

Collateral Promises. Mallory promises a local hard- ware store that she will pay for a lawn mower that her brother is purchasing on credit if the brother fails to pay the debt. Must this promise be in writing to be enforceable? Why or why not?

In this situation, Mallory becomes what is known as a guarantor on the loan. That is, she guarantees the hardware store that she will pay for the mower if her brother fails to do so. This kind of collateral promise, in which the guarantor states that he or she will become responsible only if the primary party does not perform, must be in writing to be enforceable. There is an exception, however. If the main purpose in accepting secondary liability is to secure a personal benefit—for example, if Mallory's brother bought the mower for her—the contract need not be in writing. The assumption is that a court can infer from the circumstances of the case whether the main purpose was to secure a personal benefit and thus, in effect, to answer for the guarantor's own debt.

Discharge by Operation of Law. Dr. Jake Lambert signed an employment agreement with Baptist Health Ser- vices, Inc., to provide cardiothoracic surgery services to Baptist Memorial Hospital-North Mississippi, Inc., in Oxford, Mis- sissippi. Complaints about Lambert's behavior arose almost immediately. He was evaluated by a team of doctors and psy- chologists, who diagnosed him as suffering from obsessive- compulsive personality disorder and concluded that he was unfit to practice medicine. Based on this conclusion, the hospital suspended his staff privileges. Citing the suspension, Baptist Health Services claimed that Lambert had breached his employment contract. What is Lambert's best defense to this claim? Explain.

Lambert's best defense to Baptist's allegation of breach of contract is the doctrine of impossibility. Under this doctrine, if, after a contract has been made, a supervening event makes performance impossible in an objective sense, the contract is discharged. The doctrine applies only when the parties could not have reasonably foreseen the event that renders the performance impossible. One of the situations in which this doctrine applies occurs when a party whose personal performance is essential to the completion of the contract becomes incapacitated prior to performance. In the facts of this problem, Baptist hired Lambert to provide certain surgical services to Baptist Memorial Hospital-North Mississippi. When complaints about his behavior arose, a team of doc- tors and psychologists conducted an evaluation, diagnosed him as suffering from obsessive-com- pulsive personality disorder, and concluded that he was unfit to practice medicine. The hospital suspended his staff privileges. Baptist terminated his employment and filed a suit against him for breach. The doctrine of impossibility discharges Lambert from the performance of his contract— his performance was made impossible through no fault of his own. In the actual case on which this problem is based, in Baptist's suit against Lambert, the court issued a judgment in the defendant's favor. A state intermediate appellate court applied the doctrine of impossibility to affirm this judgment.

In this age of the Internet, when people communicate via e-mail, texts, tweets, Facebook, and Skype, is the concept of jurisdiction losing its meaning?

Many believe that yes, the idea of determining jurisdiction based on individuals' and companies' physical locations no longer has much meaning. Increasingly, contracts are formed via online communica- tions. Does it matter where one of the parties has a physical presence? Does it matter where the e-mail server or Web page server is located? Probably not. In contrast, in one sense, jurisdiction still has to be decided when conflicts arise. Slowly, but ever so surely, courts are developing rules to determine where jurisdiction lies when one or both parties used online systems to sell or buy goods or services. In the final analysis, a specific court in a specific physical location has to try each case.

Business Case Problem with Sample Answer— Negligence. At the Weatherford Hotel in Flagstaff, Arizona, in Room 59, a balcony extends across thirty inches of the room's only window, leaving a twelve-inch gap with a three-story drop to the concrete below. A sign prohibits smoking in the room but invites guests to "step out onto the balcony" to smoke. Toni Lucario was a guest in Room 59 when she climbed out of the window and fell to her death. Patrick McMurtry, her estate's personal representative, filed a suit against the Weatherford. Did the hotel breach a duty of care to Locario? What might the Weath- erford assert in its defense? Explain.

Negligence requires proof that (1) the defendant owed a duty of care to the plaintiff, (2) the defendant breached that duty, (3) the defendant's breach caused the plaintiff's injury, and (4) the plaintiff suffered a legally recognizable injury. With respect to the duty of care, a business owner has a duty to use reasonable care to protect business invitees. This duty includes an obligation to discover and correct or warn of unreasonably dangerous conditions that the owner of the premises should reasonably foresee might endanger an invitee. Some risks are so obvious that an owner need not warn of them. But even if a risk is obvious, a business owner may not be excused from the duty to protect its customers from foreseeable harm. Because Lucario was the Weatherford's business invitee, the hotel owed her a duty of reasonable care to make its premises safe for her use. The balcony ran nearly the entire width of the window in Lucario's room. She could have reasonably believed that the window was a means of access to the balcony. The window/ balcony configuration was dangerous, however, because the window opened wide enough for an adult to climb out, but the twelve-inch gap between one side of the window and the balcony was unprotected. This unprotected gap opened to a drop of more than three stories to a concrete surface below. Should the hotel have anticipated the potential harm to a guest opening the window in Room 59 and attempting to access the balcony? The hotel encouraged guests to "step out onto the balcony" to smoke. The dangerous condition of the window/ balcony configuration could have been remedied at a minimal cost. These circumstances could be perceived as creating an "unreasonably dangerous" condition. And it could be concluded that the hotel created or knew of the condition and failed to take reasonable steps to warn of it or correct it. Of course, the Weatherford might argue that the window/ balcony configuration was so obvious that the hotel was not liable for Lucario's fall. In the actual case on which this problem is based, the court concluded that the Weatherford did not breach its duty of care to Lucario. On McMurtry's appeal, a state intermediate appellate court held that this conclusion was in error, vacated the lower court's judgment in favor of the hotel on this issue, and remanded the case.

Conditions of Performance. Russ Wyant owned Humble Ranch in Perkins County, South Dakota. Edward Humble, whose parents had previously owned the ranch, was Wyant's uncle. Humble held a two-year option to buy the ranch. The option included specific conditions. Once it was exercised, the parties had thirty days to enter into a purchase agreement, and the seller could become the buyer's lender by matching the terms of the proposed financing. After the option was exercised, the parties engaged in lengthy negotiations. Humble did not respond to Wyant's proposed purchase agreement nor advise him of available financ- ing terms before the option expired, however. Six months later, Humble filed a suit against Wyant to enforce the option. Is Humble entitled to specific performance? Explain.

No, Humble is not entitled to specific performance. The equitable remedy of specific performance calls for the performance of an act promised in a contract. In a case involving an interest in real property, specific performance can be the appropriate remedy when money damages would be inadequate. In some situations, however, contractual promises are conditioned. A condition is a possi- ble future event, the occurrence or nonoccurrence of which triggers the performance of a contrac- tual obligation. If the condition is not satisfied, the obligations of the parties are discharged and cannot therefore be enforced. A condition that must be fulfilled before a party's promise becomes absolute is called a condition precedent. In this problem, Humble's option had conditions—once it was exercised the parties had thirty days to enter into a purchase agreement, and Wyant could become Humble's lender by matching the terms of the proposed financing. Humble exercised the option, tolling the two-year deadline. But the parties engaged in protracted negotiations. Humble did not respond to Wyant's proposed purchase agreement and did not advise him of available financing terms before the option expired. In other words, none of the option's conditions were satisfied before it expired. In the actual case on which this problem is based, the court issued a judgment in Wyant's favor. On Humble's appeal, the South Dakota Supreme Court affirmed.

Minors. D.V.G. (a minor) was injured in a one-car auto accident in Hoover, Alabama. The vehicle was covered by an insurance policy issued by Nationwide Mutual Insurance Co. Stan Brobston, D.V.G.'s attorney, accepted Nationwide's offer of $50,000 on D.V.G.'s behalf. Before the settlement could be submitted to an Alabama state court for approval, D.V.G. died from injuries received in a second, unrelated auto accident. Nationwide argued that it was not bound to the settlement, because a minor lacks the capacity to contract and so cannot enter into a binding settlement without court approval. Should Nationwide be bound to the settlement? Why or why not?

No, a minor does not so lack the capacity to contract that he or she cannot enter into a binding settlement without court approval. The general rule is that a minor can enter into any contract an adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of that minor. An adult who enters into a contract with a minor cannot avoid his or her contractual duties on the ground that the minor can. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it. In this problem, it is clear that a contract existed at the time of D.V.G.'s death. As a minor, she did not lack the capacity to enter into a binding settlement of her potential claims. She would not have been liable on the contract, however, if she had chosen to avoid the deal. But she was the only party to the settlement that had this option. At the time that the settlement was agreed to, the contract was binding on Nationwide, notwithstanding that it was voidable at D.V.G.'s option. In the actual case on which this problem is based, Nationwide asked a federal district court to declare that there was no settlement. The question was certified to the Alabama Supreme Court, which held that Nationwide was bound to the agreement.

Promises Made in Consideration of Marriage. After twenty-nine years of marriage, Robert and Mary Lou Tuttle were divorced. They admitted in court that before they were married, they had signed a prenuptial agreement. They agreed that the agreement had stated that each would keep his or her own property and anything derived from that prop- erty. Robert came into the marriage owning farmland, while Mary Lou owned no real estate. During the marriage, ten dif- ferent parcels of land, totaling about six hundred acres, were acquired, and two corporations, Tuttle Grain, Inc., and Tuttle Farms, Inc., were formed. A copy of the prenuptial agreement could not be found. Can the court enforce the agreement without a writing? Why or why not?

No, the court cannot enforce the Tuttles' prenuptial agreement without a writing. A prenuptial agreement is an agreement made before marriage that defines each partner's ownership rights in the other partner's property. A prenuptial agreement must be in writing to be enforceable. In this problem, the Tuttles admitted in court that they had signed a prenuptial agreement before they were married, and they agreed on the general term. But a copy of the agreement could not be found. Thus, there was no way to confirm their testimony and no way to accurately determine whether the alleged term was fair. In the actual case on which this problem is based, the court held that the Tuttles' prenuptial agreement was not enforceable, because no copy could be produced, and divided the marital assets "in just proportions." On Robert's appeal, a state intermediate appellate court affirmed the decision and the division of property. "In order to accurately follow the terms of a prenuptial agreement, the writing is necessary."

Promises Made in Consideration of Marriage. Before their marriage, Linda and Gerald Heiden executed a prenuptial agreement. The agreement provided that "no spouse shall have any right in the property of the other spouse, even in the event of the death of either party." The descrip- tion of Gerald's separate property included a settlement from a personal injury suit. Twenty-four years later, Linda filed for divorce. The court ruled that the prenuptial agreement applied only in the event of death, not divorce, and entered a judgment that included a property division and spousal support award. The ruling disparately favored Linda, whose monthly income with spousal support would be $4,467, leaving Gerald with only $1,116. Did the court interpret the Heidens' prenuptial agreement correctly? Discuss.

No, the court did not interpret the Heidens' prenuptial agreement correctly. A unilateral promise to make a monetary payment or to give property in consideration of marriage must be in writing. And this requirement applies to prenuptial agreements, which may define each partner's ownership rights in their separate and joint property. In interpreting these agreements, basic contract principles apply. The terms must be enforced as written, and unambiguous words and phrases should be construed according to their plain and ordinary meaning. The prenuptial agreement between Linda and Gerald Heiden provided that "no spouse shall have any right in the property of the other spouse, even in the event of the death of either party." The description of Gerald's separate property included a settlement from a personal injury suit. On their divorce, the court interpreted the agreement to apply only in the event of death, not divorce, and entered a judgment that included a property division and spousal support award reflecting this interpretation. But the court was not correct. The use of the word "even" indicated that the Heidens intended to keep their property separate in all events, including death and, in the circumstances here, divorce. Thus, the property division and spousal support award should not have taken into account Gerald's settlement from a personal injury suit. In the actual case on which this problem is based, on the Heidens' divorce, the court interpreted and applied the prenuptial agreement as stated in the facts. A state intermediate appellate court reversed, on the reasoning set out above.

Mental Incompetence. Dorothy Drury suffered from dementia and chronic confusion. When she became unable to manage her own affairs, including decisions about medical and financial matters, her son Eddie arranged for her move to an assisted living facility. During admission, she signed aresidencyagreement,whichincludedanarbitrationclause. After she sustained injuries in a fall at the facility, a suit was filed to recover damages. The facility asked the court to compel arbitration. Was Dorothy bound to the residency agreement? Discuss.

No. Contracts made by mentally incompetent persons can be void, voidable, or valid. Mentally incompetent persons not previously so adjudged by a court may enter voidable contracts if they do not know they are entering into a contract or if they lack the mental capacity to comprehend its subject matter, nature, and consequences. Whenever there is no prior adjudication of mental incompetence, most courts examine whether the party was able to understand the nature, purpose, and consequences of his or her act at the time of the transaction. In this problem, Dorothy suffered from dementia and chronic confusion at the time that the residency agreement was executed. In fact, she needed an assisted living facility precisely because she was unable to manage her own affairs, including decisions about medical and financial matters. Under other circumstances, a party who accepts services and living quarters— as Dorothy did—can be said to have accepted the benefits of the agreement and thus manifested assent. Here, however, Dorothy's acceptance of benefits cannot amount to assent to a contract, because she lacked the capacity to give her assent. In the actual case on which this problem is based, the court denied the facility's request to compel arbitration.

Sun Airlines, Inc., prints on its tickets that it is not lia- ble for any injury to a passenger caused by the airline's negligence. If the cause of an accident is found to be the airline's negligence, can it use the clause as a defense to liability? Why or why not?

No. Generally, an exculpatory clause (a clause attempting to absolve parties of negligence or other wrongs) is not enforced if the party seeking its enforcement is involved in a business that is important to the public as a matter of practical necessity, such as an airline. Because of the essential nature of such services, the parties have an advantage in bargaining strength and could insist that anyone contracting for its services agree not to hold it liable.

Joan, who is sixteen years old, moves out of her parents' home and signs a one-year lease for an apartment at Ken- wood Apartments. Joan's parents tell her that she can return to live with them at any time. Unable to pay the rent, Joan moves back to her parents' home two months later. Can Kenwood enforce the lease against Joan? Why or why not?

No. Joan may disaffirm this contract. Because the apartment was a necessary, however, she remains liable for the reasonable value of her occupancy of the apartment.

The Parol Evidence Rule. Evangel Temple Assem- bly of God leased a facility from Wood Care Centers, Inc., to house evacuees who had lost their homes in Hurricane Katrina. One clause in the lease contract said that Evangel could terminate the lease at any time by giving Wood Care notice and paying 10 percent of the balance remaining on the lease. Another clause stated that if the facility was not given a property tax exemption (as a church), Evangel had the option to terminate the lease without making the 10 percent payment. Nine months later, the last of the evacuees left the facility, and Evangel notified Wood Care that it would end the lease. Wood Care demanded the 10 percent payment. Is parol evidence admissible to interpret this lease? Why or why not?

No. The parol evidence rule prohibits the introduction at trial of evidence of the parties' prior negotiations or agreements or contemporaneous oral agreements if that evidence contradicts or alters the terms of a written contract. The written contract is ordinarily assumed to be the final embodiment of the parties' agreement. But when, for example, the terms of a written contract are ambiguous, evidence is admissible to show the meaning of the terms. Here, the terms of the lease are not ambiguous, the contract can be interpreted on its face, and parol evidence is not admissible. Under the lease, if the facility is not tax-exempt, the tax- exemption termination clause takes effect. Even if parol evidence were admissible, however, it does not appear that this result would be different. In the actual case on which this problem is based, a year later, the evacuees moved out and Evangel notified Wood Care to end the lease. Wood Care demanded the 10-percent payment. Evangel asserted that when it moved out, the facility lost the tax exemption, and Evangel could simply terminate the lease. In Wood Care's subsequent suit against Evangel, the court held that parol evidence was not admissible, and that according to the reasoning stated above, Evangel could end the lease without making the 10-percent payment.

Lyle contracts to sell his ranch to Marley, who is to take pos- session on June 1. Lyle delays the transfer until August 1. Marley incurs expenses in providing for cattle that he bought for the ranch. When they made the contract, Lyle had no rea- son to know of the cattle. Is Lyle liable for Marley's expenses in providing for the cattle? Why or why not?

No. To recover damages that flow from the consequences of a breach but that are caused by circumstances beyond the contract (consequential damages), the breaching party must know, or have reason to know, that special circumstances will cause the nonbreaching party to suffer the additional loss. That was not the circumstance in this problem.

GamesCo orders $800 worth of game pieces from Mid- state Plastic, Inc. Midstate delivers, and GamesCo pays for $450 worth. GamesCo then says it wants no more pieces from Midstate. GamesCo and Midstate have never dealt with each other before and have nothing in writing. Can Midstate enforce a deal for the full $800? Explain your answer.

No. Under the UCC, a contract for a sale of goods priced at $500 or more must be in writing to be enforceable. In this case, the contract is not enforceable beyond the quantity already delivered and paid for.

Impossibility of Performance. In the follow- ing situations, certain events take place after the contracts are formed. Discuss which of these contracts are discharged because the events render the contracts impossible to perform. (a) Jimenez, a famous singer, contracts to perform in your nightclub. He dies prior to performance. (b) Raglione contracts to sell you her land. Just before title is to be transferred, she dies. (c) Oppenheim contracts to sell you one thousand bushels of apples from her orchard in the state of Washington. Because of a severe frost, she is unable to deliver the apples. (d) Maxwell contracts to lease a service station for ten years. His principal income is from the sale of gasoline. Because of an oil embargo by foreign oil-producing nations, gaso- line is rationed, cutting sharply into Maxwell's gasoline sales. He cannot make his lease payments.

Normally, events that take place after the formation of the contract and that make performance of the contract more difficult or burdensome do not render the contract impossible to perform and do not discharge a party's liability for failure to fully perform. If such events make performance so extremely difficult or burdensome that it is, in effect, impossible, impractical, or unreasonably ex- pensive to perform, however, the contract is discharged. The basic problem is determining when this degree of difficulty or burdensomeness is reached. (a) Jiminez's contract is personal, requiring his services for full performance of the con- tract. His death makes performance totally impossible, thereby discharging his estate from liabil- ity. (b) The passage of title to this land can be by Raglione or any person so authorized. Therefore, the death of Raglione does not render the contract impossible to perform, because a representative of her estate can perform it in her place. The contract is not discharged. (c) The contract called for apples to come from a specific orchard. Through no fault of Oppenheim's, the specific subject matter of the contract is destroyed by the frost. Therefore, Oppenheim cannot deliver the apples called for in the contract, rendering the contract impossible to perform. (d) Major discussion should center on the doctrine of commercial impracticability or frustration of commercial purpose. For the doctrine to be applied, most courts would need proof that either the rationing frustrated the very purpose both parties had in mind in making the con- tract, or that there was an implied condition that the premises were to be used for the sole purpose of selling products no longer available, or that the events rendered the anticipated performance extremely difficult or costly. In cases involving rationing during World War II, some courts held that the rationing merely created a hardship, not an absolute prohibition, and the lease contracts were enforced even though performance was more burdensome.

C&D Services contracts with Ace Concessions, Inc., to service Ace's vending machines. Later, C&D wants Dean Vending Services to assume the duties under a new con- tract. Ace consents. What type of agreement is this? Are Ace's obligations discharged? Why or why not?

Novation substitutes a new party for an original party, by agreement of all the parties. The requirements are a previous valid obligation, an agreement of all the parties to a new contract, extinguishment of the old obligation, and a new, valid contract. Novation revokes and discharges the previous obligation. Here, C&D delegated its duties under its contract with Ace to Dean, with Ace's consent. Ace's obligation to pay C&D for the execution of those duties is dis- charged, but its obligation under the new contract to pay Dean for those services will not be dis- charged until Dean is paid. The novation did, however, discharge C&D's obligation under the contract.

Debate This . . . Courts should always uphold limitation-of-liability clauses, whether or not the two parties to the contract had equal bargaining power.

One of the reasons that imitation-of-liability clauses are included in contracts is to allow sellers to predict the extent of their liabilities should something go wrong. Without such clauses, sellers would have a difficult time obtaining liability insurance and when such insurance could be obtained, it would be at higher prices. All consumers would suffer as a result. Moreover, certainly buyers and sellers with equal bargaining powers should be obligated to accept all clauses written into contracts. Nevertheless, even if one of the parties has less bargaining power than the other, the courts should still uphold limitation-of-liability clauses because there is enough competition in the marketplace so that contracts between buyers and sellers are the result of the interactions of supply and demand and are therefore efficient. How can a judge or jury uphold all limitation-of-liability clauses when in so doing they often would be perpetuating gross injustices? After all, such clauses are usually contained in long contracts when printed out or presented on a Web site in small type. Most of the time, consumers do not read contracts because they are so long and so complicated. To enforce a limitation-of- liability clause when the consumer was not even aware of its existence would be unfair. Even if a consumer understands such a clause, that does not mean the consumer really has a choice. Most contracts are presented in an all-or-nothing manner. Take it or leave it, with nothing in the middle. Consumers with little or no bargaining power must sign or not obtain the good or service they need.

Jana leaves her truck's motor running while she enters a Kwik-Pik Store. The truck's transmission engages, and the vehicle crashes into a gas pump, starting a fire that spreads to a warehouse on the next block. The warehouse collapses, causing its billboard to fall and injure Lou, a bystander. Can Lou recover from Jana? Why or why not?

Probably. To recover on the basis of negligence, the injured party as a plaintiff must show that the truck's owner owed the plaintiff a duty of care, that the owner breached that duty, that the plaintiff was injured, and that the breach caused the injury. In this problem, the owner's actions breached the duty of reasonable care. The billboard falling on the plaintiff was the direct cause of the injury, not the plaintiff's own negligence. Thus, liability turns on whether the plaintiff can connect the breach of duty to the injury. This involves the test of proximate cause—the question of foreseeability. The consequences to the injured party must have been a foreseeable result of the owner's carelessness.

Business Case Problem with Sample Answer— Consequential Damages. After submitting the high bid at a foreclosure sale, David Simard entered into a contract to purchase real property in Maryland for $192,000. Simard defaulted (failed to pay) on the contract. A state court ordered the property to be resold at Simard's expense, as required by state law. The property was then resold for $163,000, but the second pur- chaser also defaulted. The court then ordered a second resale, resulting in a final price of $130,000. Assuming that Simard is liable for consequential damages, what is the extent of his lia- bility? Is he liable for losses and expenses related to the first resale? If so, is he also liable for losses and expenses related to the second resale? Why or why not?

Simard is liable only for the losses and expenses related to the first resale. Simard could reasonably have anticipated that his breach would require another sale and that the sales price might be less than what he had agreed to pay. Therefore, he should be liable for the difference between his sales price and the first resale price ($29,000), plus any expenses arising from the first resale. Simard is not liable, however, for any expenses and losses related to the second resale. After all, Simard did not cause the second purchaser's default, and he could not reasonably have foreseen that default as a probable result of his breach.

In this chapter, we stated that the doc- trine of stare decisis "became a cornerstone of the English and American judicial systems." What does stare decisis mean, and why has this doctrine been so fundamental to the develop- ment of our legal tradition?

Stare decisis is a Latin phrase meaning "to stand on decided cases." In the King's Courts of medieval England, it became customary for judges to refer to past decisions (precedents) in deciding cases involving similar issues. Over time, because of application of the doctrine of stare decisis to issues that came before the courts, a body of jurisprudence was formed that came to be known as the "common law"—because it was common to the English realm. Common law was applied in the American colonies prior to the War of Independence and was adopted by the American states following the Revolution. Common law continues to be applied today in all cases except those falling under specific state or federal statutory law. The doctrine of stare decisis is fundamental to the development of our legal tradition because without the acceptance and application of this doctrine, the evolution of any objective legal concepts—and thus a legal "tradition"—would have been impossible.

Measure of Damages. Before buying a house, Dean and Donna Testa hired Ground Systems, Inc. (GSI), to inspect the sewage and water disposal system. GSI reported a split system with a watertight septic tank, a wastewater tank, a distribution box, and a leach field. The Testas bought the house. Later, Dean saw that the system was not as GSI described—there was no distribution box or leach field, and there was only one tank, which was not watertight. The Tes- tas arranged for the installation of a new system and sold the house. Assuming that GSI is liable for breach of con- tract, what is the measure of damages?

The Testas may recover compensatory damages and consequential damages for the breach of their contract with GSI. Damages that compensate a nonbreaching party for the loss of the bargain are compensatory damages. These damages compensate the injured party for the damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach. The standard measure of compensatory damages is the difference between the value of the breaching party's performance under the contract and the value of his or her actual performance. A measure of the compensatory damages in this case could be the difference in the value of the property with and without a septic system. Consequential damages are foreseeable damages that result from a party's breach of contract. These damages are caused by special circumstances beyond the contract—they flow from the consequences of a breach. To recover consequential damages, the breaching party must know or have reason to know that special circumstances will cause an additional loss. For example, when a party fails to perform a service, knowing that the buyer is depending on that service to determine a further course of action, a court may award consequential damages for the loss of profits from or added costs to fulfill the planned action. In this problem, as consequential damages, the Testas might recover the costs to install the new septic system and the costs to maintain the house between the discovery of the erroneous report and the date that the house was finally sold. In the actual case on which this problem is based, the court issued a judgment in the Testas' favor on their claim.

Accord and Satisfaction. Merrick grows and sells blueberries. Maine Wild Blueberry Co. agreed to buy all of Merrick's crop under a contract that left the price unliqui- dated. Merrick delivered the berries, but a dispute arose over the price. Maine Wild sent Merrick a check with a letter stat- ing that the check was the "final settlement." Merrick cashed the check but filed a suit for breach of contract, claiming that he was owed more. What will the court likely decide in this case? Why?

The accord and satisfaction created by Merrick's cashing the check would bar any recovery. An accord and satisfaction is created by cashing a check that is accompanied by a letter with restrictive language. In this case, the language in the letter is unambiguous. The check was the "final settlement." There is no doubt as to what Maine Wild intended or what should reasonably have been understood by Merrick. Merrick had the choice of accepting the check on these terms or of returning it—he chose to accept it.

Fraudulent Misrepresentation. Ricky and Sherry Wilcox hired Esprit Log and Timber Frame Homes to build a log house, which the Wilcoxes intended to sell. They paid Esprit $125,260 for materials and services. They eventually sold the home for $1,620,000 but sued Esprit due to con- struction delays. The logs were supposed to arrive at the con- struction site precut and predrilled, but that did not happen. It took five extra months to build the house while the logs were cut and drilled one by one. The Wilcoxes claimed that the interest they paid on a loan for the extra construction time cost them about $200,000. The jury agreed and awarded them that much in damages, plus $250,000 in punitive dam- ages and $20,000 in attorneys' fees. Esprit appealed, claim- ing that the evidence did not support the verdict because the Wilcoxes had sold the house for a good price. Is Esprit's argument credible? Why or why not? How should the court rule?

The court determined that "a promise made without a present intent to perform is a misrepresentation of a material fact and is sufficient to support a cause of action for fraud." Esprit had promised to deliver pre-cut and pre-drilled logs that could be assembled quickly. It knew the delivery of unfinished logs would cause problems. "After the logs arrived at the home Esprit further misrepresented that there would be only a two- or three-day delay while the logs where cut and drilled on site. The jury could conclude that Esprit's actions amounted to fraud or such indifference to negative consequences for the buyers as to support an award for punitive damages." The fact that the house was later sold successfully had nothing to do with the extra costs incurred by the Wilcoxes as they had borrowed about a million dollars to finance the project and Esprit knew that. The judgment of the lower court was affirmed.

Paula orally agrees to work with Next Corporation in New York City for two years. Paula moves her family and begins work. Three months later, Paula is fired for no stated cause. She sues for reinstatement and back pay. Next Corporation argues that there is no written contract between them. What will the court say?

The court might conclude that under the doctrine of promissory estoppel, the employer is estopped from claiming the lack of a written contract as a defense. The oral contract may be enforced because the employer made a promise on which the employee justifiably relied in moving to New York, the reliance was foreseeable, and injustice can be avoided only by enforcing the promise. If the court strictly enforces the Statute of Frauds, however, the employee may be without a remedy.

Liquidated Damages. Cohen contracts to sell his house and lot to Windsor for $100,000. The terms of the contract call for Windsor to pay 10 percent of the purchase price as a down payment. The terms further stipulate that if the buyer breaches the contract, Cohen will retain the deposit as liquidated damages. Windsor pays the deposit, but because her expected financing of the $90,000 balance falls through, she breaches the contract. Two weeks later, Cohen sells the house and lot to Ballard for $105,000. Windsor demands her $10,000 back, but Cohen refuses, claiming that Windsor's breach and the contract terms entitle him to keep the deposit. Discuss who is correct.

The entire issue rests on whether the provision is an enforceable liquidated damages clause or a penalty. Generally, the courts will enforce liquidated damages clauses under the principle of freedom of contract if damages resulting from breach would have been difficult to estimate at the time the contract was entered into and, more importantly, if the amount set is a reasonable esti- mate of what such damages would be. If the amount is excessive, the court will declare the clause to be a penalty and unenforceable, and only the amount of actual damages proved will be allowed. If, however, the amount in the clause is a reasonable estimate, the court will enforce the clause, even if the actual damages proved to be less. A good discussion of this case would go into the hindsight effect of the court in comparing actual damages proved to result from breach against those estimated at the time the contract was entered into. Should this influence the court's deci- sion? (Here, Cohen actually suffered no damage and instead profited from the breach.) If one believes that $10,000 (10 percent) is excessive, what about $1,000, given the same facts? These clauses are commonly placed in real estate purchase contracts, and the answer in either case depends on whether the clause is treated as a penalty.

19-3. Liquidated Damages and Penalties. Planned Pet- hood Plus, Inc., is a veterinarian-owned clinic. It borrowed $389,000 from KeyBank at an interest rate of 9.3 percent per year for ten years. The loan had a "prepayment penalty" clause that clearly stated that if the loan was repaid early, a specific formula would be used to assess a lump-sum payment to extinguish the obligation. The sooner the loan was paid off, the higher the prepayment penalty. After a year, the veterinar- ians decided to pay off the loan. KeyBank invoked a prepay- ment penalty of $40,525.92, which was equal to 10.7 percent of the balance due. The veterinarians sued, contending that the prepayment requirement was unenforceable because it was a penalty. The bank countered that the amount was not a penalty but liquidated damages and that the sum was reason- able. The trial court agreed with the bank, and the veterinar- ians appealed. Was the loan's prepayment charge reasonable, and should it have been enforced? Why or why not?

The prepayment penalty is not improper. The word "penalty" is used in many contracts when in fact liquidated damages are being assessed. "Where there is a breach of a contract, liquidated damages provisions must be 'reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.' A liquidated damages provision must not be 'unreasonably large for the expected loss from a breach of contract,' or 'unreasonably disproportionate to the expected loss on the very breach that did occur and was sued upon.' In an action for breach of contract, a liquidated damages provision that fails the above tests amounts to an unenforceable penalty." Planned Pethood had the right to prepay the loan principal, but that triggered the prepayment penalty that was clearly stated in the contract. The alternative for Pethood was to pay the loan annually, year by year, for 10 years as the note called for. When it took advantage of the alternative, the prepayment penalty was not unreasonable. This is a common feature of many loan agreements and the sum required does not violate some notion of equity and is not unconscionable.

Conditions. H&J Ditching & Excavating, Inc., was hired by JRSF, LLC, to perform excavating and grading work on Terra Firma, a residential construction project in West Knox County, Tennessee. Cornerstone Community Bank financed the project with a loan to JRSF. As the work pro- gressed, H&J received payments totaling 90 percent of the price on its contract. JRSF then defaulted on the loan from Cornerstone, and Cornerstone foreclosed and took possession of the property. H&J filed a suit in a Tennessee state court against the bank to recover the final payment on its contract. The bank responded that H&J had not received its payment because it had failed to obtain an engineer's certificate of final completion, a condition under its contract with JRSF. H&J responded that it had completed all the work it had contracted to do. What type of contract condition does obtaining the engineer's certificate represent? Is H&J entitled to the final payment? Discuss.

The requirement that the contractor obtain an engineer's certificate of final completion before the final payment will be made under the contract is a condition precedent. In most contracts, prom- ises of performance are not expressly conditioned—they are absolute and must be performed to avoid a breach of the contract. In some situations, however, performance is contingent on the occurrence of a certain event. If the condition is not satisfied, the obligations of the parties are discharged. A condition that must be fulfilled before a party's performance can be required is a condition precedent. In this problem, H&J was hired to excavate and grade land for a residential construction project. Cornerstone Community Bank financed the project. As the work progressed, H&J re- ceived payments totaling 90 percent of the price on its contract. But the last payment was not forthcoming when H&J believed it was due. The contractor filed a suit in a Tennessee state court against the bank to recover the final payment. The bank responded that H&J did not receive the payment because it failed to obtain an engineer's certificate of final completion, a condition under its contract. H&J argued that it completed all the work it contracted to do. H&J is not entitled to the final payment on the contract because it did not comply with the condition to obtain the engineer's certificate. This condition preceded the obligation under the contract to make the final payment. Even assuming that H&J "completed all the work it contracted to do," the final payment is not subject to disbursal without the certificate. In the actual case on which this problem is based, the court issued a judgment in the bank's favor. A state intermediate appellate court affirmed. "No certificate of substantial completion was ever issued, a condition precedent to final payment."

Debate This . . . After agreeing to an exculpatory clause or purchasing some item, minors often seek to avoid the contracts. Today's minors are far from naïve and should not be allowed to avoid their contractual obligations.

Today, teenagers, and most certainly, those just under the age of majority, are exposed to what is happening in the business world on a constant basis because of the ubiquity of media outlets—at home, at school, and everywhere there is a Wi-Fi connection. When a minor avoids an otherwise valid contract, the seller of the good or service involved gets stuck "holding the bag" while the minor had free (or at least cheap) use of the good in question. Few minors enter into contracts without understanding to what they are agreeing. As much as we wish to impute adult capacities to minors, they are still minors and are not so capable as adults in understanding the contracts into which they may voluntarily enter. Consequently, the courts are acting in a just manner when they allow minors to avoid contracts made for the purchase of goods or services. If all minors were held to their contractual obligations as if they were adults, adults would be more likely to take advantage of minors' inexperience.

The One-Year Rule. On May 1, by telephone, Yu offers to hire Benson to perform personal services. On May 5, Benson returns Yu's call and accepts the offer. Discuss fully whether this contract falls under the Statute of Frauds in the following circumstances: (See Contracts That Require a Writing.) (a) The contract calls for Benson to be employed for one year, with the right to begin performance immediately. (b) The contract calls for Benson to be employed for nine months, with performance of services to begin on Sep- tember 1. (c) The contract calls for Benson to submit a written research report, with a deadline of two years for submission.

Under the Statute of Frauds, any contract that cannot be performed within one year from the date of entering into the contract (time of acceptance), without breaching the terms, needs a writing to be enforceable. Under this rule, the following decisions are made: (a) The one-year period is measured from the day after the contract is made. Because Benson has the right to begin the one-year contract immediately, it is possible to perform the contract within one year. Therefore, the contract falls outside the Statute of Frauds and can be legally enforced without a writing. (b) The one-year period here begins with the formation of the contract, so it is measured from the day after the contract is made, May 6. Because performance is for nine months and cannot begin until September 1, however, the contract cannot be fully performed until midnight on May 31. Thus, the contract is impossible to perform within the one-year period and therefore comes under the Statute of Frauds. A writing is required for enforceability. (c) The likelihood or probability of a person performing according to the terms of a contract within a year is irrelevant to the question of whether such performance is possible. If it is possible for Benson to submit the written research report within one year, beginning May 6, the contract is outside the Statute of Frauds and legally enforceable without a writing—despite the fact that Benson is permitted two years to submit the report.

Undue Influence. Juan is an elderly man who lives with his nephew, Samuel. Juan is totally dependent on Sam- uel's support. Samuel tells Juan that unless he transfers a tract of land he owns to Samuel for a price 35 percent below its market value, Samuel will no longer support and take care of him. Juan enters into the contract. Discuss fully whether Juan can set aside this contract.

Undue influence arises from a relationship in which one party can, through unfair persuasion, greatly influence or overcome the free will of another. Any contract entered into under excessive or undue influence lacks genuine assent and is therefore voidable. Here, the influence of Samuel over his Uncle Juan is greatly enhanced by Juan's reliance on Samuel for his support. Although Juan cannot claim duress, the domination of Samuel over Juan's decisions results in undue influence. The contract is primarily for the benefit of Samuel, and Samuel used unfair persuasion in securing the contract from Juan. Juan can have the contract set aside.

Business Case Problem with Sample Answer— The Parol Evidence Rule. Rimma Vaks and her husband, Steven Mangano, executed a written contract with Denise Ryan and Ryan Auction Co. to auction their furnishings. The six-page contract provided a detailed summary of the parties' agreement. It addressed the items to be auctioned, how reserve prices would be determined, and the amount of Ryan's commission. When a dispute arose between the parties, Vaks and Mangano sued Ryan for breach of contract. Vaks and Mangano asserted that, before they executed the contract, Ryan made various oral rep- resentations that were inconsistent with the terms of their written agreement. Assuming that their written contract was valid, can Vaks and Mangano recover for breach of an oral contract? Why or why not?

Vaks and Mangano may not recover for breach of an oral contract. Under the parol evidence rule, if there is a written contract representing the complete and final statement of the parties' agreement, a party may not introduce any evidence of past agreements. Here, the written agreement was an integrated contract because the parties intended it to be a complete and final statement of the terms of their agreement. Vaks and Mangano therefore may not introduce evidence of any inconsistent oral representations made before the contract was executed.

Licensing Statutes. PEMS Co. International, Inc., agreed to find a buyer for Rupp Industries, Inc., for a commis- sion of 2 percent of the purchase price, which was to be paid by the buyer. Using PEMS's services, an investment group bought Rupp for $20 million and changed its name to Temp- Air, Inc. PEMS asked Temp-Air to pay a commission on the sale. Temp-Air refused, arguing that PEMS had acted as a bro- ker in the deal without a license. The applicable statute defines a broker as any person who deals with the sale of a business. If this statute was intended to protect the public, can PEMS collect its commission? Explain.

Whether a contract with an unlicensed person is legal and enforceable depends on the purpose of the statute. If the purpose is to protect the public from unauthorized practitioners, then a contract involving an unlicensed practitioner is generally illegal and unenforceable. This problem indicates that the applicable licensing statute was intended to protect the public from unauthorized, unlicensed practitioners. PEMS did not have a broker's license. Thus, if PEMS was acting as a broker, the unlicensed firm forfeited its right to collect a commission for its services. The statutory definition of a broker includes any person who deals with the sale of a business. It seems clear that this definition encompasses PEMS. Using PEMS's services, an investment group made a successful purchase of Rupp. Therefore PEMS is barred from maintaining this suit to collect the unpaid commission. In the actual case on which this problem is based, the court dismissed PEMS's claim on the ground that the unlicensed firm was acting as a broker.

Liquidated Damages. Cuesport Properties, LLC, sold a condominium in Anne Arundel County, Maryland, to Critical Developments, LLC. As part of the sale, Cuesport agreed to build a wall between Critical Developments' unit and an adjacent unit within thirty days of closing. If Cues- port failed to do so, it was to pay $126 per day until comple- tion. This was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. The wall was built on time, but without a county permit, and it did not comply with the county building code. Critical Developments did not modify the wall to comply with the code until 260 days after the date of the contract deadline for completion of the wall. Does Cuesport have to pay Critical Developments $126 for each of the 260 days? Explain.

Yes, Cuesport has to pay Critical Developments $126 for each of the 260 days that elapsed between the contract deadline and the date of the completion of the wall. A liquidated damages provision in a contract specifies a certain dollar amount to be paid in the event of a future default or breach of contract. A penalty provision also specifies a certain amount to be paid in the event of a default or breach of contract but is designed to penalize the breaching party. Liquidated damages provisions are usually enforceable. A provision that calls for a penalty, however, will not be enforced—recovery will be limited to actual damages. To determine if a provision is for liquidated damages or a penalty, a court asks when the contract was agreed to (1) was it apparent that damages would be difficult to estimate in the event of a breach and (2) was the amount set as damages a reasonable estimate and not excessive? If the answers to both questions are yes, the provision normally will be enforced. If either answer is no, the provision usually will not be enforced. In this problem, the contract that required the construction of the wall provided a $126 per- day payment for Cuesport's failure to complete the wall within thirty days. This was a valid liquidated damages clause, rather than an invalid penalty. It was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. In other words, in these circumstances, the answers to both of the questions above are yes. In the actual case on which this problem is based, Critical Developments filed a suit in a Maryland state court against Cuesport for breach. The court awarded the liquidated damages stipulated in the parties' contract. On Cuesport's appeal, a state intermediate appellate court affirmed.

Business Case Problem with Sample Answer— Material Breach. The Northeast Independent School District in Bexar County, Texas, hired STR Constructors, Ltd., to renovate a middle school. STR subcon- tracted the tile work in the school's kitchen to New- man Tile, Inc. (NTI). The project had already fallen behind schedule. As a result, STR allowed other workers to walk over and damage the newly installed tile before it had cured, forcing NTI to constantly redo its work. Despite NTI's requests for payment, STR remitted only half the amount due under their contract. When the school district refused to accept the kitchen, including the tile work, STR told NTI to quickly make repairs. A week later, STR terminated their contract. Did STR breach the contract with NTI? Explain.

Yes, STR breached the contract with NTI. A breach of contract is the nonperformance of a con- tractual duty. A breach is material when performance is not at least substantial. On a material breach, the nonbreaching party is excused from performance. If a breach is minor, the nonbreach- ing party's duty to perform can sometimes be suspended until the breach has been remedied, but the duty to perform is not entirely excused. Once a minor breach has been cured, the nonbreach- ing party must resume performance. Any breach—material or minor—entitles the nonbreaching party to sue for damages. In this problem, NTI had to redo its work constantly because STR permitted its employees and the employees of other subcontractors to walk over and damage the newly installed tile. Fur- thermore, despite NTI's requests for payment, STR remitted only half the amount due under their contract. Thus, NTI was deprived of at least half of the money it was owed under the contract. And STR terminated the contract, apparently wrongfully and without cause—the tile work would have been completed and satisfactorily if STR had not allowed other workers to trample the newly installed tile before it had cured. In the actual case on which this problem is based, when STR refused to pay NTI and then terminated their contract, the subcontractor filed a suit in a Texas state court to recover. From a jury verdict in NTI's favor, STR appealed. A state intermediate appellate court affirmed. "The evi- dence presented was legally sufficient for the jury to conclude that STR materially breached the contract."

Fraudulent Misrepresentation. Vianna Stibal owns and operates the ThetaHealing Institute of Knowledge (THInK) in Idaho Falls, Idaho. ThetaHealing is Stibal's "self- discovered" healing method. In her book Go Up and Seek God, Stibal stated that she had been diagnosed with cancer and had cured herself using ThetaHealing. But Stibal's representa- tion that she cured herself of cancer was false, and she knew it—her medical records did not confirm a cancer diagnosis. Believing Stibal's claim, Kara Alexander traveled from New York to Idaho to pay for, and attend, classes in ThetaHealing from Stibal. Later, Alexander began to question the validity of her THinK degree. What are the elements of a cause of action for fraudulent misrepresentation? Do the facts in this situation meet these requirements? Discuss.

Yes, the facts in the circumstances described in this problem satisfy the requirements for cause of action based on fraudulent misrepresentation. Those requirements generally include the following: The misrepresentation of a material fact. An intent to deceive. An innocent party's justifiable reliance on the misrepresentation. An injury (to collect damages) In this problem, Stibal averred in her book that she had been diagnosed with cancer and had cured herself using a "self-discovered" healing method that she referred to as "ThetaHealing." Stibal's representation that she cured herself of cancer was false, however, and she knew it. This is indicated by her medical records, which did not confirm a cancer diagnosis. Stibal used this false representation to induce people to take her classes in ThetaHealing. Among those who believed Stibal's claim was Kara Alexander, who at presumably considerable expense traveled from New York to Idaho, and paid Stibal for the classes. These facts meet all the requirements for an action based on fraudulent misrepresentation—Stibal's claim was a material fact, it was false, she knew it, Alexander justifiably relied on it in deciding to travel to Idaho and take Stibal's classes, and Alexander incurred significant expenses in doing so. This last circumstance established Alexander's injury and provided a basis for damages. In the actual case on which this problem is based, Alexander filed a suit in an Idaho state court against Stibal, alleging fraud in her assertion that she had cured herself of cancer. The court issued a judgment in Alexander's favor and awarded her $17,000 on the fraud claim. The Idaho Supreme Court affirmed, on the reasoning applied above.

Business Case Problem with Sample Answer— Fraudulent Misrepresentation. Joy Pervis and Brenda Pauley worked together as talent agents in Geor- gia. When Pervis "discovered" actress Dakota Fan- ning, Pervis sent Fanning's audition tape to Cindy Osbrink, a talent agent in California. Osbrink agreed to represent Fanning in California and to pay 3 percent of Osbrink's commissions to Pervis and Pauley, who agreed to split the payments equally. Six years later, Pervis told Pauley that their agreement with Osbrink had expired and there would be no more payments. Nevertheless, Pervis continued to receive payments from Osbrink. Each time Pauley asked about commissions, however, Pervis replied that she was not receiving any. Do these facts evidence fraud? Explain

Yes, the facts in this problem evidence fraud. There are three elements to fraud: (1) the misrepresentation of a material fact, (2) an intent to deceive, and (3) an innocent party's justifiable reliance on the misrepresentation. To collect damages, the innocent party must suffer an injury. Here, Pervis represented to Pauley that no further commission would be paid by Osbrink. This representation was false—despite Pervis's statement to the contrary, Osbrink continued to send payments to Pervis. Pervis knew the representation was false, as shown by the fact that she made it more than once during the time that she was continuing to receive payments from Osbrink. Each time Pauley asked about commissions, Pervis replied that she was not receiving any. Pauley's reliance on her business associate's statements was justified and reasonable. And for the purpose of recovering damages, Pauley suffered an injury in the amount of her share of the commissions that Pervis received as a result of the fraud.In the actual case on which this problem is based, Pauley filed a suit in a Georgia state court against Pervis, who filed for bankruptcy in a federal bankruptcy court to stay the state action. The federal court held Pervis liable on the ground of fraud for the amount of the commissions that were not paid to Pauley, and denied Pervis a discharge of the debt.

Limitation-of-Liability Clauses. Mia Eriksson was a seventeen-year-old competitor in horseback-riding events. Her riding coach was Kristi Nunnink. Eriksson signed an agreement that released Nunnink from all liability except for damages caused by Nunnink's "direct, willful and wanton negligence." During an event at Galway Downs in Temecula, California, Eriksson's horse struck a hurdle. She fell from the horse and the horse fell on her, causing her death. Her parents, Karan and Stan Eriksson, filed a suit in a Califor- nia state court against Nunnink for wrongful death. Is the limitation-of-liability agreement that Eriksson signed likely to be enforced in her parents' case? If so, how will it affect their claim? Explain.

Yes, the limitation-of-liability agreement that Eriksson signed is likely to be enforced in her parents' suit against Nunnink, their daughter's riding coach. And this would likely result in a judgment against them unless they can establish Nunnink's "direct, willful and wanton negligence." A limitation-of-liability clause affects the availability of certain remedies. Under basic contract principles, to be enforceable, these clauses must be clear and unambiguous. In this problem, Eriksson, a young equestrian event competitor, signed an agreement that released Nunnink from all liability except for damages caused by Nunnink's "direct, willful and wanton negligence." During an event, Eriksson's horse struck a hurdle, causing her to fall from the horse. The horse fell on her, resulting in her death. Her parents filed a suit against Nunnink for wrongful death. The limitation-of-liability clause expressly released Nunnink from liability for all of Eriksson's equestrian activities related to Nunnink's services except for those caused by Nunnink's "direct, willful and wanton negligence." The clause is straightforward, clear, and unambiguous, and therefore enforceable. Nunnink would be liable only if Eriksson's death was caused by Nunnink's gross negligence. The facts do not state that Eriksson's parents proved Nunnink was grossly negligent. In the actual case on which this problem is based, the court issued a judgment in Nunnink's favor. A state intermediate appellate court affirmed the judgment, on the basis expressed here.

Sufficiency of the Writing. Newmark & Co. Real Estate, Inc., contacted 2615 East 17 Street Realty, LLC, to lease certain real property on behalf of a client. Newmark e-mailed the landlord a separate agreement for the payment of Newmark's commission. The landlord e-mailed it back with a separate demand to pay the commission in installments. New- mark revised the agreement and e-mailed a final copy to the landlord. Does the agreement qualify as a writing under the Statute of Frauds? Explain.

Yes. A writing to satisfy the Statute of Frauds can consist of any order confirmation or other document, alone or in combination with other items, in hard copy or electronic copy, including e- mail. The item or items need only contain the essential terms of the contract to bind both parties to the writing. This includes the names of the parties, the subject matter, the consideration, and the quantity, and in the case of a contract involving an interest in land, the location, price, and description of the property. The party against whom enforcement is sought must have signed the writing. An electronic signature, such as a party's name typed at the bottom of an e-mail note, satisfies the signature requirement. In this problem, the e-mails between the parties included messages sent under the landlord's name. Among those messages was a copy of the agreement to pay Newmark's commission with a demand to pay the amount in installments. Newmark e-mailed a revised version of the agreement that set out all of the essential terms to the landlord, who did not object to it. This met the requirements of a writing under the Statute for Frauds. Thus, Newmark was entitled to the payment of its commission. In the actual case on which this problem is based, the landlord did not pay the commission. In Newmark's later suit to collect, a court ordered the landlord to pay the broker.

Fraudulent Misrepresentation. Charter One Bank owned a fifteen-story commercial building. A fire inspec- tor told Charter that the building's drinking-water and fire- suppression systems were linked, which violated building codes. Without disclosing this information, Charter sold the building to Northpoint Properties, Inc. Northpoint spent $280,000 to repair the water and fire-suppression systems and filed a suit against Charter One. Is the seller liable for not disclosing the building's defects? Discuss.

Yes. Ordinarily, neither party to a contract has a duty to disclose facts about the object of their deal. If a seller knows of a serious problem that a buyer cannot reasonably be expected to discover, however, the seller has a duty to speak if the defect is latent and could not readily be ascertained. In this problem, Charter was aware of the linked drinking water and fire-suppression lines. Despite Charter's knowledge of this fact, it did not provide Northpoint as a potential buyer with this information. This constituted a material misrepresentation as to the actual condition of these systems. If the misrepresentation was made with the intent to induce reliance and Northpoint's reliance on this misrepresentation was justified—as appears to be the situation—then the seller is liable to the buyer. The appropriate measure of damages is the reasonable cost to repair. In the actual case on which this problem is based, the court found that all of the elements of fraud were present and that the "cost of repair" was an appropriate measure of damages.

In selling a house, Matt tells Ann that the wiring, fixtures, and appliances are of a certain quality. Matt knows noth- ing about the quality, but it is not as specified. Ann buys the house. On learning the true quality, Ann confronts Matt. He says he wasn't trying to fool her, he was only try- ing to make a sale. Can she rescind the deal? Why or why not?

Yes. Rescission may be granted on the basis of fraudulent misrepresentation. The elements of fraudulent misrepresentation include intent to deceive, or scienter. Scienter exists if a party makes a statement recklessly, without regard to whether it is true or false, or if a party says or implies that a statement is made on some basis such as personal knowledge or personal in- vestigation when it is not.

Elle, an accountant, certifies several audit reports for Flite Corporation, her client, knowing that Flite intends to use the reports to obtain loans from Good Credit Company (GCC). Elle believes that the reports are true and does not intend to deceive GCC, but she does not check the reports before certifying them. Can Elle be held liable to GCC? Why or why not?

Yes. The accountant may be liable on the ground of negligent misrepresentation. A misrepresentation is negligent if a person fails to exercise reasonable care in disclosing material facts or does not use the skill and competence required by his or her business or profession.

Offer and Acceptance. Schmidt, the owner of a small business, has a large piece of used farm equipment for sale. He offers to sell the equipment to Barry for $10,000. Discuss the legal effects of the following events on the offer: (a) Schmidt dies prior to Barry's acceptance, and at the time he accepts, Barry is unaware of Schmidt's death. (b) The night before Barry accepts, fire destroys the equipment. (c) Barry pays $100 for a thirty-day option to purchase the equipment. During this period, Schmidt dies, and later Barry accepts the offer, knowing of Schmidt's death. (d) Barry pays $100 for a thirty-day option to purchase the equipment. During this period, Barry dies, and Barry's estate accepts Schmidt's offer within the stipulated time period.

(a) Death of either the offeror or the offeree prior to acceptance automatically termi- nates a revocable offer. The basic legal reason is that the offer is personal to the parties and cannot be passed on to others, not even to the estate of the deceased. This rule applies even if the other party is unaware of the death. Thus, Schmidt's offer terminates on Schmidt's death, and Barry's later acceptance does not constitute a contract. (b) An offer is automatically terminated by the destruction of the specific subject matter of the offer prior to acceptance. Thus, Barry's acceptance after the fire does not constitute a contract. (c) When the offer is irrevocable, under an option contract, death of the offeror does not terminate the option contract, and the offeree can accept the offer to sell the equipment, bind- ing the offeror's estate to performance. Performance is not personal to Schmidt, as the estate can transfer title to the equipment. Knowledge of the death is immaterial to the offeree's right of acceptance. Thus, Barry can hold Schmidt's estate to a contract for the purchase of the equip- ment. (d) When the offer is irrevocable, under an option contract, death of the offeree also does not terminate the offer. Because the option is a separate contract, the contract survives and passes to the offeree's estate, which can exercise the option by acceptance within the option period. Thus, acceptance by Barry's estate binds Schmidt to a contract for the sale of the equip- ment.

A Question of Ethics—Wrongful Interference. White Plains Coat & Apron Co. is a New York- based linen rental business. Cintas Corp. is a com- petitor. White Plains had five-year exclusive contracts with some of its customers. As a result of Cintas's soliciting of business, dozens of White Plains' customers breached their contracts and entered into rental agreements with Cintas. White Plains filed a suit against Cintas, alleging wrongful inter- ference. [ White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 867 N.E.2d 381 (2007)] (See Intentional Torts against Persons.) (a) What are the two important policy interests at odds in wrongful interference cases? Which of these interests should be accorded priority? (b) The U.S. Court of Appeals for the Second Circuit asked the New York Court of Appeals to answer a question: Is a general interest in soliciting business for profit a sufficient defense to a claim of wrongful interference with a contrac- tual relationship? What do you think? Why?

(a) The New York Court of Appeals recognized that "[a]t bottom, as a matter of policy, courts are called upon to strike a balance between two valued interests: protection of enforceable contracts, which lends stability and predictability to parties' dealings, and promotion of free and robust competition in the marketplace." The court acknowledged that actions might be based on both prospective and existing contracts, but "greater protection is accorded an interest in an existing contract (as to which respect for individual contract rights outweighs the public benefit to be derived from unfettered competition) than to the less substantive, more speculative interest in a prospective relationship (as to which liability will be imposed only on proof of more culpable conduct on the part of the interferer)." The court pointed out that "[a] defendant who is simply plaintiff's competitor and knowingly solicits its contract customers is not economically justified in procuring the breach of contract." In other words, "[w]hen the defendant is simply a competitor of the plaintiff seeking prospective customers and plaintiff has a customer under contract for a definite period, defendant's interest is not equal to that of plaintiff and would not justify defendant's inducing the customer to breach the existing contract." (b) The New York Court of Appeals' answer to the question was no, absent a prior economic relationship, a general economic interest in making a profit was not a sufficient defense to wrongful interference with a contractual relationship. "One who intentionally and improperly interferes with the performance of a contract . . . between another and a third person by inducing or otherwise causing the third person not to perform the contract is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract." The court explained that "the plaintiff must show the existence of its valid contract with a third party, defendant's knowledge of that contract, defendant's intentional and improper procuring of a breach, and damages. In response to such a claim, a defendant may raise the . . . defense that it acted to protect its own legal or financial stake in the breaching party's business." The court acknowledged, however, that "protecting existing contractual relationships does not negate a competitor's right to solicit business, where liability is limited to improper inducement of a third party to breach its contract. Sending regular advertising and soliciting business in the normal course does not constitute inducement of breach of contract. A competitor's ultimate liability will depend on a showing that the inducement exceeded a minimum level of ethical behavior in the marketplace."

This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (a) A federal statute conflicts with the U.S. Constitution. (b) A federal statute conflicts with a state constitutional provision. (c) A state statute conflicts with the common law of that state. (d) A state constitutional amendment conflicts with the U.S. Constitution.

(a) The U.S. Constitution—The U.S. Constitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will be declared unconstitutional and will not be enforced. (b) The federal statute—Under the U.S. Constitution, when there is a conflict between a federal law and a state law, the state law is rendered invalid. (c) The state statute—State statutes are enacted by state legislatures. Areas not covered by state statutory law are governed by state case law. (d) The U.S. Constitution—State constitutions are supreme within their respective borders unless they conflict with the U.S. Constitution, which is the supreme law of the land.

A Question of Ethics—Defamation. Aric Toll owns and manages the Balboa Island Village Inn, a restau- rant and bar in Newport Beach, California. Anne Lemen lives across from the inn. Lemen complained to the authorities about the inn's customers, whom she called "drunks" and "*****s." She referred to Aric's wife as "Madam *****" and told neighbors that the owners were involved in illegal drugs and prostitution. Lemen told Ewa Cook, a bartender at the Inn, that Cook "worked for Satan." She repeated her statements to potential customers, and the inn's sales dropped more than 20 percent. The inn filed a suit against Lemen. [ Balboa Island Village Inn, Inc. v. Lemen, 40 Cal.4th 1141, 156 P.3d 339 (2007)] (See Business and the Bill of Rights.) (a) Are Lemen's statements about the inn's owners, customers, and activities protected by the U.S. Constitution? Should such statements be protected? In whose favor should the court rule? Why? (b) Did Lemen behave unethically in the circumstances of this case? Explain.

(a) The answers to these questions begin with the protection of the freedom of speech under the First Amendment. The freedom to express an opinion is a fundamental aspect of liberty. But this right and its protection are not absolute. Some statements are not protected because, as explained in the Balboa decision, "they are no essential part of any exposition of ideas, and are of such slight social value as a step to truth that any benefit that may be derived from them is clearly outweighed by the social interest in order and morality." Defamatory statements are among those that are not protected. Arguments in favor of protecting such statements include the perception of the right to freedom of speech as necessary to liberty and a free society. Arguments opposed to such protection include "the social interest in order and morality." In between these positions might fall a balancing of both their concerns. Under any interpretation the degree to which statements can be barred before they are made is a significant question. In the Balboa case, the court issued an injunction against Lemen, ordering her to, among other things, stop making defamatory statements about the Inn. On appeal, a state intermediate appellate court invalidated this part of the injunction, ruling that it violated Lemen's right to freedom of speech under the Constitution because it was a "prior restraint"—an attempt to restrain Lemen's speech before she spoke. On further appeal, the California Supreme Court phrased "the precise question before us [to be] whether an injunction prohibiting the repetition of statements found at trial to be defamatory violates the First Amendment." The court held it could enjoin the repetition of such statements without infringing Lemen's right to free speech. Quoting from a different case, the court reasoned, "The special vice of a prior restraint is that communication will be suppressed, either directly or by inducing excessive caution in the speaker, before an adequate determination that it is unprotected by the First Amendment. An injunction that is narrowly tailored, based upon a continuing course of repetitive speech, and granted only after a final adjudication on the merits that the speech is unprotected does not constitute an unlawful prior restraint." The court added that the injunction could not prevent Lemen from complaining to the authorities, however. (b) To answer this question requires a standard to apply to the facts. A different chapter in the text sets out two fundamental approaches to ethical reasoning: one involves duty-based standards, which are often derived from religious precepts, and the other focuses on the consequences of an action and whether these are the "greatest good for the greatest number." Under the former approach, a pre-established set of moral values founded on religious beliefs can be taken as absolute with regard to behavior. Thus, if these values proscribed Lemen's name-calling as wrong, it would be construed as wrong, regardless of the truth of what she said or any effect that it had. Similarly, if the values prescribed Lemen's conduct as correct, it might be unethical not to engage in it. A different duty-based approach grounded on philosophical, rather than religious, principles would weigh the consequences of the conduct in light of what might follow if everyone engaged in the same behavior. If we all engaged in name-calling, hostility and other undesirable consequences would likely flourish. A third duty-based approach, referred to as the principle of rights theory, posits that every ethical precept has a rights-based corollary (for example, "thou shalt not kill" recognizes everyone's right to live). These rights collectively reflect a dignity to which we are each entitled. Under this approach, Lemen's name-calling would likely be seen as unethical for failing to respect her victims' dignity. Finally, an outcome-based approach focuses on the consequences of an act, requiring a determination as to whom it affects and assessments of its costs and benefits, as well as those of alternatives. The goal is to seek the maximum societal utility. Here, Lemen's behavior appears to have had little positive effect on herself or the objects of her criticism (the Inn, its employees, its patrons, and its business). The Inn's business seems to have been affected in a substantial way, which in Lemen's eyes may be a "benefit," but in the lives of its owners, employees, and customers, would more likely be seen as a "cost."

A Question of Ethics—E-Contract Disputes. Dewayne Hubbert, Elden Craft, Chris Grout, and Rhonda Byington bought computers from Dell Corp. through its Web site. Before buying, Hubbert and the others configured their own computers. To make a purchase, each buyer completed forms on five Web pages. On each page, Dell's "Terms and Conditions of Sale" were accessible by clicking on a blue hyperlink. A statement on three of the pages read, "All sales are subject to Dell's Term[s] and Conditions of Sale," but a buyer was not required to click an assent to the terms to complete a purchase. The terms were also printed on the backs of the invoices and on separate documents contained in the ship- ping boxes with the computers. Among those terms was a "Bind- ing Arbitration" clause. The computers contained Pentium 4 microprocessors, which Dell advertised as the fastest, most powerful Intel Pentium proces- sors then available. In 2002, Hubbert and the others filed a suit in an Illinois state court against Dell, alleging that this marketing was false, misleading, and deceptive. The plaintiffs claimed that the Pentium 4 microprocessor was slower and less powerful, and provided poorer performance, than either a Pentium III or an AMD Athlon, and at a greater cost. Dell asked the court to compel arbitration. [ Hubbert v. Dell Corp., 359 Ill.App.3d 976, 835 N.E.2d 113, 296 Ill.Dec. 258 (5 Dist. 2005)] (See Agreement in E-Contracts.) (a) Should the court enforce the arbitration clause in this case? If you were the judge, how would you rule on this issue? (b) Doyouthinkshrink-wrap,click-on,andbrowse-wrapterms impose too great a burden on purchasers? Why or why not? (c) An ongoing complaint about shrink-wrap, click-on, and browse-wrap terms is that sellers (often large corporations) draft them and buyers (typically individual consumers) do not read them. Should purchasers be bound in contract by terms that they have not even read? Why or why not?

(a) The court held that the arbitration clause was not a part of the contract between Dell and the plaintiffs, and that if the clause were a part of the contract, it would be unenforceable because it was unconscionable. Dell appealed to a state intermediate appellate court, which re- versed the lower court's holding and remanded the case. The appellate court held that the plain- tiffs were bound by Dell's terms, including the arbitration clause. The appellate court emphasized in part that the blue hyperlink entitled "Terms and Condi- tions of Sale" appeared on many of the Web pages completed in the ordering process. A state- ment on three of those pages explained that sales were subject to those terms. The court rea- soned that these statements placed a reasonable person on notice that there were terms attached to a purchase and that the hyperlink's contrasting blue type made it conspicuous. The court also found that these particular purchasers were not novices with respect to computers, as shown by their ability to configure their own computers before making their purchases and to distinguish the speeds among different types of processors. (b) Arguments for and against these terms are discussed in the text. As long as shrink- wrap, click-on, and browse-wrap terms are fair and reasonable, it could be maintained that they do not impose too great a burden on purchasers, even though most of whom are individual con- sumers. Without such terms, a merchant might find itself embroiled in numerous lawsuits in far- flung locales over relatively small sums and thus might be less willing to do business, or would only agree to do business limited in some other way. This would work to the advantage of almost no one. When such terms are too one-sided, or otherwise unfair, however, it could be argued that the burden on consumers is too great, especially if the unfair terms are enforced. In those cases, to avoid an onerous burden, a consumer might need to read the terms intelligently and to have them considered by an attorney. This would also seem to work to no one's advantage. (c) Sometimes, it is asserted that most buyers, especially individual consumers, do not read shrink-wrap, click-on, or browse-wrap terms. The law does provide ways to avoid these terms for consumers who have been taken advantage of by a clause in "fine print" or "legalese" that the consumers may not have read and may not even have known about. These avenues include protection against fraud, unconscionability, and adhesion contracts, as well as consumer protec- tion statutes.

A Question of Ethics—Unilateral Contracts. International Business Machines Corp. (IBM) hired Niels Jensen in 2000 as a software sales representa- tive. According to the brochure on IBM's "Sales Incentive Plan" (SIP), "the more you sell, the more earnings for you." But "the SIP program does not constitute a promise by IBM. IBM reserves the right to modify the program at any time." Jensen was given a "quota letter" that said he would be paid $75,000 as a base salary and, if he attained his quota, an additional $75,000 as incentive pay. Jensen closed a deal worth more than $24 million to IBM. When IBM paid him less than $500,000 as a commission, Jensen filed a suit. He argued that the SIP was a unilateral offer that became a binding con- tract when he closed the sale. (a) Would it be fair to the employer for the court to hold that the SIP brochure and the quota letter created a unilateral contract if IBM did not intend to create such a contract? Would it be fair to the employee to hold that no contract was created? Explain. (b) The "Sales Incentives" section of IBM's brochure included a clause providing that "management will decide if an adjustment to the payment is appropriate" when an employee closes a large transaction. Does this affect your answers to the questions above? From an ethical perspec- tive, would it be fair to hold that a contract exists despite these statements? Why or why not?

(a) The court issued a summary judgment in favor of IBM, holding that there was no contract between the parties because they had not agreed on the commission arrangement. Jen- sen appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed the judgment of the lower court. The appellate court acknowledged that "[a]n employer can make a unilateral offer to its employees, and the offer becomes a contract when its conditions are fulfilled." Jensen failed to show that IBM made an offer here, however, "because the documents on which he relies do not manifest IBM's willingness to extend any offer to enter into a contract. The terms of IBM's Sales Incentive Plan make clear that they are not to be construed as an offer that can be accepted to form a contract. . . . "[W]e view this case as an effort by Jensen to create an enforceable contract out of a policy that expressed IBM's contrary intentions. We see IBM's Sales Incentive Plan as no more than an announcement of a policy expressing its intent to pay incentives in specified amounts but retaining full discretion to determine amounts until the time that they are actually paid. Seen in this light, descriptions of the plan did not amount to an offer to enter into a contract, but the announcement of a nonbinding intention, much like that in which an employee is told that he will be paid a bonus if the company does well, without being promised specific amounts." (b) Citing the quota letter, the court concluded that "IBM did not invite a bargain or man- ifest a willingness to enter into a bargain. To the contrary, it manifested its clear intent to preclude the formation of a contract." Under the terms displayed on the intranet and stated in the letter, IBM indicated that Jensen could not rely on the description of potential commissions in the SIP brochure because "IBM could modify or cancel the Sales Incentive Plan at any time. . . . Thus, IBM made clear that there were no conditions that Jensen could satisfy to create a binding con- tract before IBM decided to pay him. IBM unambiguously characterized sales commissions as a form of incentive pay that it intended to make but which it reserved the right to calculate or even not make, even after sales were closed." The brochure's reference to the intranet "amounts to an incorporation by reference to intranet materials that establish a special rate of commissions in 'large opportunity' transactions . . . . These are all terms of the 'offer' on which Jensen relies."

A Question of Ethics—Dangerous Products. Susan Calles lived with her four daughters—Amanda, age eleven; Victoria, age five; and Jenna and Jillian, age three. In March 1998, Calles bought an Aim N Flame utility lighter, which she stored on the top shelf of her kitchen cabinet. A trigger can ignite the Aim N Flame after an "ON/OFF" switch is slid to the "on" position. On the night of March 31, Calles and Victoria left to get videos. Jenna and Jillian were in bed, and Amanda was watching television. Calles returned to find fire trucks and emergency vehicles around her home. Robert Finn, a fire investigator, determined that Jenna had started a fire using the lighter. Jillian suffered smoke inhalation, was hospitalized, and died on April 21. Calles filed a suit in an Illinois state court against Scripto-Tokai Corp., which distributed the Aim N Flame, and oth- ers. In her suit, which was grounded, in part, in strict liability claims, Calles alleged that the lighter was an "unreasonably danger- ous product." Scripto filed a motion for summary judgment. [Calles v. Scripto-Tokai Corp., 224 Ill.2d 247, 864 N.E.2d 249, 309 Ill. Dec. 383 (2007)] (See Strict Product Liability.) (a) A product is "unreasonably dangerous" when it is dan- gerous beyond the expectation of the ordinary consumer. Whose expectation—Calles's or Jenna's—applies? Does the lighter pass this test? Explain. (b) Calles presented evidence as to the likelihood and seri- ousness of injury from lighters that do not have child- safety devices. Scripto argued that the Aim N Flame is an alternative source of fire and is safer than a match. Calles admitted that she knew the dangers presented by light- ers in the hands of children. Scripto admitted that it had been a defendant in several suits for injuries under similar circumstances. How should the court rule? Why?

(a) The state supreme court held that the "ordinary consumer of a lighter, such as the Aim N Flame here, is an adult—the typical user and purchaser. Therefore, the expectations re- garding the Aim N Flame's use and safety must be viewed from the point of view of the adult consumer." The court held that the lighter met this test. "The purpose of a lighter, such as the Aim N Flame, is to produce a flame. Clearly then, the ordinary consumer would expect that, when the trigger is pulled, a flame would be produced. Here, the Aim N Flame was not used in its intended manner, i.e., by an adult." But "[a]n ordinary consumer would expect that a child could obtain possession of the Aim N Flame and attempt to use it. Thus, a child is a reasonably foreseeable user. Likewise, an ordinary consumer would appreciate the consequences that would naturally flow when a child obtains possession of a lighter. Specifically, an ordinary consumer would expect that the Aim N Flame, in the hands of a child, could cause the result that occurred here—the starting of a fire that led to injury to a child. . . . In other words, the Aim N Flame did not fail to perform as an ordinary consumer would expect when used in a reasonably foreseeable manner. Thus, as a matter of law, no fact finder could conclude that the Aim N Flame was unreasonably dangerous under the consumer-expectation test." (b) The court issued a summary judgment in Scripto's favor, but on Calles's appeal, a state intermediate appellate court reversed this judgment, and Scripto appealed to the Illinois Supreme Court, which affirmed the lower appellate court's ruling, remanding the case for trial on Calles's strict liability claims. The state supreme court considered a number of factors to deter- mine whether the lighter was an unreasonably dangerous product, but concluded that "reasonable persons could differ on the weight to be given the relevant factors, particularly where additional 10 UNIT TWO: TORTS AND CRIMES proofs are necessary, and thus could differ on whether the risks of the Aim N Flame outweigh its utility. Therefore, reasonable persons could differ as to whether the Aim N Flame is unreasonably dangerous, and we cannot say that Scripto was entitled to judgment as a matter of law."

A Question of Ethics—The Common Law Tradition. On July 5, 1884, Dudley, Stephens, and Brooks— "all able-bodied English seamen"—and a teenage English boy were cast adrift in a lifeboat following a storm at sea. They had no water with them in the boat, and all they had for sustenance were two one- pound tins of turnips. On July 24, Dudley proposed that one of the four in the lifeboat be sacrificed to save the others. Stephens agreed with Dudley, but Brooks refused to consent—and the boy was never asked for his opinion. On July 25, Dudley killed the boy, and the three men then fed on the boy's body and blood. Four days later, a passing vessel rescued the men. They were taken to England and tried for the murder of the boy. If the men had not fed on the boy's body, they would probably have died of starvation within the four-day period. The boy, who was in a much weaker condition, would likely have died before the rest. [Regina v. Dud- ley and Stephens, 14 Q.B.D. (Queen's Bench Division, Eng- land) 273 (1884)] (See The Common Law Tradition.) (a) The basic question in this case is whether the survivors should be subject to penalties under English criminal law, given the men's unusual circumstances. Were the defen- dants' actions necessary but unethical? Explain your rea- soning. What ethical issues might be involved here? (b) Should judges ever have the power to look beyond the written "letter of the law" in making their decisions? Why or why not?

(a) Your answer to these questions and the reasons for those answers will likely follow one of the three schools of jurisprudential thought discussed in Chapter 1. In other words, your reasoning would indicate how you personally view the nature of ethics and the law. If your sentiments are similar to those of the positivist school, you would have little difficulty. Your answers would include that regardless of the necessity, or even the ethicality, of the men's actions, the criminal law of their nation should be applied. In contrast, if you hold that there is a higher, "natural" law with legal and ethical principles to which all human beings are subject, you might have concluded that, given their circumstances, the men should be subject to that higher law, not any nation's particular laws. If you reached this conclusion, then you would have to further decide whether those principles would sanction the killing of another human being for the sake of necessity—survival in these circumstances—or absolutely prohibit the taking of another's life under any circumstances. This is both a legal and an ethical question that you would ultimately answer on the basis of your personal ethical, religious, or philosophical leanings. Approaching the question from a legal realist's perspective, you would probably attempt to balance your personal, subjective view of the men's actions against the views held by the others—how do most people feel about the issue? How would they respond to whatever your decision might be? As a judge, do you have an obligation to be responsive to society's ethical standards? If so, to what extent should this obligation be a determining factor in your decision, and how do you balance this obligation against your duty to uphold the law? (b) The legal realists believed that, just as each judge is influenced by the beliefs and attitudes unique to his or her personality, so, too, is each case attended by a unique set of circumstances. According to the legal realist school of thought, judges should tailor their decisions to take account of the specific circumstances of each case, rather than rely on an abstract rule that may not relate to those circumstances. Legal realists also believe that judges should consider extra-legal sources, such as economic and sociological data, in making decisions, to the extent that those sources illuminate the circumstances and issues involved in specific cases. A counterargument can be derived from the positivist school: the law is the law, and there is no need to look beyond it to apply it. In fact, a legal positivist might argue that looking at extra-legal sources would be acting contrary to the law.

Elaine Sweeney went to Ragged Mountain Ski Resort in New Hampshire with a friend. Elaine went snow tubing down a run designed exclusively for snow tubers. There were no Ragged Mountain employees present in the snow-tube area to instruct Elaine on the proper use of a snow tube. On her fourth run down the trail, Elaine crossed over the center line between snow-tube lanes, collided with another snow tuber, and was injured. Elaine filed a negligence action against Ragged Mountain seeking compensation for the injuries that she sustained. Two years earlier, the New Hampshire state legislature had enacted a statute that prohibited a person who participates in the sport of skiing from suing a ski-area operator for injuries caused by the risks inherent in skiing. Using the information presented in the chapter, answer the following questions. 1. What defense will Ragged Mountain probably assert? 2. The central question in this case is whether the state statute establishing that skiers assume the risks inherent in the sport bars Elaine's suit. What would your decision be on this issue? Why? 3. Suppose that the court concludes that the statute applies only to skiing and not to snow tubing. Will Elaine's law suit be successful? Explain. 4. Now suppose that the jury concludes that Elaine was partly at fault for the accident. Under what theory might her damages be reduced in proportion to the degree to which her actions contributed to the accident and her resulting injuries?

1A. Defense The strongest defense will be assumption of the risk, which is common in sports. That defense is strengthened by the state statute that formalizes the defense. 2A. Statute Yes, because the statute strengthened the traditional common law rule. The legislature can change or limit common law rules, such as those for liability. Here the legislature strengthened the rule of assumption of the risk, which makes it very difficult for a plaintiff to overcome. 3A. Effect of statute No, because of assumption of the risk. The defense of assumption of the risk would still likely be a successful defense for the ski resort. That rule generally applies to participants in sporting events unless the host creates unreasonably dangerous conditions and does not warn clients. 4A. Proportioned damages Comparative negligence allows the jury to compute the contributions of both parties to the situation. This results in the reduction or elimination of the plaintiff's recovery, depending on the state rule and the percent of negligence contributed.

John operates a motorcycle repair shop from his home but finds that his business is limited by the small size of his garage. Driving by a neighbor's property, he notices a for-sale sign on a large, metal-sided garage. John contacts the neighbor and offers to buy the building, hoping that it can be dismantled and moved to his own property. The neighbor accepts John's payment and makes a generous offer in return. If John will help him dismantle the garage, which will take a substantial amount of time, he will help John reassemble it after it has been transported to John's property. They agree to have the entire job completed within two weeks. John spends every day for a week working with his neighbor to disassemble the building. In his rush to acquire a larger workspace, he turns down several lucrative repair jobs. Once the disassembled building has been moved to John's property, however, the neighbor refuses to help John reassemble it as he originally promised. Using the information presented in the chapter, answer the following questions. 1. Are the basic elements of consideration present in the neighbor's promise to help John reassemble the garage? Why or why not? 2. Suppose that the neighbor starts to help John but then realizes that putting the building back together will take much more work than dismantling it. Under which principle discussed in the chapter might the neighbor be allowed to ask for additional compensation? 3. What if John's neighbor made his promise to help reassemble the garage at the time he and John were moving it? Suppose he said, "Since you helped me take it down, I will help you put it back up." Would John be able to enforce this promise? Why or why not? 4. Under what doctrine discussed in the chapter might John seek to recover the profits he lost when he turned down repair jobs for one week?

1A. Elements Yes, there was an offer that was accepted with consideration. The parties agreed to the terms of the deal, which included cash for the building and the labor to take the building down and put it back together. 2A. Principle Under the rule of unforeseen difficulties, a change in the terms may be allowed because of unforeseen difficulties, although that rule is not easy to have applied. 3A. Promise No, John cannot enforce the promise because it is a gift being offered. At this point in their dealings, the neighbor is making a promise with no consideration from John, so it is a gift, not a bargained-for exchange. 4A. Doctrine Assuming the neighbor knew about the income John was losing by counting on the deal as discussed, John might recover under the doctrine of promissory estoppel, which is when one has reasonably relied on the promise of another.

A state legislature enacted a statute that required any motorcycle operator or passenger on the state's highways to wear a - protective helmet. Jim Alderman, a licensed motorcycle operator, sued the state to block enforcement of the law. Alder man asserted that the statute violated the equal protection clause because it placed requirements on motorcyclists that were not imposed on other motorists. Using the information presented in the chapter, answer the following questions. 1. Why does this statute raise equal protection issues instead of substantive due process concerns? 2. What are the three levels of scrutiny that the courts use in determining whether a law violates the equal protection clause? 3. Which standard of scrutiny, or test, would apply to this situation? Why? 4. Applying this standard, is the helmet statute constitutional? Why or why not?

1A. Equal protection When a law or action limits the liberty of some persons but not others, it may violate the equal protection clause. Here, because the law applies only to motorcycle operators and passengers, it raises equal protection issues. 2A. Levels The three levels of scrutiny that courts apply to determine whether the law or action violates equal protection are strict scrutiny (if fundamental rights are at stake), intermediate scrutiny (in cases involving discrimination based on gender or legitimacy), and the rational basis test (in matters of economic or social welfare). 3A. Standard The court would likely apply the rational basis test. Similar to seat-belt laws and speed limits, a statute requiring motorcyclists to wear helmets involves the state's attempt to protect the welfare of its citizens. Thus, the court would consider the statute a matter a social welfare and require that it be rationally related to a legitimate government objective. 4A. Application The statute is probably constitutional, because requiring helmets is rationally related to a legitimate government objective (public health and safety). Under the rational basis test, courts rarely strike down laws as unconstitutional, and this statute will likely further the legitimate state interest of protecting the welfare of citizens and promoting safety.

Stan Garner resides in Illinois and promotes boxing matches for SuperSports, Inc., an Illinois corporation. Garner created the concept of "Ages" promotion—a three-fight series of boxing matches pitting an older fighter (George Foreman) against a younger fighter. The concept had titles for each of the three fights, including "Battle of the Ages." Garner contacted Foreman and his manager, who both reside in Texas, to sell the idea, and they arranged a meeting in Las Vegas, Nevada. During negotiations, Foreman's manager signed a nondisclosure agreement prohibiting him from disclosing Garner's promotional concepts unless the parties signed a contract. Nevertheless, after negotiations fell through, Foreman used Garner's "Battle of the Ages" concept to promote a subsequent fight. Garner filed a suit against - Foreman and his manager in a federal district court located in Illinois, alleging breach of contract. Using the informa tion presented in the chapter, answer the following questions. 1. On what basis might the federal district court in Illinois exercise jurisdiction in this case? 2. Does the federal district court have original or appellate jurisdiction? 3. Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have exercised per sonal jurisdiction over Foreman or his manager? Why or why not? - 4. Now suppose that Garner had filed his action in a Nevada state court. Would that court have had personal jurisdic tion over Foreman or his manager? Explain.

1A. Federal jurisdiction The federal district court exercises jurisdiction because the case involves diversity of citizenship. Diversity jurisdiction requires that the plaintiff and defendant be from different jurisdictions and that the dollar amount of the controversy exceed $75,000. Here, Garner resides in Illinois, and Foreman and his manager live in Texas. Because the dispute involved the promotion of boxing matches with George Foreman, the amount in controversy exceeded $75,000. 2A. Original or appellate jurisdiction Original jurisdiction, because the case was initiated in that court and that is where the trial will take place. Courts having original jurisdiction are courts of the first instance, or trial courts—that is courts in which lawsuits begin and trials take place. In the federal court system, the district courts are the trial courts, so the federal district court has original jurisdiction. 3A. Jurisdiction in Illinois No, because the defendants lacked minimum contacts with the state of Illinois. Because the defendants were from another state, the court would have to determine if they had sufficient contacts with the state for the Illinois court to exercise jurisdiction based on a long arm statute. Here, the defendants never went to Illinois, and the contract was not formed in Illinois. Thus, it is unlikely that an Illinois state court would find sufficient minimum contacts to exercise jurisdiction. 4A. Jurisdiction in Nevada Yes, because the defendants met with Garner and formed a contract in the state of Nevada. A state can exercise jurisdiction over out-of-state defendants under a long arm statute if defendants had sufficient contacts with the state. Because the parties met Garner and negotiated the contract in Nevada, a court would likely hold these activities were sufficient to justify a Nevada court's exercising personal jurisdiction.

Shane Durbin wanted to have a recording studio custom-built in his home. He sent invitations to a number of local contractors to submit bids on the project. Rory Amstel submitted the lowest bid, which was $20,000 less than any of the other bids Durbin received. Durbin called Amstel to ascertain the type and quality of the materials that were included in the bid and to find out if he could substitute a superior brand of acoustic tiles for the same bid price. Amstel said he would have to check into the price difference. The parties also discussed a possible start date for construction. Two weeks later, Durbin changed his mind and decided not to go forward with his plan to build a recording studio. Amstel filed a suit against Durbin for breach of contract. Using the information presented in the chapter, answer the following questions. 1. Did Amstel's bid meet the requirements of an offer? Explain. 2. Was there an acceptance of the offer? Why or why not? 3. Suppose that the court determines that the parties did not reach an agreement. Further suppose that Amstel, in anticipation of building Durbin's studio, had purchased materials and refused other jobs so that he would have time in his schedule for Durbin's project. Under what theory discussed in the chapter might Amstel attempt to recover these costs? 4. How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the offer terminated at any time described here? Explain.

1A. Offer A bid can be an offer if it contains all of the requisite elements: a serious, objective intent on the part of the offeror and an offer communicated to the offeree in certain, definite terms comprehen- sible to both parties. Amstel's bid met the requirements His intent appeared to be that of a serious, reasonable offeree; the terms were sufficiently definite; and the bid was communicated to Durbin. If the price, materials, and start date were left open, these factors might be sufficient to question the status of the bid as an offer. 2A. Acceptance To create a contract, an offer must be accepted unequivocally. Durbin questioned the materials included in the bid and asked about the possibility of substituting different acoustic tiles and dis- cussed a starting date. Although this does not constitute an acceptance of the offer, neither is it a rejection. His questions were inquiries, not a rejection of the bid. Durbin's later call to say that he had changed his mind, however, was a rejection. 3A. Theory When individuals rely on promises, as Amstel would have done in this scenario, and the reliance is considered to form a basis for contract rights and duties, under the doctrine of promissory es- toppel (or detrimental reliance), the party who has reasonably relied on the promise can often obtain some measure of recovery. 4A. Termination Yes, Durbin asked about better quality tiles; until that issue was settled, because it likely changed the price, a contract was never formed, so Durbin had the right to cancel the deal. The contract was still being negotiated because Amstel wanted information about alternative materials, which affected the price. Failure to settle that matter means the offer was never accepted and either party had the right to walk away.

Suppose that the California legislature passes a law that severely restricts carbon dioxide emissions from automobiles in that state. A group of automobile manufacturers files suit against the state of California to prevent the enforcement of the law. The automakers claim that a federal law already sets fuel economy standards nationwide and that fuel economy standards are essentially the same as carbon dioxide emission standards. According to the automobile manufacturers, it - is unfair to allow California to impose more stringent regulations than those set by the federal law. Using the informa tion presented in the chapter, answer the following questions. 1. Who are the parties (the plaintiffs and the defendant) in this lawsuit? 2. Are the plaintiffs seeking a legal remedy or an equitable remedy? 3. What is the primary source of the law that is at issue here? 4. Where would you look to find the relevant California and federal laws?

1A. Parties The automobile manufacturers are the plaintiffs, and the state of California is the defendant. 2A. Remedy The plaintiffs are seeking an injunction, an equitable remedy, to prevent the state of California from enforcing its statute restricting carbon dioxide emissions. 3A. Source of law This case involves a law passed by the California legislature and a federal statute; thus the primary source of law is statutory law. 4A. Finding the law Federal statutes are found in the United States Code, and California statutes are published in the California Code. You would look in these sources to find the relevant state and federal statutes.

Shalene Kolchek bought a Great Lakes Spa from Val Porter, a dealer who was selling spas at the state fair. Kolchek signed an installment contract. Porter then handed her the manufacturer's paperwork and arranged for the spa to be delivered and installed for her. Three months later, Kolchek left her six-year-old daughter, Litisha, alone in the spa. While exploring the spa's hydromassage jets, Litisha stuck her index finger into one of the jet holes and was unable to remove her finger from the jet. Litisha yanked hard, injuring her finger, then panicked and screamed for help. Kolchek was unable to remove Litisha's finger, and the local police and rescue team were called to assist. After a three-hour operation that included draining the spa, sawing out a section of the spa's plastic molding, and slicing the jet casing, Litisha's finger was freed. Following this procedure, the spa was no longer functional. Litisha was taken to the local emergency room, where she was told that a bone in her finger was broken in two places. Using the information presented in the chapter, answer the following questions. 1. Under which theories of product liability can Kolchek sue Porter to recover for Litisha's injuries? 2. Would privity of contract be required for Kolchek to succeed in a product liability action against Great Lakes? Explain. 3. For an action in strict product liability against Great Lakes, what six requirements must Kolchek meet? 4. What defenses to product liability might Porter or Great Lakes be able to assert?

1A. Product liability Kolchek may sue the manufacturer Great Lakes for product liability based upon negligence. Furthermore, she may assert claims against Great Lakes and Porter, as a member of the dis- tributive chain, for strict product liability based upon design defects associated with the spa and inadequate warnings with respect to its use. 2A. Privity of contract Injured consumers may bring claims sounding in product liability or strict liability against manu- facturers despite the absence of a direct contractual relationship. Potential defendants to such actions include manufacturers, sellers, and lessors. 3A. Requirements Plaintiffs in strict product liability cases must show the product was in a defective condition when it was sold, the defendant sells or distributes such products in the ordinary course of business, the product was unreasonably dangerous, the plaintiff suffered physical harm or injury to property as a result of use of the product, the injury was proximately caused by the defect, and the product was not substantially changed from the time it was sold to the time the injury occurred. 4A. Defenses Comparative negligence allows the jury to compute the contributions of both parties to the situa- tion. This results in the reduction or elimination of the plaintiff's recovery, depending on the state rule and the percent of negligence contributed. Leaving a six year old unattended in the spa may be deemed negligent and thereby reduce the plaintiff's ultimate recovery.

Mitsui Bank hired Ross Duncan as a branch manager in one of its Southern California locations. At that time, Duncan received an employee handbook informing him that Mitsui would review his performance and salary level annually. In - can to be the credit development officer (CDO) and gave him a written compensation plan. Duncan's compensation was to be based on the program's success and involved a bonus and commissions based on the volume of new loans and sales. The written plan also stated, "This compensation plan will be reviewed and potentially amended after one year 2016, Mitsui decided to create a new lending program to help financially troubled businesses stay afloat. It hired Dun and will be subject to such review and amendment annually thereafter." Duncan's efforts as CDO were successful, and the program he developed grew to represent 25 percent of Mitsui's business in 2016 and 40 percent in 2017. Nevertheless, Mitsui refused to give Duncan a raise in 2016. Mitsui also amended his compensation plan to significantly reduce his compensation and to change his performance evaluation schedule to every six months. When he had still not received a raise by 2018, Duncan resigned as CDO and filed a lawsuit alleging breach of contract. Using the information presented in the chapter, answer the following questions. 1. What are the four requirements of a valid contract? 2. Did Duncan have a valid contract with Mitsui for employment as CDO? If so, was it a bilateral or a unilateral contract? 3. What are the requirements of an implied contract? 4. Can Duncan establish an implied contract based on the employment manual or the written compensation plan? Why or why not?

1A. Requirements of a contract The four requirements for any contract to be valid are agreement, consideration, capacity, and legality. 2A. Type of contract Yes, Duncan had a valid contract with Mitsui for employment as credit development officer. The contract was bilateral because it was a promise for a promise—to work in exchange for compen- sation. No performance was necessary. The contract existed as soon as the promises were ex- changed. The contract was valid because the parties had an agreement, consideration (employ- ment in exchange for payment), capacity (presumed, especially with businesses and business- persons), and the agreement was legal. 3A. Implied contract Implied contracts are contracts formed by the parties' conduct rather than by their words. For an implied-in-fact contract to exist, the plaintiff must furnish some property or service to the defendant expecting to be paid, the defendant must know or should know that the plaintiff expects to be paid, and the defendant must have a chance to reject the property or service and does not. 4A. Employment manual and written compensation plan To establish an implied-in-fact contract in these circumstances, the plaintiff must have furnished a service to the defendant expecting to be paid, the defendant must have known that the plaintiff expected to be paid, and the defendant must have had a chance to reject the service. Here, Duncan provided service as a credit development officer to Mitsui, who hired and agreed to pay him for this service and accepted the service as it was rendered. Presumably, the initial hiring and duties of the position were discussed between the parties, if not put in writing, and were thus express, not implied. But the terms set out in the employment manual and written compensation plan were clearly express, not implied, as indicated by the quote from the plan.

A county court in Illinois is deciding a case involving an issue that has never been addressed before in that state's courts. The Iowa Supreme Court, however, recently decided a case involving a very similar fact pattern. Is the Illinois court obligated to follow the Iowa Supreme Court's decision on the issue? If the United States Supreme Court had decided a similar case, would that decision be binding on the Illinois court? Explain. (See The Common Law Tradition.)

A decision of a court is binding on all inferior courts. Because no state's court is inferior to any other state's court, no state's court is obligated to follow the decision of another state's court on an issue. The decision may be persuasive, however, depending on the nature of the case and the particular judge hearing it. A decision of the United States Supreme Court on an issue is binding, like the decision of any court, on all inferior courts. The United States Supreme Court is the nation's highest court, however, and thus, its decisions are binding on all courts, including state courts.

Commerce Clause. A Georgia state law requires the use of contoured rear-fender mudguards on trucks and trail- ers operating within Georgia state lines. The statute further makes it illegal for trucks and trailers to use straight mud- guards. In approximately thirty-five other states, straight mud- guards are legal. Moreover, in Florida, straight mudguards are explicitly required by law. There is some evidence suggesting that contoured mudguards might be a little safer than straight mudguards. Discuss whether this Georgia statute violates any constitutional provisions.

A Georgia statute that requires the use of contoured rear-fender mudguards on trucks and trailers operating within its state lines, when thirty-five other states make it legal to use straight mudguards and Florida explicitly mandates the use of straight mudguards, would violate the commerce clause. This hypothetical question is based on Bibb v. Navajo Freight Lines, Inc. [359 U.S. 520, 79 S.Ct. 962, 3 L.Ed.2d 1003 (1959)], in which the United States Supreme Court concluded that a similar statute placed an unconstitutional burden upon interstate commerce. In Bibb, the Court acknowledged the fact that a state that insists upon a particular regulation may sometimes place a substantial burden of delay and inconvenience on interstate commerce. As in Bibb, the burden placed on interstate commerce by this Georgia statute would outweigh Georgia's interest in regulating its highways. According to the facts in this hypothetical, the contoured mudguard is not clearly superior in safety to the straight mudguard.

. Implied Contract. Janine was hospitalized with severe abdominal pain and placed in an intensive care unit. Her doctor told the hospital personnel to order around-the-clock nursing care for Janine. At the hospital's request, a nursing ser- vices firm, Nursing Services Unlimited, provided two weeks of in-hospital care and, after Janine was sent home, an additional two weeks of at-home care. During the at-home period of care, Janine was fully aware that she was receiving the benefit of the nursing services. Nursing Services later billed Janine $4,000 for the nursing care, but Janine refused to pay on the ground that she had never contracted for the services, either orally or in writing. In view of the fact that no express contract was ever formed, can Nursing Services recover the $4,000 from Janine? If so, under what legal theory? Discuss.

According to the question, Janine was apparently unconscious or otherwise unable to agree to a contract for the nursing services she received while she was in the hospital. As you read in the chapter, however, sometimes the law will create a fictional contract in order to prevent one party from unjustly receiving a benefit at the expense of another. This is known as a quasi contract and provides a basis for Nursing Services to recover the value of the services it provided while Janine was in the hospital. As for the at-home services that were provided to Janine, because Janine was aware that those services were being provided for her, Nursing Services can recover for those services under an implied-in-fact contract. Under this type of contract, the conduct of the parties creates and defines the terms. Janine's acceptance of the services constitutes her agree- ment to form a contract, and she will probably be required to pay Nursing Services in full.

Equal Protection. With the objectives of prevent- ing crime, maintaining property values, and preserving the uality of urban life, New York City enacted an ordinance to regulate the locations of adult entertainment establishments. The ordinance expressly applied to female, but not male, top- less entertainment. Adele Buzzetti owned the Cozy Cabin, a New York City cabaret that featured female topless danc- ers. Buzzetti and an anonymous dancer filed a suit in a fed- eral district court against the city, asking the court to block the enforcement of the ordinance. The plaintiffs argued, in part, that the ordinance violated the equal protection clause. Under the equal protection clause, what standard applies to the court's consideration of this ordinance? Under this test, how should the court rule? Why?

According to the standards applied to determine compliance with the equal protection clause, this ordinance's classification—a gender-based distinction—is subject to intermediate scrutiny. Under this standard, the court could dismiss the plaintiffs' complaint. Gender-based distinctions are acceptable in circumstances in which the two genders are not similarly situated. The city's objectives of preventing crime, maintaining property values, and preserving the quality of urban life, are legitimate and important. Regulation of female, but not male, topless dancing, in the context of the overall regulation of sexually explicit commercial establishments, could reasonably be interpreted as substantially related to achieving these objectives. The court might point out, for example, that males are often topless on beaches, in sporting events, during performances at the ballet, and in magazine photos without sexual suggestiveness. Female breasts are rarely exposed in public venues without sexual overtones, however. This arguably makes it permissible for the law to regard female toplessness differently from male toplessness.

Spotlight on the National Football League— Arbitration. Bruce Matthews played football for the Tennes- see Titans. As part of his contract, he agreed to submit any dispute to arbitration. He also agreed that Tennessee law would determine all matters related to workers' compensation. After Matthews retired, he filed a workers' compensation claim in California. The arbitrator ruled that Matthews could pursue his claim in California but only under Tennessee law. Should this award be set aside? Explain.

An arbitrator's award generally is the final word on the matter. A court's review of an arbitrator's decision is extremely limited in scope, unlike an appellate court's review of a lower court's deci- sion. A court will set aside an award only if the arbitrator's conduct or "bad faith" substantially prejudiced the rights of one of the parties, if the award violates an established public policy, or if the arbitrator exceeded her or his powers. In this problem, and in the actual case on which this problem is based, the NFLPA argued that the award was contrary to public policy because it required Matthews to forfeit the right to seek workers' compensation under California law. The court rejected this argument, because under the arbitrator's award Matthews could still seek workers' compensation under Tennessee law. Thus, the arbitration award was not clearly contrary to public policy.

After World War II, several Nazis were convicted of "crimes against humanity" by an international court. Assuming that these convicted war criminals had not disobeyed any law of their country and had merely been following their government's orders, what law had they violated? Explain.

At the time of the Nuremberg trials, "crimes against humanity" were new international crimes. The laws criminalized such acts as murder, extermination, enslavement, deportation, and other inhumane acts committed against any civilian population. These international laws derived their legitimacy from "natural law." Natural law, which is the oldest and one of the most significant schools of jurisprudence, holds that governments and legal systems should reflect the moral and ethical ideals that are inherent in human nature. Because natural law is universal and discoverable by reason, its adherents believe that all other law is derived from natural law. Natural law therefore supersedes laws created by humans (national, or "positive," law), and in a conflict between the two, national or positive law loses its legitimacy. The Nuremberg defendants asserted that they had been acting in accordance with German law. The judges dismissed these claims, reasoning that the defendants' acts were commonly regarded as crimes and that the accused must have known that the acts would be considered criminal. The judges clearly believed the tenets of natural law and expected that the defendants, too, should have been able to realize that their acts ran afoul of it. The fact that the "positivist law" of Germany at the time required them to commit these acts is irrelevant. Under natural law theory, the international court was justified in finding the defendants guilty of crimes against humanity.

Bensing Company manufactures generic drugs for the treatment of heart disease. A federal law requires generic drug makers to use labels that are identical to the labels on brand-name versions of the drugs. Hunter Rothfus purchased Bensing's generic drugs in Ohio and wants to sue Bensing for defective labeling based on its failure to comply with Ohio state common law (rather than the fed- eral labeling requirements). What defense might Bensing assert to avoid liability under state law?

Bensing can assert the defense of preemption. An injured party may not be able to sue the manufacturer of defective products that are subject to comprehensive federal regulatory schemes. If the federal government has a comprehensive regulatory scheme (such as it does with medical devices and vaccines), then it is assumed that the rules were designed to ensure a product's safety, and the federal rules will preempt any state regulations. Therefore, Bensing could not be held liable under state law if it complied with the federal drug-labeling requirements.

Debate This . . . Legislation aimed at "protecting people from themselves" concerns the individual as well as the pub- lic in general. Protective helmet laws are just one example of such legislation. Should individuals be allowed to engage in unsafe activities if they choose to do so?

Certainly many will argue in favor of individual rights. If certain people wish to engage in risky activities such as riding motorcycles without a helmet, so be it. That should be their choice. No one is going to argue that motorcycle riders believe that there is zero danger when riding a motorcycle without a helmet. In other words, individuals should be free to make their own decisions and consequently, their own mistakes. In contrast, there is a public policy issue involved. If a motorcyclist injures him- or herself in an accident because he or she was not wearing a protective helmet, society ends up paying in the form of increased medical care expenses, lost productivity, and even welfare for other family members. Thus, the state has an interest in protecting the public in general by limiting some individual rights.

Debate This . . . Companies should be able to make or break employment contracts whenever and however they wish.

Companies, especially large corporations, hold all of the cards with respect to their actual and future employees. Absent statutes and case law that limits their abilities to break employment contracts on a whim, employees would have no protections. Employees would face increased uncertainty about the longevity of their jobs, which ultimately would reduce their productivity. There would be more turnover in jobs, and more unemployment. Contracts are not made to be broken, but rather upheld—and that is where the courts come in. The courts must be there to protect the rights of aggrieved former employees. Employers, even large corporations, do not "hold all of the cards," contrary to popular be- lief. All companies compete for workers. It would be foolish for companies to break employment contracts on a whim. After all, it's costly to train new workers. The reality is that good workers are highly valued and companies must pay competitive wages (or more) to keep workers. So, even if companies had no legal constraints about how they honor their contracts with employees, they have a business reason to honor those contracts—lower labor costs, greater employee productivity, and ultimately, higher profits.

Debate This . . . Courts should not be able to rule on the adequacy of consideration. A deal is a deal.

Courts should not accept to rule on the adequacy of consideration because in so doing, they create a moral hazard situation for anyone who, after the fact, doesn't think she or he "got a good deal." In other words, if those who enter into agreements know that they can later avoid their contractual obligations by claiming that the consideration was inadequate, they will take less time and resources to determine if the agreement is correct, appropriate, and fair. Sometimes people are tricked into entering into agreements for which they receive grossly unfair consideration. Fraud might be involved. Undue influence (duress) could be another reason. In such situations, these individuals should have access to the court system to redress their grievances. To deny them this access would be unfair.

Applied Products, Inc., does business with Beltway Dis- tributors, Inc., online. Under the Uniform Electronic Transactions Act, what determines the effect of the elec- tronic documents evidencing the parties' deal? Is a party's "signature" necessary? Explain.

First, it might be noted that the UETA does not apply unless the parties to a contract agree to use e-commerce in their transaction. In this deal, of course, the parties used e-commerce. The UETA removes barriers to e-commerce by giving the same legal effect to e-records and e-signa- tures as to paper documents and signatures. The UETA does not include rules for those transac- tions, however.

Agreement. Ball e-mails Sullivan and inquires how much Sullivan is asking for a specific forty-acre tract of land Sullivan owns. Sullivan responds, "I will not take less than $60,000 for the forty-acre tract as specified." Ball immediately sends Sullivan a fax stating, "I accept your offer for $60,000 for the forty-acre tract as specified." Discuss whether Ball can hold Sullivan to a contract for the sale of the land.

For an offer to exist, the offeror must show a definite intention to make and be bound by the offer. Invitations to trade or negotiate or mere statements of intentions to enter into a contract upon further bargaining do not constitute offers but are instead preliminary negotiations. Thus, any attempted acceptance would not bind the parties to a contract as there is no offer in existence to be accepted. Sullivan stated only a price from which to bargain further, not an intention of a definite commitment to sell at $60,000. There is no contract between Sullivan and Ball.

Business Case Problem with Sample Answer— Quasi Contract. Robert Gutkowski, a sports marketing expert, met numerous times with George Stein- brenner, the owner of the New York Yankees, to discuss the Yankees Entertainment and Sports Network (YES). Gutkowski was paid as a consultant. Later, he filed a suit, seeking an ownership share in YES. There was no written contract for the share, but he claimed that there were discussions about his being a part owner. Does Gutkowski have a valid claim for payment? Dis- cuss.

Gutkowski does not have a valid claim for payment, nor should he recover on the basis of a quasi contract. Quasi contracts are imposed by courts on parties in the interest of fairness and justice. Usually, a quasi contract is imposed to avoid the unjust enrichment of one party at the expense of another. Gutkowski was compensated as a consultant. For him to establish a claim that he is due more compensation based on unjust enrichment, he must have proof. As it is, he has only his claim that there were discussions about his being a part owner of YES. Discussions and negotia- tions are not a basis for recovery on a quasi contract. In the actual case on which this problem is based, the court dismissed Gutkowski's claim for payment.

Business Case Problem with Sample Answer— Product Liability. While driving on Interstate 40 in North Carolina, Carroll Jett became distracted by a texting system in the cab of his tractor-trailer truck. He smashed into several vehicles that were slowed or stopped in front of him, injuring Barbara and Michael Durkee and others. The injured motorists filed a suit in a federal district court against Geologic Solutions, Inc., the maker of the texting system, alleging product liability. Was the accident caused by Jett's inattention or the texting device? Should a manufacturer be required to design a product that is incapable of distracting a driver? Discuss.

Here, the accident was caused by Jett's inattention, not by the texting device in the cab of his truck. In a product liability case based on a design defect, the plaintiff has to prove that the product was defective at the time it left the hands of the seller or lessor. The plaintiff must also show that this defective condition made it "unreasonably dangerous" to the user or consumer. If the product was delivered in a safe condition and subsequent mishandling made it harmful to the user, the seller or lessor normally is not liable. To successfully assert a design defect, a plaintiff has to show that a reasonable alternative design was available and that the defendant failed to use it. The plaintiffs could contend that the defendant manufacturer of the texting device owed them a duty of care because injuries to vehicle drivers and passengers, and others on the roads, were reasonably foreseeable due to the product's design, which (1) required the driver to divert his eyes from the road to view an incoming text from the dispatcher, and (2) permitted the receipt of texts while the vehicle was moving. But manufacturers are not required to design a product incapable of distracting a driver. The duty owed by a manufacturer to the user or consumer of a product does not require guarding against hazards that are commonly known or obvious or protecting against injuries that result from a user's careless conduct. That is what happened here. In the actual case on which this problem is based, the court reached the same conclusion, based on the reasoning stated above, and an intermediate appellate court affirmed the judgment.

Design Defects. Yun Tung Chow tried to unclog a floor drain in the kitchen of the restaurant where he worked. He used a drain cleaner called Lewis Red Devil Lye that con- tained crystalline sodium hydroxide. The product label said to wear eye protection, to put one tablespoon of lye directly into the drain, and to keep one's face away from the drain because there could be dangerous backsplash. Without eye protection, Chow mixed three tablespoons of lye in a can and poured that mixture down the drain while bending over it. Liquid splashed back into his face, causing injury. He brought a product liability suit based on inadequate warnings and design defect. The trial court granted summary judgment to the manufacturer, and Chow appealed. An expert for Chow stated that the product was defective because it had a tendency to backsplash. Is that a convincing argument? Why or why not?

If there were any inadequacies in the warning label, they were not a substantial factor in bringing about the injuries suffered. It was Chow's responsibility to read the label, which covered the factors involved in the incident. So that claim is properly dismissed. As to the claim of design defect, Chow must establish that the product was not reasonably safe and that it was feasible to design it in a safer manner. The claim of an expert that backsplash is a common problem does not mean there is a safer design. There was no evidence offered of a superior, safer design of the product in question so the claim was properly dismissed.

Arbitration. PRM Energy Systems owned patents licensed to Primenergy to use in the United States. Their contract stated that "all disputes" would be settled by arbitra- tion. Kobe Steel of Japan was interested in using the technol- ogy represented by PRM's patents. Primenergy agreed to let Kobe use the technology in Japan without telling PRM. When PRM learned about the secret deal, the firm filed a suit against Primenergy for fraud and theft. Does this dispute go to arbitra- tion or to trial? Why?

In many circumstances, a party that has not signed an arbitration agreement (Kobe in this case) cannot compel arbitration. There are exceptions, however. According to the court, "The first relies on agency and related principles to allow a nonsignatory (Kobe) to compel arbitration when, as a result of the nonsignatory's close relationship with a signatory (Primenergy), a failure to do so would eviscerate [gut] the arbitration agreement." That applies here. Kobe and Primenergy claimed to have entered into a licensing agreement under the terms of the agreement between PRM and Primenergy. The license agreement is central to the resolution of the dispute, so Kobe can compel arbitration. Similarly, all claims PRM has against Primenergy go to arbitration because the arbitration clause covers "all disputes." That would include allegations of fraud and theft. Such matters can be resolved by arbitration. "Arbitration may be compelled under 'a broad arbitration clause ... as long as the underlying factual allegations simply "touch matters covered by" the arbitration provision.' It generally does not matter that claims sound in tort, rather than in contract." The reviewing court affirmed the trial court's decision.

Debate This . . . All liability suits against tobacco companies for lung cancer should be thrown out of court now and forever.

It is difficult to believe that those who smoked in the past and those who smoke tobacco products today didn't or don't know about the health dangers of smoking. After all, even 75 years ago, before any research was carried out, kids called cigarettes "coffin nails." Common sense tells anyone that inhaling smoke into one's lungs cannot have a positive effect on one's health. Cigarettes are just another product that individuals have the choice to buy or not to buy. There should be no liability issues here. Cigarette companies for years promoted the glamour and even the safety of smoking, so tobacco manufacturers should be liable for the deaths caused by cigarette smoking, at least those that occurred in the past. There is uncontroverted proof that the ads for cigarette smoking were misleading because they played down the negative health effects of this activity. Any time false advertising is an issue, companies that engage in it should be held liable for the results of such advertising.

Acceptance. Judy Olsen, Kristy Johnston, and their mother, Joyce Johnston, owned seventy-eight acres of real property on Eagle Creek in Meagher County, Montana. When Joyce died, she left her interest in the property to Kristy. Kristy wrote to Judy, offering to buy Judy's interest or to sell her own interest to Judy. The letter said to "please respond to Bruce Townsend." In a letter to Kristy—not to Bruce—Judy accepted Kristy's offer to sell her interest. By that time, how- ever, Kristy had made the same offer to sell her interest to their brother, Dave, and he had accepted. Did Judy and Kristy have an enforceable, binding contract? Or did Kristy's offer specify- ing one exclusive mode of acceptance mean that Judy's reply was not effective? Discuss.

Judy's reply was effective, and Judy and Kristy had an enforceable binding contract—Kristy's offer did not limit its acceptance to one exclusive mode. Thus, Judy was entitled to an order of specific performance. Acceptance is a voluntary act by the offeree that shows assent (agreement) to the terms of an offer. The offeree's act may consist of words or conduct. The acceptance must be unequiv- ocal and must be communicated to the offeror. A means of communicating acceptance can be expressly authorized by the offeror or impliedly authorized by the facts and circumstances sur- rounding the situation. When an offeror specifies how acceptance should be made, express au- thorization exists, and the contract is not formed unless the offeree uses that specified mode of acceptance. If the offeror does not expressly authorize a certain mode of acceptance, then ac- ceptance can be made by any reasonable means. In this problem, Kristy's offer did not limit Judy's mode of acceptance. Kristy could have used language like "You must reply to Bruce Townsend to accept this offer," or "You can accept this offer, if at all, only by responding to Bruce Townsend." This language would have made clear that Judy could accept the offer only by replying to Townsend. But Kristy's offer only requested that Judy "please respond to Bruce Townsend"—the offer did not include words of limitation. And Kristy did not otherwise make clear through her words and associated conduct that a reply to Townsend represented the exclusive mode of acceptance. In the actual case on which this problem is based, Judy filed a suit in a Montana state court against Kristy and obtained an order of specific performance. On Kristy's appeal, the Montana Supreme Court affirmed, according to the reasoning stated above.

Product Misuse. Five-year-old Cheyenne Stark was riding in the backseat of her parents' Ford Taurus. Chey- enne was not sitting in a booster seat. Instead, she was using a seatbelt designed by Ford, but was wearing the shoulder belt behind her back. The car was involved in a collision. As a result, Cheyenne suffered a spinal cord injury and was para- lyzed from the waist down. The family filed a suit against Ford Motor Co., alleging that the seatbelt was defectively designed. Could Ford successfully claim that Cheyenne had misused the seatbelt? Why or why not?

No, Ford could not succeed on a claim that Cheyenne had misused the seatbelt. Product misuse occurs when a product is used for a purpose that was not intended. This defense has been severely limited by the courts. It is recognized as a defense only when the particular use was not reasonably foreseeable. Manufacturers and suppliers are required to expect reasonably foreseeable misuses and to design products that are safe when misused or marketed with a pro- tective device, such as a childproof cap. In the facts of this problem, Cheyenne was too young to be negligent, and it is reasonably foreseeable that a child would wear a seatbelt incorrectly without understanding the risks. In the actual case on which this problem is based, the court issued a judgment in Cheyenne's favor.

Statute of Limitations. Leonard Kranzler loaned Lewis Saltzman $100,000. Saltzman made fifteen payments on the loan, but this did not repay the entire amount. More than ten years after the date of the loan, but less than two years after the date of the last payment, Kranzler filed a suit against Saltzman to recover the outstanding balance. Saltzman claimed that the suit was barred by a ten-year statute of limitations. Does Kranzler need to prove a new promise with new consider- ation to collect the unpaid debt? Explain.

No, Kranzler does not need to prove a new promise with new consideration to collect the unpaid debt. A statute of limitations requires a creditor to sue within a specified period to collect a debt. If the creditor fails to sue in time, recovery is barred by the statute. Even if recovery is barred by the statute, a debtor who promises to pay the debt makes an enforceable promise. This promise does not need new consideration. The promise extends the limitations period, and the creditor can sue to recover. The promise can be implied if the debtor acknowledges a barred debt by making a partial payment. Under these principles, each time a debtor makes a payment, the statute of limitations begins to run anew, even if a period of time equal to the statutory period has elapsed from the time that the debt was incurred or the last, previous payment made. In this problem, the statute of limitations prescribed a ten-year limit on a suit to collect a debt. Saltzman borrowed $100,000 from Kranzler and made fifteen payments. Each one of the payments triggered a new ten-year limitation period. Kranzler filed his suit less than two years after the date of the last payment. This was well within the time limit. In the actual case on which this problem is based, the court entered a judgment for the unpaid debt in Kranzler's favor.

Strict Product Liability. Duval Ford, LLC, sold a new Ford F-250 pick-up truck to David Sweat. Before taking delivery, Sweat ordered a lift kit to be installed on the truck by a Duval subcontractor. Sweat also replaced the tires and modified the suspension system to increase the towing capac- ity. Later, through Burkins Chevrolet, Sweat sold the truck to Shaun Lesnick. Sweat had had no problems with the truck's steering or suspension, but Lesnick did. He had the steer- ing repaired and made additional changes, including install- ing a steering stabilizer and replacing the tires. Two months later, Lesnick was driving the truck when the steering and suspension suddenly failed, and the truck flipped over, caus- ing Lesnick severe injuries. Could Lesnick successfully claim that Duval and Burkins had failed to warn him of the risk of a lifted truck? Explain.

No, Lesnick could not succeed on a theory of product liability against the sellers of the lifted pick- up truck by arguing that they failed to warn him of the risk of a lifted vehicle. A product may be deemed defective because of inadequate warnings. But the defect and its risks must be fore- seeable—that is, the seller must know, or have reason to know, of the defect and its risks. Liability would exist if a knowledgeable seller withheld this information from its customers. In this problem, Duval Ford sold a new Ford F-250 pick-up truck to Sweat. Sweat had Duval install a lift kit on the truck, and also modified the suspension system and replaced the tires. Later, through Burkins Chevrolet, Sweat sold the truck to Lesnick. Sweat had had no problems with the truck's steering or suspension, but Lesnick did. He had the steering repaired. Lesnick made other changes, including installing a steering stabilizer and again replacing the tires. Lesnick was driving the truck when the steering and suspension suddenly failed, and the truck flipped over, causing him severe injuries. In these facts, the sellers had no duty to warn Lesnick of risks associated with the lifted truck because there is no evidence that there was anything inherently dangerous about the truck when it was sold. Furthermore, Lesnik was well aware that the truck was lifted, and this fact was likely a factor in his decision to buy the truck. In the actual case on which this problem is based, Lesnick filed a suit in a Florida state court against Duval and Burkins, on a theory of product liability, alleging that the sellers failed to warn him of the risk of a lifted vehicle. The court issued a summary judgment in the defendants' favor. A state intermediate appellate court affirmed this judgment, on the conclusion stated above.

Agreement. Amy Kemper was seriously injured when her motorcycle was struck by a vehicle driven by Chris- topher Brown. Kemper's attorney wrote to Statewide Claims Services, the administrator for Brown's insurer, asking for "all the insurance money that Mr. Brown had under his insurance policy." In exchange, the letter indicated that Kemper would sign a "limited release" on Brown's liability, provided that it did not include any language requiring her to reimburse Brown or his insurance company for any of their incurred costs. State- wide then sent a check and release form to Kemper, but the release demanded that Kemper "place money in an escrow account in regards to any and all liens pending." Kemper refused the demand, claiming that Statewide's response was a counteroffer rather than an unequivocal acceptance of the settlement offer. Did Statewide and Kemper have an enforce- able agreement? Discuss.

No, Statewide and Kemper did not have an enforceable agreement. Under the mirror image rule, the offeree's acceptance must match the offeror's offer exactly. If the acceptance changes or adds to the terms of the original offer, it will be considered a counteroffer. A counteroffer is a rejection of the original offer and the simultaneous making of a new offer. If an offer is rejected, it is termi- nated. Here, the purported settlement agreement was not enforceable because Statewide's re- sponse to Kemper's offer was not unconditional or identical to her terms. In response, Statewide demanded that Kemper place settlement funds into an escrow account. This change or addition to the terms of the original offer constituted a counteroffer—a rejection of Kemper's original offer and the simultaneous making of a new offer. And Kemper refused the new demand. In the actual case on which this problem is based, a court enforced the settlement. On Kemper's appeal, a state intermediate appellate court reversed, holding that Statewide's response to Kemper's offer constituted a counteroffer, which she rejected.

Requirements of the Offer. Technical Consumer Products, Inc. (TCP), makes and distributes energy-efficient lighting products. Emily Bahr was TCP's district sales man- ager in Minnesota, North Dakota, and South Dakota when the company announced the details of a bonus plan. A district sales manager who achieved 100 percent year-over-year sales growth and a 42 percent gross margin would earn 200 percent of his or her base salary as a bonus. TCP retained absolute discretion to modify the plan. Bahr's base salary was $42,500. Her final sales results for the year showed 113 percent year- over-year sales growth and a 42 percent gross margin. She anticipated a bonus of $85,945, but TCP could not afford to pay the bonuses as planned, and Bahr received only $34,229. In response to Bahr's claim for breach of contract, TCP argued that the bonus plan was too indefinite to be an offer. Is TCP correct? Explain.

No, TCP is not correct—the bonus plan was not too indefinite to be an offer. One of the require- ments for an effective offer is that its terms must be reasonably definite. This is so a court can determine whether a breach has occurred and award an appropriate remedy. Generally, these terms include an identification of the parties and the object or subject of the contract, the consid- eration to be paid, and the time of performance. In this problem, TCP provided its employees, including Bahr, with the details of a bonus plan. A district sales manager such as Bahr who achieved 100 percent year-over-year sales growth and a 42 percent gross margin would earn 200 percent of their base salary. TCP added that it retained absolute discretion to modify the plan. Bahr exceeded the goal and expected a bonus commensurate with her performance. TCP paid her less than half what its plan promised, however. In the ensuing litigation, TCP claimed that the bonus plan was too indefinite to constitute an offer, but this was not in fact the case. Clear criteria applied to determine an employee's eligi- bility for a certain amount within a specific deadline. A court asked to apply the plan would have little or no doubt as to the amount an employee would be entitled to. The term that reserved discretion to TCP to modify the plan did not sufficiently undercut the clarity of the offer to prevent the formation of a contract. In the actual case on which this problem is based, the court concluded that the reservation of discretion to revoke a plan makes an offer too indefinite and issued a judgment in TCP's favor. A state intermediate appellate court reversed this judgment, holding that TCP's plan was a suffi- ciently definite offer.

Freedom of Speech. Mark Wooden sent an e-mail to an alderwoman for the city of St. Louis. Attached was a nineteen-minute audio file that compared her to the biblical character Jezebel. The audio said she was a "bitch in the Sixth Ward," spending too much time with the rich and powerful and too little time with the poor. In a menacing, maniacal tone, Wooden said that he was "dusting off a sawed-off shot- gun," called himself a "domestic terrorist," and referred to the assassination of President John Kennedy, the murder of federal judge John Roll, and the shooting of Representative Gabrielle Giffords. Feeling threatened, the alderwoman called the police. Wooden was convicted of harassment under a state criminal statute. Was this conviction unconstitutional under the First Amendment? Discuss

No, Wooden's conviction was not unconstitutional. Certain speech is not protected under the First Amendment. Speech that violates criminal laws—threatening speech, for example—is not constitutionally protected. Other unprotected speech includes fighting words, or words that are likely to incite others to respond violently. And speech that harms the good reputation of another, or defamatory speech, is not protected under the First Amendment. In his e-mail and audio notes to the alderwoman, Wooden discussed using a sawed-off shotgun, domestic terrorism, and the assassination and murder of politicians. He compared the alderwoman to the biblical character Jezebel, referring to her as a "bitch in the Sixth Ward." These references caused the alderwoman to feel threatened. The First Amendment does not protect such threats, which in this case violated a state criminal statute. There was nothing unconstitutional about punishing Wooden for this unprotected speech. In the actual case on which this problem is based, Wooden appealed his conviction, arguing that it violated his right to freedom of speech. Under the principles set out above, the Missouri Supreme Court affirmed the conviction.

Interpretation of Contracts. Lehman Broth- ers, Inc. (LBI), wrote a letter to Mary Ortegón offering her employment as LBI's "Business Chief Administrative Offi- cer in Its Fixed Income Division." The offer included a sal- ary of $150,000 per year and an annual "minimum bonus" of $350,000. The letter stated that the bonus would be paid unless Ortegón resigned or was terminated for certain causes. In other words, the bonus was not a "signing" bonus—it was clearly tied to her performance on the job. Ortegón accepted the offer. Before she started work, however, LBI rescinded it. Later, LBI filed for bankruptcy in a federal court. Ortegón filed a claim with the court for the amount of the bonus on the ground that LBI had breached its contract with her by not paying it. Can extrinsic evidence be admitted to interpret the meaning of the bonus term? Explain.

No, extrinsic evidence is not admissible to interpret the meaning of the bonus term in this problem. When a dispute arises over the meaning of a term in a contract, a court will enforce it according to its obvious terms if the contract's writing is clear. Under the plain meaning rule, the meaning of the term is determined from the written document alone. If a term is ambiguous, a court can con- sider extrinsic evidence. In this problem, Lehman Brothers, Inc., (LBI) offered Mary Ortegón a job. The offer included an annual "minimum bonus" of $350,000. The bonus was to be paid unless Ortegón quit or was terminated for certain causes. The bonus was clearly tied to Ortegón's performance on the job .It was not a "signing" bonus. Ortegón accepted the offer, but before she started work, LBI rescinded it. Later, LBI filed for bankruptcy. Ortegón filed a claim for the amount of the bonus on the ground that LBI breached its contract with her by not paying it. Because the expressed term concerning the bonus is clear, under the plain meaning rule extrinsic evidence is not admissible to interpret it. The contract clearly provided that the bonus was part of Ortegón's compensation for her per- formance on the job. Ortegón never became LBI's employee and never started to perform. Thus Ortegón never had any right to the bonus, and LBI did not breach their contract when it refused to give it to her." In the actual case on which this problem is based, James Giddens, the bankruptcy trustee, denied the claim, and the court issued a judgment in the trustee's favor. The U.S. Court of Appeals for the Second Circuit affirmed this judgment on the reasoning stated above.

Business Case Problem with Sample Answer— Corporate Contacts. LG Electronics, Inc., a South Korean company, and nineteen other foreign companies participated in the global market for cathode ray tube (CRT) products. CRTs were integrated as components in consumer goods, including televi- sion sets, and were sold for many years in high volume in the United States, including the state of Washington. The state filed a suit in a Washington state court against LG and the others, alleging a conspiracy to raise prices and set production levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. Should this motion be granted? Explain.

No, the defendants' motion to dismiss the suit for lack of personal jurisdiction should not be granted. A corporation normally is subject to jurisdiction in a state in which it is doing business. A court applies the minimum-contacts test to determine whether it can exercise jurisdiction over an out-of-state corporation. This requirement is met if the corporation sells its products within the state or places its goods in the "stream of commerce" with the intent that the goods be sold in the state. In this problem, the state of Washington filed a suit in a Washington state court against LG Electronics, Inc., and nineteen other foreign companies that participated in the global market for cathode ray tube (CRT) products. The state alleged a conspiracy to raise prices and set pro- duction levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. These goods were sold for many years in high volume in the United States, including the state of Washington. In other words, the corporations purposefully established minimum contacts in the state of Washington. This is a sufficient basis for a Washington state court to assert personal jurisdiction over the defendants. In the actual case on which this problem is based, the court dismissed the suit for lack of personal jurisdiction. On appeal, a state intermediate appellate court reversed on the reasoning stated above.

Procedural Due Process. Robert Brown applied for admission to the University of Kansas School of Law. Brown answered "no" to questions on the application asking if he had a criminal history and acknowledged that a false answer con- stituted "cause for . . . dismissal." In fact, Brown had crimi- nal convictions for domestic battery and driving under the influence. He was accepted for admission to the school. When school officials discovered his history, however, he was noti- fied of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused to grant Brown a hearing and then expelled him. Did the school's actions deny Brown due process? Discuss.

No, the school's actions did not deny Brown due process. Procedural due process requires that any government decision to take life, liberty, or property must be made fairly. The government must give a person proper notice and an opportunity to be heard. The government must use fair procedures—the person must have at least an opportunity to object to a proposed action before a fair, neutral decision maker. In this problem, Robert Brown applied for admission to the University of Kansas School of Law. He answered "no" to the questions on the application about criminal history and acknowledged that a false answer constituted cause for dismissal. He was accepted for admission to the school. But Brown had previous criminal convictions for domestic battery and driving under the influence. When school officials discovered this history, Brown was notified of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused, and expelled him. As for due process, Brown knew he could be dismissed for false answers on his application. The school gave Brown notice of its intent to expel him and gave him an opportunity to be heard (in writing). Due process does not require that any specific set of detailed procedures be followed as long as the procedures are fair. In the actual case on which this problem is based, Brown filed a suit in a federal district court against the school, alleging denial of due process. From a judgment in the school's favor, Brown appealed. The U.S. Court of Appeals for the Tenth Circuit affirmed, concluding that "the procedures afforded to Mr. Brown were fair."

Spotlight on Kansas City Chiefs—Consider- ation. On Brenda Sniezek's first day of work for the Kansas City Chiefs Football Club, she signed a document that purported to compel arbitration of any dis- putes that she might have with the Chiefs. In the document, Sniezek agreed to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). She agreed to refer all dis- putes to the NFL Commissioner for a binding decision. On the Commissioner's decision, she agreed to release the Chiefs and others from any related claims. Nowhere in the document did the Chiefs agree to do anything. Was there consideration for the arbitration provision? Explain.

No, there was no consideration for the arbitration provision. Consideration is required to create a bilateral contract. Consideration is something of legally sufficient value given in return for a promise. The "something of legally sufficient value" may consist of either a promise to do or refrain from doing something or a transfer of something of value. In this problem, the arbitration "agreement" contains promises made only by Sniezek. Only Sniezek agrees to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). Only Sniezek agrees to refer all disputes to the NFL Commissioner for a binding decision. Only Sniezek agrees to release the Chiefs from any related claims on the Commissioner's decision. Nowhere in the document do the Chiefs agree to do anything. Thus, the document does not contain any promises by the Chiefs to constitute sufficient consideration for Sniezek's promise to forgo her right of access to the courts and arbitrate her claims against them. The Chiefs might argue that the "agreement" was a condition of Sniezek's keeping her employment, which the Chiefs had already offered her and she had already accepted. But the document did not alter the nature of her employment relationship—no employment contract was created, no additional compensation or other benefit was offered. Consequently, allowing Sniezek to stay on the job was not sufficient consideration to support a promise to arbitrate. In the actual case on which this problem is based, Sniezek filed a charge of age discrimination against the Chiefs in a Missouri state court, and the Chiefs filed a motion to compel arbitration. The court denied the motion, and a state intermediate appellate court affirmed the denial for the reasons stated above.

Business Case Problem with Sample Answer— Online Acceptances. Heather Reasonover opted to try Internet service from Clearwire Corp. Clearwire sent her a confirmation e-mail and a modem. When Reasonover plugged in the modem, an "I accept terms" box appeared. Without clicking on the box, Reasonover quit the page. She had not seen Clear- wire's "Terms of Service," accessible only through its Website. Although the e-mail she received and the printed mate- rials included with the model included URLs to the compa- ny's Web site, neither URL gave direct access to the "Terms of Service." A clause in the "Terms of Service" required sub- scribers to submit any dispute to arbitration. Is Reasonover bound to this clause? Why or why not?

No. A shrink-wrap agreement is an agreement whose terms are expressed inside the box in which the goods are packaged. The party who opens the box may be informed that he or she agrees to the terms by keeping whatever is in the box. In many cases, the courts have enforced the terms of shrink-wrap agreements just as they enforce the terms of other contracts. But not all of the terms presented in shrink-wrap agreements have been enforced by the courts. One important consideration is whether the buyer had adequate notice of the terms. A click-on agreement is formed when a buyer, completing a transaction on a computer, is required to indicate his or her assent to be bound by the terms of an offer by clicking on a button that says, for example, "I agree." In Reasonover's situation, no such agreement was formed with respect to Clearwire's "Terms of Service" (TOS). The e-mail did not give notice of the TOS. It did not contain a direct link to the terms—accessing them required clicks on further links through the firm's homepage. The written, shrink-wrap materials accompanying the modem did not provide adequate notice of the TOS. There was only a reference to Clearwire's Web site in small print at the bottom of one page. Similarly, Reasonover's access to an "I accept terms" box did not estab- lish notice of the terms. She did not click on the box but quit the page. Even if any of these refer- ences was sufficient notice, Reasonover kept the modem only because Clearwire told her that she could not return it. In the actual case on which this problem is based, the court refused to compel arbitration on the basis of the clause in Clearwire's TOS.

Strict Product Liability. David Dobrovolny bought a new Ford F-350 pickup truck. A year later, the truck spon- taneously caught fire in Dobrovolny's driveway. The truck was destroyed, but no other property was damaged, and no one was injured. Dobrovolny filed a suit in a Nebraska state court against Ford Motor Co. on a theory of strict product liability to recover the cost of the truck. Nebraska limits the applica- tion of strict product liability to situations involving personal injuries. Is Dobrovolny's claim likely to succeed? Why or why not? Is there another basis for liability on which he might recover? Explain.

No. Dobrovolny's claim is not likely to succeed. The majority of states recognize strict product liability. The purpose of strict product liability is to ensure that the costs of injuries resulting from defective products are borne by the manufacturers rather than by the injured persons. The law imposes this liability as a matter of public policy. Some state courts limit the application of the tort theory of strict product liability to situations involving personal injuries rather than property damage. In this problem, Nebraska recognizes strict product liability, but the state's courts limit its application. The issue is whether these limits apply when a product self-destructs without causing damage to persons or other property. When a product injures only itself, the reasons for imposing liability in tort lose their significance. The consumer has not been injured, and the loss concerns the consumer's benefit of the bargain from the contract with the seller of the product. Although a consumer with only a damaged product may not recover in tort, the consumer is not without other remedies. Recovery can be sought on a contract theory for breach of warranty. Product value and quality are the purposes of warranties. Thus, even though the court is likely to deny Dobrovolny's strict product liability claim, he might seek to recover for breach of warranty on contract principles for the loss of his truck. If there were no express warranties that the truck would not spontaneously combust, relief may be possible for breach of the implied warranty of merchantability or fitness for a particular purpose. In the actual case on which this problem is based, the court issued a decision in Ford's favor.

Can a state, in the interest of energy conservation, ban all advertising by power utilities if conservation could be accomplished by less restrictive means? Why or why not? (See Business and the Bill of Rights.)

No. Even if commercial speech is neither related to illegal activities nor misleading, it may be restricted if a state has a substantial interest that cannot be achieved by less restrictive means. In this case, the interest in energy conservation is substantial, but it could be achieved by less restrictive means. That would be the utilities' defense against the enforcement of this state law.

Fidelity Corporation offers to hire Ron to replace Monica, who has given Fidelity a month's notice of intent to quit. Fidelity gives Ron a week to decide whether to accept. Two days later, Monica decides not to quit and signs an employment contract with Fidelity for another year. The next day, Monica tells Ron of the new contract. Ron immediately faxes a formal letter of acceptance to Fidelity. Do Fidelity and Ron have a contract? Why or why not?

No. Revocation of an offer may be implied by conduct inconsistent with the offer. When the corporation hired someone else, and the offeree learned of the hiring, the offer was revoked. The acceptance was too late.

Dyna tells Ed that she will pay him $1,000 to set fire to her store so that she can collect under a fire insurance pol- icy. Ed sets fire to the store, but Dyna refuses to pay. Can Ed recover? Why or why not?

No. This contract, although not fully executed, is for an illegal purpose and therefore is void. A void contract gives rise to no legal obligation on the part of any party. A contract that is void is no contract. There is nothing to enforce.

Minimum Contacts. Seal Polymer Industries sold two freight containers of latex gloves to Med-Express, Inc., a company based in North Carolina. When Med-Express failed to pay the $104,000 owed for the gloves, Seal Polymer sued in an Illinois court and obtained a judgment against Med- Express. Med-Express argued that it did not have minimum contacts with Illinois because it was incorporated under North Carolina law and had its principal place of business in North Carolina. Therefore, the Illinois judgment based on personal jurisdiction was invalid. Was this argument alone sufficient to prevent the Illinois judgment from being collected against Med-Express in North Carolina? Why or why not?

No. This statement alone was insufficient to establish that Illinois did not have jurisdiction over the defendant. The court ruled that Med-Express failed to introduce factual evidence proving that the Illinois trial court lacked personal jurisdiction over Med-Express. Med-Express had merely recited that it was a North Carolina corporation and did not have minimum contacts with Illinois. Med- Express sent a letter to this effect to the clerk of Cook County, Illinois, and to the trial court judge. But that was not enough. When a judgment of a court from another state is challenged on the grounds of personal jurisdiction, there is a presumption that the court issuing the judgment had jurisdiction until the contrary is shown. It was not.

Spotlight on Crime Stoppers—Communication. The Baton Rouge Crime Stoppers (BCS) offered a reward for information about the "South Louisi- ana Serial Killer." The information was to be pro- vided via a hot line. Dianne Alexander had survived an attack by a person suspected of being the killer. She identified a suspect in a police photo lineup and later sought to collect the reward. BCS refused to pay because she had not provided information to them via the hot line. Had Alexander complied with the terms of the offer? Explain.

One of the requirements for an effective offer is communication, resulting in the offeree's knowledge of the offer. One of the requirements for an effective acceptance is also communica- tion—in most situations, the offeror must be notified of the acceptance. In a unilateral contract, the full performance of some act is called for. If acceptance is evident, notification may be unnec- essary, unless of course the offeror asks for it. In this problem, the offer consisted of a reward. To obtain the reward, an offeree was asked to provide information regarding the "South Louisiana Serial Killer" to the Baton Rouge Crime Stoppers (BCS) via a hotline. Alexander did not comply with the terms of this offer, and thus the offerors were not bound to pay her. She provided information to the police related to the arrest and indictment of the killer. But there was no indication in the offer that the police were the offerors or that they were authorized to receive acceptance of the requested information on behalf of the offerors. In the actual case on which this problem is based, Alexander filed a suit against BCS to obtain the reward. The court issued a judgment in favor of the defendants.

Consideration. Daniel, a recent college graduate, is on his way home for the Christmas holidays from his new job. He is caught in a snowstorm and is taken in by an elderly cou- ple, who provide him with food and shelter. After the snow- plows have cleared the road, Daniel proceeds home. Daniel's father, Fred, is most appreciative of the elderly couple's action and promises to pay them $500. The elderly couple, in need of funds, accept Fred's offer. Then, because of a dispute between Daniel and Fred, Fred refuses to pay the elderly couple the $500. Discuss whether the couple can hold Fred liable in con- tract for the services rendered to Daniel.

Past consideration is no consideration; therefore, a promise to pay for an event that has already taken place is not enforceable. There is nothing to bargain for. Also, there is no consideration if the promise is based on a moral duty (obligation) to pay. Because Daniel is presumed to be an adult responsible for his own care, Fred has no legal duty of care to Daniel. Thus, Fred's promise cannot be enforced by the elderly couple, because Fred had at best only a moral obligation to reimburse them for the care rendered, and the promise to pay was for an event already performed. Because of the harshness of this rule, a few states have passed statutes enforcing such agreements (usually only up to the value of care received), or a court will enforce such a promise if the promisor received a substantial valuable benefit (such as being saved from physical harm or financial disaster). In the case of Fred and the elderly couple, it is unlikely that the court would hold for the elderly couple, as Daniel was the recipient of the substantial valuable benefit, not the promisor, Fred.

Quasi Contracts. Lawrence M. Clarke, Inc., was the general contractor for construction of a portion of a sani- tary sewer system in Billings, Michigan. Clarke accepted Kim Draeger's proposal to do the work for a certain price. Drae- ger arranged with two subcontractors to work on the project. The work provided by Draeger and the subcontractors proved unsatisfactory. All of the work fell under Draeger's contract with Clarke. Clarke filed a suit in a Michigan state court against Draeger, seeking to recover damages on a theory of quasi con- tract. The court awarded Clarke $900,000 in damages on that theory. A state intermediate appellate court reversed this award. Why?

The appellate court reversed the lower court's award to Clarke of $900,000 in damages on a quasi contract theory because the dispute fell under Draeger's contract with Clarke. The doctrine of quasi contract generally does not apply when an existing contract covers the area in controversy. In that circumstance, the nonbreaching party can sue the breaching party for breach of the con- tract. Here, Lawrence M. Clarke, Inc. was the general contractor for the construction of a portion of a sanitary sewer system. Kim Draeger proposed to do the work for a certain price, and Clarke accepted. Draeger arranged with two subcontractors to work on the project. But Draeger and the subcontractors provided less than perfect, competent, or complete work. Clarke filed a suit in against Draeger to recover damages on a theory of quasi contract. The court awarded Clarke damages on that theory. An appellate court reversed this award because all of the work and its disputed performance was covered by Draeger's contract with Clarke. In the actual case on which this problem is based, in Clarke's action against Draeger, the court chose to decide the case under the theory of quasi contract. A state intermediate appellate reversed the decision on the ground stated above.

Debate This . . . Each time a state legislature enacts a law that applies the assumption of risk doctrine to a particular sport, participants in that sport suffer.

The argument is that the less liability imposed on a sports-activity operator, the less that operator will take care to maintain the sports terrain and equipment. In other words, using the example of a ski area, a law that exempts the ski area from liability for skiing accidents will result in the ski area owner investing less in maintaining the trail system as well in the signage indicating hidden hazards. Additionally, ski area owner will pay for fewer ski patrollers who force fast skiers to slow down in congested areas or areas reserved for beginners. In contrast, there may be an upside to applying the assumption of risk doctrine to sports that are obviously not always safe. The benefit to all of those who participate is that tickets for such sports as Alpine skiing will be cheaper. There is competition among ski resorts. Therefore, if the ski resort owner pays less in liability insurance because of the state law under study in this debate topic, at least part of the savings will be passed on to ticket buyers. Also, when participants know that they can't sue for accidents, some may ski less recklessly.

A water pipe bursts, flooding a Metal Fabrication Com- pany utility room and tripping the circuit breakers on a panel in the room. Metal Fabrication contacts Nouri, a licensed electrician with five years' experience, to check the damage and turn the breakers back on. Without test- ing for short circuits, which Nouri knows that he should do, he tries to switch on a breaker. He is electrocuted, and his wife sues Metal Fabrication for damages, alleg- ing negligence. What might the firm successfully claim in defense?

The company might defend against this electrician's claim by asserting that the electrician should have known of the risk and, therefore, the company had no duty to warn. According to the problem, the danger is common knowledge in the electrician's field and should have been apparent to this electrician, given his years of training and experience. In other words, the company most likely had no need to warn the electrician of the risk. The firm could also raise comparative negligence. Both parties' negligence, if any, could be weighed and the liability distributed proportionately. The defendant could also assert assumption of risk, claiming that the electrician voluntarily entered into a dangerous situation, knowing the risk involved.

Danny and Marion Klein were injured when part of a fireworks display went astray and exploded near them. They sued Pyrodyne Corp., the pyrotechnic com- pany that was hired to set up and discharge the fireworks. The Kleins alleged, among other things, that the company should be strictly liable for damages caused by the fireworks display. Will the court agree with the Kleins? What factors will the court con- sider in making its decision? Discuss fully.

The court agreed with the Kleins, applying the rule that "any party carrying on an 'abnormally dangerous activity' is strictly liable for ensuing damages." The court looked to the factors listed in the Restatement (Second) of Torts, Section 520, to determine whether the fireworks display was abnormally dangerous. Those factors are "(a) existence of a high degree of risk of some harm to the person, land or chattels of others; (b) likelihood that the harm that results from it will be great; (c) inability to eliminate the risk by the exercise of reasonable care; (d) extent to which the activity is not a matter of common usage; (e) inappropriateness of the activity to the place where it is carried on; and (f) extent to which its value to the community is outweighed by its dangerous attributes." Of these factors, "ordinarily several of them will be required for strict liability," but "it is not necessary that each of them be present, especially if others weigh heavily." In particular, the court found the first three factors to be present in this case. "Any time a person ignites aerial shells with the intention of sending them aloft to explode in the presence of large crowds of people, a high risk of serious personal injury or property damage is created. That risk arises because of the possibility that a shell will malfunction or be misdirected. Furthermore, no matter how much care pyrotechnicians exercise, they cannot entirely eliminate the high risk inherent in setting off powerful explosives such as fireworks near crowds."

Appellate, or Reviewing, Courts. Angelica West- brook was employed as a collector for Franklin Collection Service, Inc. During a collection call, Westbrook told a debtor that a $15 processing fee was an "interest" charge. This vio- lated company policy. Westbrook was fired. She filed a claim for unemployment benefits, which the Mississippi Depart- ment of Employment Security (MDES) approved. Franklin objected. At an MDES hearing, a Franklin supervisor testi- fied that she had heard Westbrook make the false statement, although she admitted that there had been no similar incidents with Westbrook. Westbrook denied making the statement, but added that if she had said it, she did not remember it. The agency found that Franklin's reason for terminating West- brook did not amount to the misconduct required to disqual- ify her for benefits and upheld the approval. Franklin appealed to a state intermediate appellate court. Is the court likely to uphold the agency's findings of fact? Explain.

Yes, the state intermediate appellate court is likely to uphold the agency's findings of fact. Appellate courts normally defer to lower tribunals' findings on questions of fact because those forums' decision makers are in a better position to evaluate testimony. A trial court judge or jury, for example, can directly observe witnesses' gestures, demeanor, and other nonverbal conduct during a trial. A judge or justice sitting on an appellate court cannot. In this problem, Angelica Westbrook, an employee of Franklin Collection Service, Inc., allegedly made a statement during a call to a debtor that violated company policy. Westbrook was fired, and applied for unemployment benefits. Benefits were approved, but Franklin objected. Witnesses at an administrative hearing on the dispute included a Franklin supervisor who testified that she heard Westbrook make the false statement, although she admitted that Westbrook had not been involved in any similar incidents. Westbrook denied making the statement, but added that if she had said it, she did not remember it. The agency found that Franklin's reason for terminating Westbrook did not amount to the misconduct required to disqualify her for benefits and upheld the approval. Franklin appealed. Under the standard for appellate review of findings of fact, the appellate court will likely affirm the agency's findings. In the actual case on which this problem is based, the state intermediate appellate court to which Franklin appealed the MDES's approval of Johnson's claim upheld the agency's decision.

Intentional Infliction of Emotional Distress. While living in her home country of Tanzania, Sophia Kiwa- nuka signed an employment contract with Anne Margareth Bakilana, a Tanzanian living in Washington, D.C. Kiwanuka traveled to the United States to work as a babysitter and maid in Bakilana's house. When Kiwanuka arrived, Bakilana con- fiscated her passport, held her in isolation, and forced her to work long hours under threat of having her deported. Kiwa- nuka worked seven days a week without breaks and was sub- jected to regular verbal and psychological abuse by Bakilana. Kiwanuka filed a complaint against Bakilana for intentional infliction of emotional distress, among other claims. Bakilana argued that Kiwanuka's complaint should be dismissed because the allegations were insufficient to show outrageous intentional conduct that resulted in severe emotional distress. If you were the judge, in whose favor would you rule? Why?

The court found that the facts alleged in the complaint, if true, were sufficient to establish Kiwanuka's claim of intentional infliction of emotional distress. There was evidence that Bakilana, on a daily basis, used her position of power and control over Kiwanuka to engage in an intentional pattern of outrageous verbal abuse against her. The complaint further alleged that Bakilana intentionally interfered with Kiwanuka's attempts to form relationships or acquaintances, thereby deepening Kiwanuka's suffering of isolation and distress. These allegations were sufficient to show extreme and outrageous conduct, intentionally committed, that resulted in severe emotional distress to Kiwanuka. Therefore, the court held that Kiwanuka's claim for intentional infliction of emotional distress could be tried.

According to the question, Janine was apparently unconscious or otherwise unable to agree to a contract for the nursing services she received while she was in the hospital. As you read in the chapter, however, sometimes the law will create a fictional contract in order to prevent one party from unjustly receiving a benefit at the expense of another. This is known as a quasi contract and provides a basis for Nursing Services to recover the value of the services it provided while Janine was in the hospital. As for the at-home services that were provided to Janine, because Janine was aware that those services were being provided for her, Nursing Services can recover for those services under an implied-in-fact contract. Under this type of contract, the conduct of the parties creates and defines the terms. Janine's acceptance of the services constitutes her agree- ment to form a contract, and she will probably be required to pay Nursing Services in full. Psycho Chihuahua materials to the agency. Taco Bell made a Chihuahua the focus of its marketing but paid nothing to Wrench. Wrench filed a suit against Taco Bell in a federal court claiming that it had an implied contract with Taco Bell and that Taco Bell breached that contract. Do these facts sat- isfy the requirements for an implied contract? Why or why not?

The court held that Wrench submitted sufficient evidence of an implied contract to survive Taco Bell's motion for summary judgment on the issue. "Implied in fact contracts often arise where one accepts a benefit from another for which compensation is customarily expected. Thus, where evidence shows that the parties understood that compensation would be paid for services ren- dered, a promise to pay fair value may be implied, even if no agreement was reached as to price, duration, or other terms of the contract." Here, "Taco Bell concedes that there is sufficient evi- dence in the record to support Plaintiff's allegation that the parties had a basic understanding that if Taco Bell used the Psycho Chihuahua idea, concept, or image, that Taco Bell would compen- sate Plaintiffs for the fair value of such use." Furthermore, "[t] he cases establish that a plaintiff may support a claim of implied in fact contract by showing that the plaintiff disclosed an idea to the defendant at the defendant's request and the defendant understood that the plaintiff expected compensation for use of his ideas. Because Taco Bell concedes that there is sufficient evidence to support such an understanding in this case, Taco Bell's assertion that Plaintiffs cannot establish an implied in fact contract must be rejected." The court ruled against Wrench on other grounds. Wrench appealed to the U.S. Court of Appeals for the Fifth Circuit, which agreed with the lower court's holding on Wrench's implied-in-fact contract claim (but reversed the ruling on the other grounds).

Quasi Contract. Kim Panenka asked to borrow $4,750 from her sister, Kris, to make a mortgage payment. Kris deposited a check for that amount into Kim's bank account. Hours later, Kim asked to borrow another $1,100. Kris took a cash advance on her credit card and deposited this amount into Kim's account. When Kim did not repay the amounts, Kris filed a suit, arguing that she had "loaned" Kim the money. Can the court impose a contract between the sisters? Explain.

The court in this case could impose a quasi contract to avoid the unjust enrichment of Kim at Kris's expense. To recover on this basis, one party must confer a benefit on another party, the other party must appreciate or know of the benefit, and the other party must retain the benefit under circumstances that would make it inequitable to do this without paying for it. Here, Kris asserted that she "loaned" Kim the money that her sister asked for. The loan conferred a benefit on Kim, who clearly knew of it. Kris's use of the word "loan" implied that she gave her sister the money with the expectation of being repaid. These circumstances met the test for an award to Kris of recovery in quasi contract. In the actual case on which this problem is based, the court granted a judgment in Kris's favor for the repayment of the loans. The court stated, "All equities lie with the plaintiff and whether or not there is a written contract to support the amount is not necessarily required. It's whether or not someone gives something over, pays something for somebody and it's inequitable for that person to retain the benefit of that without returning the money."

Business Case Problem with Sample Answer— The Dormant Commerce Clause. In 2001, Puerto Rico enacted a law that requires specific labels on cement sold in Puerto Rico and imposes fines for any violations of these requirements. The law prohibits the sale or distribution of cement man- ufactured outside Puerto Rico that does not carry a required label warning that the cement may not be used in government-financed construction projects. Antilles Cement Corp., a Puerto Rican firm that imports foreign cement, filedacomplaintinfederalcourt,claimingthatthislawvio- lated the dormant commerce clause. (The dormant com- merce clause doctrine applies not only to commerce among the states and U.S. territories, but also to international commerce.) Did the 2001 Puerto Rican law violate the dor- mant commerce clause? Why or why not?

The court ruled that, like a state, Puerto Rico generally may not enact policies that discriminate against out-of-state commerce. The law requiring companies that sell cement in Puerto Rico to place certain labels on their products is clearly an attempt to regulate the cement market. The law imposed labeling regulations that affect transactions between the citizens of Puerto Rico and private companies. State laws that on their face discriminate against foreign commerce are almost always invalid, and this Puerto Rican law is such a law. The discriminatory labeling requirement placed sellers of cement manufactured outside Puerto Rico at a competitive disadvantage. This law therefore contravenes the dormant commerce clause.

Product Liability. Jason Clark, an experienced hunter, bought a paintball gun. Clark practiced with the gun and knew how to screw in the carbon dioxide cartridge, pump the gun, and use its safety and trigger. Although Clark was aware that he could purchase protective eyewear, he chose not to buy it. Clark had taken gun safety courses and understood that it was "common sense" not to shoot anyone in the face. Clark's friend, Chris Wright, also owned a paintball gun and was simi- larly familiar with the gun's use and its risks. Clark, Wright, and their friends played a game that involved shooting paintballs at cars whose occupants also had the guns. One night, while Clark and Wright were cruising with their guns, Wright shot at Clark's car, but hit Clark in the eye. Clark filed a product liability lawsuit against the manufacturer of Wright's paintball gun to recover for the injury. Clark claimed that the gun was defectively designed. During the trial, Wright testified that his gun "never malfunctioned." In whose favor should the court rule? Why?

The court should rule in favor of the manufacturer, finding that the gun did not malfunction but performed exactly as Clark and Wright expected. The court should also point out that Clark and Wright appreciated the danger of using the guns without protective eyewear. Clark offered no proof that the paintball gun used in the incident failed to function as expected. He was aware that there was protective eyewear available but he chose not to buy it. He was an active participant in shooting paintballs at other vehicles. The evening of the incident Clark carried his paintball gun with him for that purpose. Wright also knew it was dangerous to shoot someone in the eye with a paintball gun. But the most crucial testimony was Wright's statement that his paintball gun did not malfunction.

Business Case Problem with Sample Answer— Reading Citations. Assume that you want to read the entire court opinion in the case of Equal Employment Opportunity Commission v. Autozone, Inc., 809 F.3d 916 (7th Cir. 2016). Refer to the subsection enti- tled "Finding Case Law" in this chapter, and then explain specifically where you would find the court's opinion. (See How to Find Primary Sources of Law.)

The court's opinion in this case—Equal Employment Opportunity Comission v. Autozone, Inc., 809 F.3d 916 (7th Cir. 2016)—can be found in volume 809 of Federal Reporter, Third Series on page 916. The U.S. Court of Appeals for the Seventh Circuit issued this opinion in 2016.

Spotlight on AOL—Common Law. AOL, LLC, mistakenly made public the personal informa- tion of 650,000 of its members. The members filed a suit, alleging violations of California law. AOL asked the court to dismiss the suit on the basis of a "forum-selection clause" in its member agreement that designates Virginia courts as the place where member disputes will be tried. Under a decision of the United States Supreme Court, a forum-selection clause is unenforceable "if enforcement would contravene a strong public policy of the forum in which suit is brought." California courts have declared in other cases that the AOL clause contravenes a strong public policy. If the court applies the doctrine of stare decisis, will it dismiss the suit? Explain.

The doctrine of stare decisis is the process of deciding case with reference to former decisions, or precedents. Under this doctrine, judges are obligated to follow the precedents established within their jurisdiction. In this problem, the enforceability of a forum selection clause is at issue. There are two precedents mentioned in the facts that the court can apply The United States Supreme Court has held that a forum selection clause is unenforceable "if enforcement would contravene a strong public policy of the forum in which suit is brought." And California has declared in other cases that the AOL clause contravenes a strong public policy. If the court applies the doctrine of stare decisis, it will dismiss the suit. In the actual case on which this problem is based, the court determined that the clause is not enforceable under those precedents.

Preexisting Duty. Tabor is a buyer of file cabinets manufactured by Martin. Martin's contract with Tabor calls for delivery of fifty file cabinets at $40 per cabinet in five equal installments. After delivery of two installments (twenty cabi- nets), Martin informs Tabor that because of inflation, Martin is losing money. Martin will promise to deliver the remain- ing thirty cabinets only if Tabor will pay $50 per cabinet. Tabor agrees in writing to do so. Discuss whether Martin can legally collect the additional $100 on delivery to Tabor of the next installment of ten cabinets.

The general rule is that a promise to do what one already has a legal or contractual duty to do is not legally sufficient consideration, because there is neither a legal benefit to the promisor nor a legal detriment to the promisee. This is called the preexisting duty rule. Unless there is a change of duties (consideration), the promise to pay for that which was previously contracted is unenforceable. An exception to this rule exists under the UCC for contracts for the sale of goods. The UCC provides that an agreement modifying a contract for the sale of goods needs no consideration to be binding [UCC 2-209(1)]. Therefore, the agreement by Tabor to pay the additional $10 per cabinet (a good) may be binding, even though no consideration (detriment) is given by Martin for the increase in price. (The issue, then, for the courts to determine will be whether Martin is taking unfair advantage of Tabor.)

Defamation. Richard is an employee of the Dun Construction Corp. While delivering materials to a construc- tion site, he carelessly backs Dun's truck into a passenger vehicle driven by Green. This is Richard's second accident in six months. When the company owner, Dun, learns of this latest accident, a heated discussion ensues, and Dun fires Richard. Dun is so angry that he immediately writes a let- ter to the union of which Richard is a member and to all other construction companies in the community, stating that Richard is the "worst driver in the city" and that "anyone who hires him is asking for legal liability." Richard files a suit against Dun, alleging libel on the basis of the statements made in the letters. Discuss the results.

The legal issue is whether Dun has libeled Richard's character. For Richard to recover in a legal action, he must prove the following elements: (a) that the defendant's writing contained a false statement, not privileged, presented as fact (called a false statement of fact), or a statement of opinion that was overpublicized, or even a true statement of fact that was overpublicized; (b) that the writing was made known to others besides the plaintiff (called publication); and (c) that damage occurred, if damages are sought by plaintiff. In this case, the writing of the letter and its distribution could not be considered privileged. One could argue that privilege may be extended to Dun if a union contract required that specific notice and reasons for firing union members be given to union officials. Such privilege, however, would not extend to the other construction busi- nesses. Dun could also argue that the statements were true. Truth is a defense against a defamation suit. Richard would then argue that the statements were presented as facts, not merely opinion, and were false, or that even if they were true, they were overpublicized. Proof of publication is already established. Finally, if Richard cannot secure comparable work because of the letters, he might be able to recover lost wages. (Note here that if compensatory damages are proved, Richard will probably also be awarded punitive damages.)

Spotlight on Intentional Torts—Defamation. Sharon Yeagle was an assistant to the vice presi- dent of student affairs at Virginia Polytechnic Institute and State University (Virginia Tech). As part of her duties, Yeagle helped students partici- pate in the Governor's Fellows Program. The Collegiate Times, Virginia Tech's student newspaper, published an article about the university's success in placing students in the program. The article's text surrounded a block quotation attributed to Yeagle with the phrase "Director of Butt Licking" under her name. Yeagle sued the Collegiate Times for defamation. She argued that the phrase implied the commission of sodomy andwasthereforeactionable.WhatisCollegiateTimesdefense to this claim?

The newspaper's defense was that the statement was not actionable defamation because it did not convey any factual information about Sharon Yeagle. The court noted that the phrase was disgusting and in extremely bad taste, but agreed with the newspaper. The phrase was no more than "rhetorical hyperbole" and could not be understood as stating an actual fact about Yeagle. Considering the article as a whole, which generally presented a positive view of Yeagle's efforts, the phrase did not denigrate her job title, her morals, or her conduct in the workplace.

2-2. Venue. Brandy Austin used powdered infant for- mula manufactured by Nestlé USA, Inc., to feed her infant daughter. Austin claimed that a can of the formula was con- taminated with Enterobacter sakazakii bacteria, causing severe injury to the infant. The bacteria can cause infections of the bloodstream and central nervous system—in particular, men- ingitis (inflammation of the tissue surrounding the brain or spinal cord). Austin filed an action against Nestlé in Henne- pin County District Court in Minnesota. Nestlé argued for a change of venue because the alleged harm had occurred in South Carolina. Austin is a South Carolina resident and had given birth to her daughter in that state. Should the case be transferred to a South Carolina venue? Why or why not?

The purpose behind most venue statutes is to ensure that a defendant is not "hailed into a remote district, having no real relationship to the dispute." The events in dispute have no connection to Minnesota. The Court stated: "Looked at through the lens of practicality—which is, after all, what [the venue statute] is all about—Nestlé's motion can really be distilled to a simple question: does it make sense to compel litigation in Minnesota when this state bears no relationship to the parties or the underlying events?" The court answered no to this simple question. The plaintiff resides in South Carolina, her daughter's injuries occurred there, and all of her medical treatment was provided (and continues to be provided) in that state. South Carolina is the appropriate venue for this litigation against Nestlé to proceed.

Rescission. Farrokh and Scheherezade Sharabian- lou signed a purchase agreement to buy a building owned by Berenstein Associates for $2 million. They deposited $115,000 toward the purchase. Before the deal closed, an environmental assessment of the property indicated the presence of chemicals used in dry cleaning. This substantially reduced the property's value. Do the Sharabianlous have a good argument for the return of their deposit and rescission of the contract Explain your answer.

The reviewing court concluded that "Rescission is intended to restore the parties as nearly as possible to their former positions and 'to bring about substantial justice by adjusting the equities between the parties'." Rescission does not occur if a contract is affirmed; it means the contract is repudiated. Here rescission is appropriate because the contracting parties were mutually mistaken as to the condition of the property. The environmental contamination substantially reduced its value. When an agreement to purchase property is subject to rescission, "the seller must refund all payments received in connection with the sale." Hence, the award of damages to the Berensteins was reversed and the Sharabianlous were refunded their deposit.

Debate This . . . The terms and conditions in click-on agreements are so long and detailed that no one ever reads the agreements. Therefore, the act of clicking on "I agree" is not really an acceptance.

The terms and conditions included in click-on agreements have become so detailed, confusing, and most importantly, long, that no one would ever take the time to read one. Knowing, though, that one is unable to purchase or license a product or service purchased on the Internet without clicking "yes" means that everyone just clicks "yes." That is far from what we normally believe is voluntary assent. Indeed, the choice is all or nothing—accept all terms and conditions or do not buy from us. There appears to be no acceptable alternative to click-on agreements when buying a good or service on the Internet. No company would ever eliminate the click-on agreement from its e- commerce system because it would be exposing itself to even more potential lawsuits. The rea- son such click-on terms and conditions are so numerous is specifically to avoid frivolous and expensive lawsuits. As a result, ultimately, overall costs are lower for e-commerce, and therefore consumers pay lower prices in general.

Acceptance. Altisource Portfolio Solutions, Inc., is a global corporation that provides real property owners with a variety of services, including property preservation—repairs, debris removal, and so on. Lucas Contracting, Inc., is a small trade contractor in Carrollton, Ohio. On behalf of Altisource, Berghorst Enterprises, LLC, hired Lucas to perform preserva- tion work on certain foreclosed properties in eastern Ohio. When Berghorst did not pay for the work, Lucas filed a suit in an Ohio state court against Altisource. Before the trial, Lucas e-mailed the terms of a settlement. The same day, Altisource e-mailed a response that did not challenge or contradict Lucas's proposal and indicated agreement to it. Two days later, however, Altisource forwarded a settlement document that contained additional terms. Which proposal most likely satis- fies the element of agreement to establish a contract? Explain.

The terms for a settlement that Lucas originally e-mailed to Altisource are most likely to be con- sidered by a court to satisfy the element of agreement to establish a contract. One of the elements for the formation of a valid contract is agreement—mutual assent to the terms of a bargain. Agree- ment is evidenced by an offer and an acceptance. An offeree's acceptance of an offer leads to the creation of an enforceable contract. Acceptance is a voluntary act that shows assent. The act may consist of words or conduct. The acceptance must be unequivocal—it must mirror the terms of the offer. In this problem, Lucas was not paid for work for which it had been hired and which it had performed. The contractor filed a suit against Altisource to recover. Before the trial, Lucas e- mailed the terms of a settlement to the defendant. Altisource e-mailed a response that did not challenge or contradict the proposal and indicated agreement to it. Two days later, however, Alti- source forwarded a different settlement document that contained additional terms. But because Lucas clearly set out the terms of a settlement in its e-mail and Altisource responded without contradiction or challenge, it is most likely that the original proposal would be held to meet the requirement of agreement to establish a valid contract. In the actual case on which this problem is based, on Lucas's motion to enforce the original settlement without the additional terms, the court issued a judgment to enforce it. A state interme- diate appellate court affirmed the lower court's judgment for the reasons stated above.

Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings,leaking car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal environmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not?

This problem concerns standing to sue. As you read in the chapter, to have standing to sue, a party must have a legally protected, tangible interest at stake. The party must show that he or she has been injured, or is likely to be injured, by the actions of the party that he or she seeks to sue. In this problem, the issue is whether the Turtons had been injured, or were likely to be injured, by the county's landfill operations. Clearly, one could argue that the injuries that the Turtons complained of directly resulted from the county's violations of environmental laws while operating the landfill. The Turtons lived directly across from the landfill, and they were experi- encing the specific types of harms (fires, scavenger problems, groundwater contamination) that those laws were enacted to address. Thus, the Turtons would have standing to bring their suit.

Spotlight on Plagiarism—Due Process. The Russ College of Engineering and Technology of Ohio University announced in a press conference that it had found "rampant and flagrant plagiarism" in the theses of mechanical engineering graduate stu- dents. Faculty singled out for "ignoring their ethical responsi- bilities" included Jay Gunasekera, chair of the department. Gunasekera was prohibited from advising students. He filed a suit against Dennis Irwin, the dean of Russ College, for violat- ing his due process rights. What does due process require in these circumstances? Why?

To adequately claim a due process violation, a plaintiff must allege that he was deprived of "life, liberty, or property" without due process of law. A faculty member's academic reputation is a protected interest. The question is what process is due to deprive a faculty member of this interest and in this case whether Gunasekera was provided it. When an employer inflicts a public stigma on an employee, the only way that an employee can clear his or her name is through publicity. Gunasekera's alleged injury was his public association with the plagiarism scandal. Here, the court reasoned that "a name-clearing hearing with no public component would not address this harm because it would not alert members of the public who read the first report that Gunasekera challenged the allegations. Similarly, if Gunasekera's name was cleared at an unpublicized hearing, members of the public who had seen only the stories accusing him would not know that this stigma was undeserved." Thus the court held that Gunasekera was entitled to a public name- clearing hearing.

Debate This . . . Under the doctrine of stare decisis, courts are obligated to follow the precedents established in their jurisdiction unless there is a compelling reason not to. Should U.S. courts continue to adhere to this common law principle, given that our government now regulates so many areas by statute?

Under the doctrine of stare decisis, courts are obligated to follow the precedents established in their jurisdictions unless there is a compelling reason not to. Should U.S. courts continue to adhere to this common law principle, given that our government now regulates so many areas by statute? Both England and the U.S. legal systems were constructed on the common law system. The doctrine of stare decisis has always been a major part of this system—courts should follow precedents when they are clearly established, excepted under compelling reasons. Even though more common law is being turned into statutory law, the doctrine of stare decisis is still valid. After all, even statutes have to be interpreted by courts. What better basis for judges to render their decisions than by basing them on precedents related to the subject at hand? In contrast, some students may argue that the doctrine of stare decisis is passé. There is certainly less common law governing, say, environmental law than there was 100 years ago. Given that federal and state governments increasingly are regulating more aspects of commercial transactions between merchants and consumers, perhaps the courts should simply stick to statutory language when disputes arise.

Strict Product Liability. Medicis Pharmaceutical Corp. makes Solodyn, a prescription oral antibiotic. Medi- cis warns physicians that "autoimmune syndromes, includ- ing drug-induced lupus-like syndrome," may be associated with use of the drug. Amanda Watts had chronic acne. Her physician prescribed Solodyn. Information included with the drug did not mention the risk of autoimmune disorders, and Watts was not otherwise advised of it. She was prescribed the drug twice, each time for twenty weeks. Later, she experienced debilitating joint pain and, after being hospitalized, was diag- nosed with lupus. On what basis could Watts recover from Medicis in an action grounded in product liability? Explain.

Watts might recover from Medicis in an action grounded in product liability on proven allegations that the drug was unreasonably dangerous because Medicis failed to provide adequate warnings of its known dangers. A product's maker or seller is liable for products that are so defective as to be unreasonably dangerous. This exists when a product is dangerous beyond the expectation of the ordinary consumer or a less dangerous alternative was economically feasible, but the maker or seller failed to use it. A product may be deemed unreasonably dangerous because of inadequate instructions or warnings. In the fact of this problem, Medicis Pharmaceutical Corp. made Solodyn, a prescription drug. Medicis warned prescribing physicians that "autoimmune syndromes, including drug- induced lupus-like syndrome," are possible from the use of the drug. Amanda Watts's physician prescribed Solodyn for her acne. An insert included with the drug did not mention the risk of autoimmune disorders, and Watts was not otherwise advised of it. Later, she was diagnosed with lupus. In other words, Medicis did not adequately warn Watts about the risks of Solodyn and the inadequacy of the warning contributed to Watts's injuries. In the actual case on which this problem is based, Watts filed a suit in an Arizona state court against Medicis to recover for her injuries. The court dismissed her complaint. A state in- termediate appellate court vacated the dismissal and remanded the case, based in part on the reasoning stated above.

Implied Contracts. Ralph Ramsey insured his car with Allstate Insurance Co. He also owned a house on which he maintained a homeowner's insurance policy with Allstate. Bank of America had a mortgage on the house and paid the insurance premiums on the homeowner's policy from Ralph's account. After Ralph died, Allstate canceled the car insurance. Ralph's son Douglas inherited the house. The bank continued to pay the premiums on the homeowner's policy, but from Douglas's account, and Allstate continued to renew the insur- ance. When a fire destroyed the house, Allstate denied cov- erage, however, claiming that the policy was still in Ralph's name. Douglas filed a suit in a federal district court against the insurer. Was Allstate liable under the homeowner's policy? Explain.

Yes, Allstate was liable under the homeowner's policy. A contract that is implied from the conduct of the parties. This type of contract differs from an express contract in that the conduct of the parties, rather than their words, creates and defines the terms of the contract. For an implied contract to exist, a party must furnish a service or property (which includes money), the party must expect to receive something in return for that property or service, and the other party must know or should know of that expectation and had a chance to reject the property or service but did not. Of course, a contract may be a mix of express and implied terms. In this problem, the homeowner's policy was a mix of express and implied terms. As for the elements showing the existence of the implied terms, the payments for the premiums on the policy continued after Ralph's death, but the amounts were paid from Douglas's account. Un- doubtedly, Douglas expected to receive coverage under the policy in return for his payments. The insurer Allstate must have known that Douglas expected the coverage—insurance has long been Allstate's business, and the company obviously understands the relationship between the pay- ments of premiums and the expectation of insurance coverage. And Allstate had the opportunity to cancel the homeowner's policy—as it had with Ralph's auto insurance, which was canceled— but did not terminate it. In the actual case on which this problem is based, the court issued a judgment in Allstate's favor on the implied contract issue. The U.S. Court of Appeals for the Sixth Circuit reversed this judgment—"A reasonable fact-finder could determine that [Allstate's] continuation of the premium payments constituted a contract implied in fact with Douglas."

The Commerce Clause. Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains its corporate headquarters, four warehouses, and a maintenance facility and terminal location for repairing and storing vehicles in Massachusetts. All of the vehicles in Regency's fleet were bought in other states. Massa- chusetts imposes a use tax on all taxpayers subject to its jurisdic- tion, including those that do business in interstate commerce, as Regency does. When Massachusetts imposed the tax on the purchase price of each tractor and trailer in Regency's fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause. What is the chief consideration under the commerce clause when a state law affects interstate commerce? Is Massachusetts's use tax valid? Explain.

Yes, Massachusetts's use tax is valid under the commerce clause. When a state regulation that affects interstate commerce is challenged under the commerce clause, the court weighs the state's interest in regulating the matter against the burden that the regulation places on interstate commerce. Because a court balances the interests involved, it is difficult to predict the outcome in a particular case. State laws that alter conditions of competition to favor in-state interests over out-of-state competitors in a market are considered discriminatory and usually invalidated. In this problem, Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains a headquarters, warehouses, and other facilities in Massachusetts. All of the vehicles in Regency's fleet were bought in other states. When Massachusetts imposed a use tax on the purchase price of each tractor and trailer in Regency's fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause. But Massachusetts imposes the tax on all taxpayers subject to its jurisdiction, not only those that, like Regency, do business in interstate commerce. Hence, the tax is not discriminatory. As for the balancing test, Massachusetts presumably imposes the tax based on the benefits derived from a company's using and storing vehicles in the state. The burden that the regulation places on interstate commerce seems slight weighed against the state's interest in regulating this matter. In the actual case on which this problem is based, Nichols filed a suit in a federal district court against TNI, alleging discrimination on the basis of sex. TNI filed a motion for summary judgment, which the court granted. But the U.S. Court of Appeals for the Eighth Circuit reversed. "Genuine issues of material fact remain."

Negligence. DSC Industrial Supply and Road Rider Supply are located in North Kitsap Business Park in Seattle, Washington. Both firms are owned by Paul and Suzanne Marshall. The Marshalls had outstanding commercial loans from Frontier Bank. The bank dispatched one of its employ- ees, Suzette Gould, to North Kitsap to "spread Christmas cheer" to the Marshalls as an expression of appreciation for their business. Approaching the entry to Road Rider, Gould tripped over a concrete "wheel stop" and fell, suffering a bro- ken arm and a dislocated elbow. The stop was not clearly vis- ible, it had not been painted a contrasting color, and it was not marked with a sign. Gould had not been aware of the stop before she tripped over it. Is North Kitsap liable to Gould for negligence? Explain.

Yes, North Kitsap is liable to Gould in the circumstances of this problem for negligence. To succeed in an action for negligence, a plaintiff must prove that the defendant owed a duty of care to the plaintiff, the defendant breached the duty, the breach caused an injury to the plaintiff, and the plaintiff thereby suffered a legally recognizable injury. In this problem, Frontier Bank sent one of its employees, Suzette Gould, to North Kitsap Business Park in Seattle, Washington, to "spread Christmas cheer" to a couple of the bank's customers, Paul and Suzanne Marshall, as an expression of appreciation for their business. The Marshalls owned DSC Industrial Supply and Road Rider Supply, which were located in North Kitsap. Approaching the entry to Road Rider, Gould tripped over a concrete "wheel stop" and fell, suffering a broken arm and a dislocated elbow. Applying the principles of negligence theory to these facts, North Kitsap owed Gould a duty as a business invitee of the Marshalls (and thus of North Kitsap) to protect her from dangerous conditions on the premises. Gould was not aware of the wheel stop, which was a dangerous condition because it was not clearly visible, and not painted a contrasting color or marked with a sign. North Kitsap breached its duty by not making the stop safer. This breach was the proximate cause of Gould's injuries. In the actual case on which this problem is based, Gould filed a suit in a Washington state court against North Kitsap, alleging negligence. The court issued a judgment in her favor. A state intermediate appellate court affirmed the judgment, on the reasoning stated here.

Negligence. Ronald Rawls and Zabian Bailey were in an auto accident in Bridgeport, Connecticut. Bailey rear-ended Rawls at a stoplight. Evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surroundings. Rawls filed a suit in a Connecticut state court against his insurance company, Progressive Northern Insur- ance Co., to obtain benefits under an underinsured motorist clause, alleging that Bailey had been negligent. Could Rawls collect? Discuss.

Yes, Rawls could obtain benefits from Progressive Northern Insurance Co. under an underinsured motorist clause, on the ground that Bailey had been negligent. To succeed in a negligence action, the plaintiff must prove that (1) the defendant owed a duty of care to the injured party (plaintiff), (2) the defendant breached that duty, (3) the breach was the cause of harm to the plaintiff, and (4) the harm to the plaintiff was a legally recognizable injury. The duty must be such that a reasonable person engaging in the same activity would anticipate a risk of the negative consequences and guard against it. In this problem, Zabian Bailey rear-ended Rawls at a stoplight. According to the facts, the evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surroundings. Bailey's duty to Rawls included any and all of thee precautions—braking in time, turning the vehicle, keeping the vehicle under control, and remaining attentive to the surroundings. Clearly, Bailey breached this duty, and the breach caused whatever harm Rawls suffered—damage to his vehicle and injury to himself. Depending on whether Bailey was grossly negligent, punitive damages might be appropriate. In the actual case on which this problem is based, a jury found in Rawls's favor, and the court entered a judgment against Progressive. On the insurer's appeal, a state intermediate appellate court reversed, but on further appeal the state supreme court reversed again, holding that the evidence supported the jury's findings in Rawls's favor.

Negligence. Charles Robison, an employee of West Star Transportation, Inc., was ordered to cover an unevenly loaded flatbed trailer with a 150-pound tarpaulin (a water- proof cloth). The load included uncrated equipment and pallet crates of different heights, about thirteen feet off the ground at its highest point. While standing on the load, manipulating the tarpaulin without safety equipment or assis- tance, Robison fell and sustained a traumatic head injury. He filed a suit against West Star to recover for his injury. Was West Star "negligent in failing to provide a reasonably safe place to work," as Robison claimed? Explain.

Yes, West Star was negligent in failing to provide a reasonably safe place to work. Central to the tort of negligence is the concept of duty of care. Tort law measures duty by the reasonable person standard—how a reasonable person would have acted in the same circumstances. But the degree of care to be exercised varies, depending on the person's profession, his or her relationship with the injured party, and other factors—in other words, it is what a reasonable person in the position of the defendant in a negligence case would have done in the particular circumstances. In this problem, West Star Transportation, Inc., ordered its employee Charles Robison to cover an unevenly loaded flatbed trailer with a heavy tarpaulin. The load was ungainly, uneven, and about thirteen feet above the ground at its highest point. Manipulating the tarpaulin without safety equipment or assistance, Charles fell from the load and sustained a head injury. West Star owed a duty to its employee to exercise reasonable care, but West Star did not do what a shipper of ordinary prudence would have done under the same or similar circumstances. West Star should have refused to handle a load requiring unreasonably dangerous tarping or the company should have taken appropriate safety precautions. In the actual case on which this problem is based, a jury found that West Star's negligence proximately caused the incident. On West Star's appeal, a state intermediate appellate court affirmed.

Arbitration. Horton Automatics and the Industrial Division of the Communications Workers of America, the union that represented Horton's workers, negotiated a col- lective bargaining agreement. If an employee's discharge for a workplace-rule violation was submitted to arbitration, the agreement limited the arbitrator to determining whether the rule was reasonable and whether the employee had violated it. When Horton discharged employee Ruben de la Garza, the union appealed to arbitration. The arbitrator found that de la Garza had violated a reasonable safety rule, but "was not totally convinced" that Horton should have treated the violation more seriously than other rule violations. The arbi- trator ordered de la Garza reinstated. Can a court set aside this order? Explain.

Yes, a court can set aside this order. The parties to an arbitration proceeding can appeal an arbitrator's decision, but court's review of the decision may be more restricted in scope than an appellate court's review of a trial court's decision. In fact, the arbitrator's decision is usually the final word on a matter. A court will set aside an award if the arbitrator exceeded her or his pow- ers—that is, arbitrated issues that the parties did not agree to submit to arbitration. In this problem, Horton discharged its employee de la Garza, whose union appealed the discharge to arbitration. Under the parties' arbitration agreement, the arbitrator was limited to determining whether the rule was reasonable and whether the employee violated it. The arbitrator found that de la Garza had violated a reasonable safety rule, but "was not totally convinced" that the employer should have treated the violation more seriously than other rule violations and ordered de la Garza reinstated. This order exceeded the arbitrator's authority under the parties' agreement. This was a ground for setting aside the order. In the actual case on which this problem is based, on the reasoning stated here, the U.S. Court of Appeals for the Fifth Circuit reached the same conclusion.

The state in which Sue resides requires that her dispute with Tipton be submitted to mediation or nonbinding arbitration. If the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, will a court hear the case? Explain. (See Alternative Dispute Resolution.)

Yes, if the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, a court will hear the case. It is required that the dispute be submitted to mediation or arbitration, but this outcome is not binding

Sue uses her smartphone to purchase a video security system for her architectural firm from Tipton, Inc., a company located in a different state. The system arrives a month after the projected delivery date, is of poor quality, and does not function as advertised. Sue files a suit against Tipton in a state court. Does the court in Sue's state have jurisdiction over Tipton? What factors will the court consider in determining jurisdiction? (See Basic Judicial Requirements.)

Yes, the court in Sue's state has jurisdiction over Tipton on the basis of the company's minimum contacts with the state. Courts look at the following factors in determining whether minimum contacts exist: the quantity of the contacts, the nature and quality of the contacts, the source and connection of the cause of action to the contacts, the interest of the forum state, and the convenience of the parties. Attempting to exercise jurisdiction without sufficient minimum contacts would violate the due process clause. Generally, courts have found that jurisdiction is proper when there is substantial business conducted online (with contracts, sales, and so on). Even when there is only some interactivity through a Web site, courts have sometimes held that jurisdiction is proper. Jurisdiction is not proper when there is merely passive advertising. Here, all of these factors suggest that the defendant had sufficient minimum contacts with the state to justify the exercise of jurisdiction over the defendant. Two especially important factors were that the plaintiff sold the security system to a resident of the state and that litigating in the defendant's state would be inconvenient for the plaintiff.

Equal Protection.Abbott Laboratories licensed SmithKline Beecham Corp. to market an Abbott human immunodeficiency virus (HIV) drug in conjunction with one of SmithKline's drugs. Abbott then increased the price of its drug fourfold, forcing SmithKline to increase its prices and thereby driving business to Abbott's own combination drug. SmithKline filed a suit in a federal district court against Abbott. During jury selection, Abbott struck the only self- identified gay person among the potential jurors. (The pricing of HIV drugs is of considerable concern in the gay commu- nity.) Could the equal protection clause be applied to prohibit discrimination based on sexual orientation in jury selection? Discuss.

Yes, the equal protection clause can be applied to prohibit discrimination based on sexual orientation in jury selection. The appropriate level of scrutiny would be intermediate scrutiny. Under the equal protection clause of the Fourteenth Amendment, the government cannot enact a law or take another action that treats similarly situated individuals differently. If it does, a court examines the basis for the distinction. Intermediate scrutiny applies in cases involving discrimination based on gender. Under this test, a distinction must be substantially related to an important government objective. Gays and lesbians were long excluded from participating in our government and the privileges of citizenship. A juror strike on the basis of sexual orientation tells the individual who has been struck, as well as the trial participants and the general public, that the judicial system still treats gays and lesbians differently. This deprives these individuals of the opportunity to participate in a democratic institution on the basis of a characteristic that has nothing to do with their fitness to serve. In the actual case on which this problem is based, SmithKline challenged the strike. The judge denied the challenge. On SmithKline's appeal, the U.S. Court of Appeals for the Ninth Circuit held that the equal protection clause prohibits discrimination based on sexual orientation in jury selection and requires that heightened scrutiny be applied to equal protection claims involving sexual orientation. The appellate court remanded the case for a new trial.

Agreements That Lack Consideration. Arkansas- Missouri Forest Products, LLC (Ark-Mo), sells supplies to make wood pallets. Blue Chip Manufacturing (BCM) makes pallets. Mark Garnett, an owner of Ark-Mo, and Stuart Lerner, an owner of BCM, went into business together. Garnett and Lerner agreed that Ark-Mo would have a 30-percent owner- ship interest in their future projects. When Lerner formed Blue Chip Recycling, LLC (BCR), to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a "Telephone Deal," Lerner then promised Garnett that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest, and Garnett agreed to forgo an ownership interest in BCR. But when Blue Chip III, LLC (BC III), was formed to operate a repair facility in the Midwest, Lerner told Garnett that he "was not getting anything." Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. Was there consideration to support the Telephone Deal? Explain.

Yes, there was consideration to support the Telephone Deal. Consideration can consist of a promise, a performance, or forbearance (refraining from an action that one has a legal right to undertake). In this problem, Mark Garnett, an owner of Arkansas-Missouri Forest Products, LLC (Ark- Mo), and Stuart Lerner, an owner of Blue Chip Manufacturing (BCM), agreed to go into wood- pallet enterprises together, with Ark-Mo to have a 30-percent ownership interest in their future projects. When Lerner formed Blue Chip Recycling, LLC (BCR) to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a "Telephone Deal," Lerner promised that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest. Garnett then agreed to forego an ownership interest in BCR. Acting on Ark-Mo's behalf, Garnett could have accepted the 5-percent allocation in BCR, but he refrained from doing so. Instead, he accepted Lerner's promise of a 30-percent share in their future projects in the Midwest and made no more demand regarding BCR. In other words, Garnett forwent the opportunity to have an ownership interest in BCR in exchange for Lerner's agreement that Ark-Mo would have a 30-percent ownership interest in certain future projects. In the actual case on which this problem is based, Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. The court issued a judgment in Lerner's favor. A state intermediate appellate court reversed, in part on the reasoning stated here. "Valid legal consideration supported the Telephone Deal."

Unilateral Contract. Rocky Mountain Races, Inc., sponsors the "Pioneer Trail Ultramarathon," with an adver- tised first prize of $10,000. The rules require the competitors to run 100 miles from the floor of Blackwater Canyon to the top of Pinnacle Mountain. The rules also provide that Rocky reserves the right to change the terms of the race at any time. Monica enters the race and is declared the winner. Rocky offers her a prize of $1,000 instead of $10,000. Did Rocky and Monica have a contract? Explain

Yes, these parties had a contract. Contests, lotteries, and other competitions for prizes are offers for contracts. Here, the offer is phrased so that each competitor can accept only by completing the run. At that point, a contract is formed—a unilateral contract—binding its sponsor to perform as promised. Rocky did not breach the contract when the prize was changed. Under the rules, Rocky could change the terms at any time.

Alison receives a notice of property taxes due from a local tax collector. The notice is for tax on Jerry's property, but Alison believes that the tax is on her property and pays it. Can Alison recover from Jerry the amount that she paid? Why or why not?

Yes. A person who is unjustly enriched at the expense of another can be required to account for the benefit under the theory of quasi contract. The parties here did not have a contract, but the law will impose one to avoid the unjust enrichment.

Liability to Business Invitees. Kim went to Ling's Market to pick up a few items for dinner. It was a stormy day, and the wind had blown water through the market's door each time it opened. As Kim entered through the door, she slipped and fell in the rainwater that had accumulated on the floor. The manager knew of the weather conditions but had not posted any sign to warn customers of the water hazard. Kim injured her back as a result of the fall and sued Ling's for damages. Can Ling's be held liable for negligence? Discuss.

Yes. An occupier of the premises has a duty to use ordinary care to keep its premises in a reasonably safe condition and to warn customers of any foreseeable hazards. What constitutes a foreseeable hazard depends on whether a reasonably prudent person would conclude that harm could likely result from the conditions. Here, the manager knew of the storm conditions, knew that water accumulated rapidly on the floor, and knew or should have known that the water created a hazard. A court could find that the manager's failure to remove the water constituted negligence, and the manager could be held liable for Kim's injuries.

Rim Corporation makes tire rims that it sells to Supe- rior Vehicles, Inc., which installs them on cars. One set of rims is defective, which an inspection would reveal. Supe- rior does not inspect the rims. The car with the defective rims is sold to Town Auto Sales, which sells the car to Uri. Soon, the car is in an accident caused by the defec- tive rims, and Uri is injured. Is Superior Vehicles liable? Explain your answer.

Yes. The manufacturer is liable for the injuries to the user of the product. A manufacturer is liable for its failure to exercise due care to any person who sustains an injury proximately caused by a negligently made (defective) product. In this problem, the failure to inspect is a failure to use due care. Thus, Rim Corporation is liable to the injured buyer, Uri. Of course, the maker of the component part may also be liable.

In September, Sharyn agrees to work for Totem Produc- tions, Inc., at $500 a week for a year beginning January 1. In October, Sharyn is offered the same work at $600 a week by Umber Shows, Ltd. When Sharyn tells Totem about the other offer, a Totem representative tears up their contract and agrees that Sharyn will be paid $575. Is the new contract binding? Explain.

Yes. The original contract was executory. The parties rescinded it and agreed to a new contract. If Sharyn had broken the contract to accept a contract with another employer, she might have been held liable for damages for the breach.

Suppose that a state imposes a higher tax on out-of-state companies doing business in the state than it imposes on in-state companies. Is this a violation of equal protection if the only reason for the tax is to protect the local firms from out-of-state competition? Explain.

Yes. The tax would limit the liberty of some persons (out-of-state businesses), so it is subject to a review under the equal protection clause. Protecting local businesses from out-of- state competition is not a legitimate government objective. Thus, such a tax would violate the equal protection clause.

Before Maria starts her first year of college, Fred prom- ises to give her $5,000 when she graduates. She goes to college, borrowing and spending far more than $5,000. At the beginning of the spring semester of her senior year, she reminds Fred of the promise. Fred sends her a note that says, "I revoke the promise." Is Fred's prom- ise binding? Explain.

Yes. Under the doctrine of detrimental reliance, or promissory estoppel, the promisee is entitled to payment of $5,000 from the promisor on graduation. There was a promise, on which the promisee relied, the reliance was substantial and definite (the promisee went to college for the full term, incurring considerable expenses, and will likely graduate), and it would only be fair to en- force the promise.