SAINT LOUIS UNIVERSITY -- SCHOOL OF LAW-- FINAL EXAMINATION

Professor Frost -- Closed Book Exam, December 10, 1991, 3 hours

CONTRACTS

READ ALL THE FOLLOWING INSTRUCTIONS CAREFULLY

(i) Write your examination number on your bluebook(s) and on this examination. Use only your examination number, not your name.

(ii) This is an closed book examination. You MAY NOT use any materials.

(iii) Statutory, case and restatement citations may be used but are not required. The better answers will include a thorough analysis of the issues presented rather than a string of citations.

(iv) Conciseness and clarity of expression, organization and clarity of presentation, while not separately taken into account in the grade, necessarily have some impact on the grader's evaluation of your understanding of the subject matter.

(v) This examination has 8 numbered pages. Check that you have a complete examination.

(vi) This examination consists of 4 questions. Each question is assigned a suggested time limit which corresponds to the weight given that question in the determination of the final grade. ALL ANSWERS MUST BE EXPLAINED. Your grade will be based on your analysis of the issues rather than your ability to come to a single "correct" solution.

(vii) Remember that this is an examination of your understanding of the material covered in Contracts. Answer the questions based upon the Contracts readings and class discussions and not on the basis of material discussed or read in your other classes.

Question 1

1 hour

Bill owned a small retail sporting goods store that has been experiencing some hard times. In January of 1991, Bill borrowed $50,000 from Big Bank to expand the store and to buy some new inventory. Bill anticipated that during the summer he would sell enough inventory to pay off the loan and agreed that he would repay the loan on October 1, 1991.

The summer selling season did not go as planned and Bill was unable to pay the loan on October 1. On September 15, 1991, Bill called Larry Loanofficer, who was the bank official in charge of his loan. Bill told Larry that he would not be able to pay the $50,000 loan when due. Larry responded, "Well, I guess that we will just have to take your house." Bill told Larry that if the bank would wait until after the Christmas selling season that he would have enough money to repay the loan. Larry said that he would consider waiting.

Bill discussed his plight with his mother, Martha, who told him not to worry. Martha phoned Larry on October 1, 1991 and told him, "My son needs time to pay you back. Don't worry about getting your money because if Bill can't pay, I will stand good for the loan." Larry responded, "I will have to think all of this over." Immediately after the telephone call, Martha wrote a note to Larry stating, "As we discussed, I will stand good for my son's loan." Larry received the letter the following day.

By December 1, 1991, it became obvious to everyone concerned that Bill would not be able to repay the loan even after the Christmas selling season. Martha wrote Larry a note on December 1 stating, "Circumstances have changed for the worse. I therefore will be unable to continue my guaranty of Bill's debt." Larry received the note on December 5 and immediately initiated a suit against Bill seeking repayment of the debt.

Larry estimates that the bank will recover only $20,000 of the $50,000 owed by Bill. Larry believes that if the bank had taken immediate action against Bill on October 1, that the bank would have recovered $35,000.

You represent the bank who wants to know whether it can recover any of its loses from Martha. Please write a memo analyzing the bank's rights, including its potential remedies, against Martha.

Question 2

30 minutes

After Bill's failure in the sporting goods business, he decided to open a retail hardware store. Bill called Sam, a wholesale paint supplier, to place an order for inventory. Bill told Sam that he was starting a retail hardware store and wanted to order some paint for his inventory. Sam told Bill that paint was $10 per gallon and was sold by the case. Bill, thinking that a case consisted of 24 gallons of paint placed an order for 10 cases. Sam told Bill that he would ship the order in a few weeks.

In the wholesale paint business a "case" means 4 gallons of paint. Sam knew this and wondered why a retail store would only stock 40 gallons of paint. Sam called Bill and asked, "Are you sure that 10 cases of paint will be enough?" Bill, still unaware of the fact that the term case meant four gallons of paint, responded, "I want to start out small until I see how the business is going." Sam said, "I guess you know what you want" and hung up.

Between this conversation and the time Sam shipped the paint, the price of a solvent necessary for the manufacture of paint rose dramatically. Consequently, the wholesale price of paint rose from $10 to $20, where it remained at the time Sam shipped 40 gallons of paint to Bill.

When Bill received the 40 gallon paint shipment, he immediately called Sam to inquire about the rest of the shipment. Sam told Bill, "I shipped your order of 10 cases and you were lucky to get that." Sam hung up on Bill and refused to take any more calls from him. Bill ultimately decided not to purchase paint from anyone else but is still upset that Sam refused to ship all of the paint he believed that he ordered.

Bill was so impressed with your representation of Big Bank that he wants you to represent him against Sam. Please advise Bill of his rights, including any potential remedies, against Sam.

Question 3

1 Hour

Brenda owned a manufacturing business engaged in the production of specialized tools for use in the aerospace industry. From time to time Brenda purchased plastic handles for the tools from a variety of suppliers. On the morning of September 15, 1991, Brenda called Sean's Plastics, Inc. to ask its price for 1,000 plastic handles. The salesman she spoke to told her that Sean's Plastics would send her a quote.

That afternoon, Brenda received a telephone facsimile transmission (fax) from Sean's Plastics which is reproduced in full below:

In response to your telephone call we quote you a price of $5 each for 1,000 five inch standard plastic handles. We will ship within 10 days of your order. If this price is acceptable to you, please sign this quote where indicate and send it back to us via fax.

Sean's Plastics

Accepted

Date

Immediately after Brenda received the fax, she mailed a letter to Sean's Plastics stating, "I have received your offer and your price is much to high." On September 16, 1991, Brenda reconsidered her actions of the day before and decided to accept the offer. She faxed a purchase order to Sean's Plastics which stated, in part:

Regarding your offer of September 15, 1991.

Please ship 1500 plastic handles at $5 each by September 26, 1991. This offer is subject to all of the terms and conditions set out below and supersedes all prior oral and written agreements.

Among the terms and conditions of the purchase order was the following term:

All disputes between the parties hereto shall be determined through arbitration in accordance with the rules of the American Arbitration Association.

The fax was received by Sean's Plastics on the morning of September 16, 1991. The letter was not received until September 20, 1991. Sean's Plastics shipped 1500 handles on September 26, 1991 and Brenda accepted the handles on September 30, 1991. On October 15, 1991 Brenda informed Sean's Plastics of her claim that the handles were defective and refused to pay the purchase price. On November 15, Sean's Plastics sued Brenda for the purchase price of the handles.

Brenda has requested that the court enforce the arbitration term in the purchase order. You are the judge. Write an opinion on the enforceability of the arbitration term.

Question 4

30 minutes

Manufacturing Corp. is engaged in the business of making and selling specialized machinery to the automotive industry. In its business, Manufacturing uses large quantities of steel. In July, 1991, Manufacturing entered into an agreement with Steel Co. under which Manufacturing agreed to buy rolled steel exclusively from Steel Co. and Steel agreed to provide Manufacturing a 10% discount from the price it charged its other customers. Steel agreed to the discount because it expected to sell large quantities of rolled steel to Manufacturing.

In September, 1991 Manufacturing started using more plastic in making its product. The result of this change was to cut Manufacturing's needs for Steel in half. Since Manufacturing is now buying less steel, Steel Co. has refused to grant Manufacturing Co. the 10% discount. Manufacturing has refused to pay anything more than 90% of the amounts Steel claims it is owed. Steel has refused to ship steel to Manufacturing unless Manufacturing pays the 10% difference. Manufacturing has therefore been forced to purchase steel from other steel companies.

You represent Manufacturing which is contemplating bringing suit against Steel for Steel's failure to ship the rolled steel. Assess Manufacturing's chances of success in such a suit.