978-1285860381 Chapter 19 Solution Manual Part 2

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Additional Case: Hyler v. Garner 1

Facts: Jim and Bonnie Hyler enjoyed traveling about the country with a camping trailer that they

pulled behind their car. Jim sustained a back injury that left his right leg numb and he was unable to

hook up the trailer to the car. The Hylers visited Autorama and explained to a salesman that because of

Jim’s disability, they needed a low-maintenance recreational vehicle with a solid warranty. The

salesman recommended a $62,000 Lexington Mallard R.V. He explained that the vehicle came with

three warranties: one from the chassis manufacturer, one from the engine manufacturer, and one from

Mallard for the coach. The Mallard warranty said that if the dealer did not provide satisfactory service,

the buyer could contact the manufacturer directly. The salesman persuaded the Hylers to buy the

vehicle.

The Hylers had constant problems with their R.V. The television, air conditioner, and defroster

were loosely attached, a bumper was defective, the windows would not shut tight, the shower door fell

off, a fuel tank leaked, the side walls separated from the floor, and the windshield began to fall out.

Autorama fixed some but not all of the problems, which it characterized as routine. The Hylers

contacted Mallard, only to learn that it was bankrupt. After Autorama made a third attempt to repair

the defective windshield, the dealer refused to return the vehicle to the Hylers until they acknowledged

in writing that Autorama had complied with all warranties and had no further warranty liability. Jim

Hyler told Autorama to keep the vehicle and sued for rescission.

The trial court found that Autorama had misrepresented the warranties because the dealer knew

that Mallard was in bankruptcy and would be unable to assist a dissatisfied customer. The court

ordered rescission and Autorama appealed.

Issue: Were the Hylers entitled to rescission based on misrepresentation?

Holding: Judgment for the Hylers affirmed. First the court concluded that the intent necessary in an

equity action is “intent to induce the plaintiff to act or refrain from acting.” The court then examined

the evidence, which showed Bonnie Hyler was concerned about the quality of the Mallard motor home.

The Autorama salesperson assured her “there was nothing to worry about,” the motor home “had a full

one-year factory warranty.” The manufacturer was in bankruptcy at the time they purchased the motor

home, and Autorama’s owner testified he knew at the time of Hylers’ purchase that Mallard would not

be responsive to warranty claims. He admitted he did not advise the Hylers of potential problems with

the manufacturer’s warranty before they purchased the motor home. Autorama’s misrepresentation lay

in what it failed to say.

The court next considered remedies, stating the Hylers were entitled to rescission of the contract

and restitution. The court ordered that Autorama return the purchase price of the motor home, plus the

value of the vehicles the Hylers traded for the motor home. Autorama argued there should be a

deduction from that total for the Hyler’s use of the motor home, but there was no evidence on which

the trial court could calculate such a deduction. Therefore, the district court did not err in failing to

deduct this amount.

Question: What did the trial court consider in the Hylers’ claim of misrepresentation?

Answer: Autorama’s alleged failure to disclose (1) the manufacturer’s troubled financial condition

Question: What does Autorama argue?

Answer: The evidence does not support several of the court’s findings: (1) the Hylers relied on a

representation that the motor home was covered by a full, as opposed to a limited, manufacturer’s

1 548 N.W.2d 864, 1996 Iowa Sup. LEXIS 322 Iowa Supreme Court, 1996

Other Remedies

In contract lawsuits, plaintiffs are occasionally awarded the remedies of specific performance,

injunction, and reformation. Specific performance is a court ordering the parties to perform the

contract involving the sale of land or some other asset that is considered “unique.” An injunction is a

court order requiring someone to refrain from doing something. Reformation is a process in which a

court will partially rewrite a contract.

Case: Milicic v Basketball Marketing Company, Inc.2

Facts: The Basketball Marketing Company (BMC) markets, distributes, and sells basketball apparel

and related products. BMC signed a long term endorsement contract with a 16-year-old Serbian player,

Darko Milicic, who was virtually unknown in the United States until, two years later, he was the

second pick in the NBA draft and became immensely marketable. Four days after his 18th birthday,

Milicic made a buy-out offer to BMC, seeking release from his contract so that he could arrange a more

lucrative one elsewhere. BMC refused and Milicic then disaffirmed the contract, returning all money

and goods he had received from BMC. Believing that Milicic was negotiating an endorsement deal

with either Reebok or Adidas, BMC sent both companies letters informing them it had an enforceable

endorsement deal with Milicic that was valid for several more years. After receiving this letter Adidas

stopped negotiating with Milicic just short of signing a contract. Milicic sued BMC, seeking a

preliminary injunction that would prohibit BMC from sending such letters to competitors. The trial

court granted the preliminary injunction and BMC appealed.

Issue: Was Milicic entitled to a preliminary injunction?

Holding: Judgment for Milicic affirmed. Excerpts from the court’s opinion:

Milicic met the four essential prerequisites necessary for injunctive relief. 1. Likelihood of

success on the merits: Pennsylvania law recognizes, except as to necessities, the contract of a

minor is voidable if the minor disaffirms it at any reasonable time after the minor attains majority.

Milicic stated his unequivocal revocation and voidance of the agreement within a reasonable time

after reaching the age of majority. 2. Irreparable harm: Top N.B.A. draft picks generally solicit,

negotiate and secure endorsement contracts within a short time after the draft to take advantage of

the publicity, excitement, and attendant marketability associated with the promotion. BMC

blocked these efforts by Milicic. These business opportunity and market advantage losses may

aptly be characterized as irreparable injury for purposes of equitable relief. 3. Denying the

injunction would cause greater injury: BMC’s refusal to acknowledge Milicic’s ability to disaffirm

is at odds with public policy. Because infants are not competent to contract, the ability to disaffirm

protects them from their own immaturity and lack of discretion. Under Pennsylvania law BMC

should have had a guardian appointed for Milicic to oversee his affairs. 4. The injunction restored

the parties to the status quo.

Question: How did this dispute arise?

Question: On what basis did he disaffirm?

Question: Did he fail to disaffirm properly?

Question: Then why didn’t BMC honor his disaffirmance?

Question: In this part of its opinion does the court really refer to Milicic as an “infant?” Why?

2 857 A.2d 689 Superior Court of Pennsylvania, 2004

Question: What test does the court apply to evaluate the preliminary injunction?

Answer: Milicic had to prove four things to obtain the preliminary injunction:

Likelihood of success on the merits (i.e., that his legal claim is strong enough to win at trial),

Question: Did Milicic prove each of these things?

Drafting Exercise: Injunctions

If you chose to assign to students the injunction drafting exercise described above, this is a good place

to discuss it. The injunction might simply say:

Defendant Francis Bacon is hereby ordered to immediately cease and desist from keeping or maintaining

on his premises at 123 Main Street, City, any pigs, goats, ostriches, or any other livestock or animals

that are prohibited by any zoning regulation or any other law, rule, or regulation of this State or any

political subdivision.

Special Issues

Mitigation of Damages

A party injured by a breach of contract may not recover for damages that he could have avoided with

reasonable efforts.

Nominal Damages

Nominal damages are a token sum, such as one dollar, given to a plaintiff who demonstrates that the

defendant breached the contract but cannot prove serious injury.

Liquidated Damages

It can be difficult or even impossible to prove how much damage the injured party has suffered. So

lawyers and executives negotiating a deal may include in the contract a liquidated damages clause, a

provision stating in advance how much a party must pay if it breaches.

Role Playing: Negotiating Liquidated Damages

Flatt University is seeking to gain greater national recognition by dramatically improving its women’s

basketball team. Pat Smart Pinnacle, a famous coach with a reputation for quickly transforming teams

into winners, has expressed interest. She is a great coach but has a reputation for moving on to a new

job when she feels like it. Divide the class into even numbered groups, one set representing Flatt and

the other Pat.

What Pat would like: She does want the job, and will compromise to get it. She would like a five-year

guaranteed deal with a starting salary of between $350,000 and $375,000, and a raise of 5 to 20 percent

per year. She might consider linking some of the raises to performance.

What Flatt would like: The school desperately needs Pat, but only if she will stay the full five years.

The University is willing to build a new basketball arena provided they have the star coach for the full

period. The school would like to pay a starting salary of about $325,000. Flatt prefers that any raises

be tied to performance, such as number of games won per year (the team will play 28 per year) or

appearances in the NCAA tournament. The school is nervous that Pat would stay a couple of years and

move on, so it wants either a liquidated damage clause or something else that will ensure that Pat

sticks around.

Multiple Choice Questions

1. CPA QUESTION Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain

Master’s computer system. Master’s manufacturing process depends on its computer system

operating properly at all times. A liquidated damages clause in the contract provided that Accur

would pay $1,000 to Master for each day that Accur was late responding to a service request. On

January 12, Accur was notified that Master’s computer system had failed. Accur did not respond to

Master’s service request until January 15. If Master sues Accur under the liquidated damage

provision of the contract, Master will:

(a) win, unless the liquidated damages provision is determined to be a penalty

(b) win, because under all circumstances liquidated damage provisions are enforceable

(d) lose, because liquidated damage provisions violate public policy

2. CPA QUESTION Kaye contracted to sell Hodges a building for $310,000. The contract

required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building.

Hodges sued Kaye. To what relief is Hodges entitled?

(a) punitive damages and direct damages

(b) specific performance and direct damages

(d) direct damages or specific performance

3. A manufacturer delivers a new tractor to Farmer Ted on the first day of the harvest season. But,

the tractor will not start. It takes two weeks for the right parts to be delivered and installed. The

repair bill comes to $1000. During the two weeks, some acres of Farmer Ted’s crops die. He

argues in court that his lost profit on those acres is $60,000. If a jury awards $1000 for tractor

repairs, it will be in the form of ____ damages. If it awards $60,000 for the lost crops, it will be in

the form of ____ damages.

(a) direct; direct

(b) direct; consequential

(d) consequential; consequential

(e) direct; incidental

4. Julie signs a contract to buy Nick’s 2012 Mustang GT for $20,000. Later, Nick changes his mind

and refuses to sell his car. Julie soon buys a similar 2012 Mustang GT for $21,500. She then sues

Nick and wins $1,500. The $1,500 represents her ____.

(a) expectation interest

(b) reliance interest

(d) none of the above

5. Under the Uniform Commercial Code, a seller ____ generally entitled to recover consequential

damages. Under the UCC, a buyer ____ generally entitled to recover consequential damages.

(a) is; is

(b) is; is not

(d) is not; is not

Case Questions

1. Lewis signed a contract for the rights to all timber located on Nine Mile Mine. He agreed to pay

$70 per thousand board feet ($70/mbf). As he began work, Nine Mile became convinced that Lewis

lacked sufficient equipment to do the job well and forbade him to enter the land. Lewis sued. Nine

Mile moved for summary judgment. The mine offered proof that the market value of the timber

was exactly $70/mbf, and Lewis had no evidence to contradict Nine Mile. The evidence about

market value proved decisive. Why? Please rule on the summary judgment motion.

Answer: Motion granted. Nine Mile may have breached the agreement, but there is no evidence

2. Twin Creeks Entertainment signed a deal with U.S. JVC Corp. in which JVC would buy 60,000

feature film videocassettes from Twin Creeks over a three-year period. JVC intended to distribute

the cassettes nationwide. Relying on its deal with JVC, Twin Creeks signed an agreement with

Paramount Pictures, agreeing to purchase a minimum of $600,000 worth of Paramount cassettes

over a two-year period. JVC breached its deal with Twin Creeks and refused to accept the

cassettes it had agreed upon. Twin Creeks sued and claimed, among other damages, the money it

owed to Paramount. JVC moved to dismiss the claim based on the Paramount contract, on the

ground that Twin Creeks, the seller of goods, was not entitled to such damages. What kind of

damages is Twin Creeks seeking? Please rule on the motion to dismiss.

Answer: Twin Creeks’s claim is dismissed. The Paramount losses are consequential damages.

3. Racicky was in the process of buying 320 acres of ranch land. While that sale was being

negotiated, Racicky signed a contract to sell the land to Simon. Simon paid $144,000, the full price

of the land. But Racicky then went bankrupt, before he could complete the purchase of the land, let

alone its sale. Which of these remedies should Simon seek: expectation, restitution, specific

performance, or reformation?

Answer: He should, and did, seek restitution. Expectation damages will be unavailable since

4. Parkinson was injured in an auto accident by a driver who had no insurance. Parkinson filed a claim

with her insurer, Liberty Mutual, for $2,000 under her “uninsured motorist” coverage. Liberty

Mutual told her that if she sought that money, her premiums would go “sky high,” so Parkinson

dropped the claim. Later, after she had spoken with an attorney, Parkinson sued. What additional

claim was her attorney likely to make?

Answer: A claim for punitive damages, based on Liberty Mutual’s bad faith in discouraging

5. You Be the Judge: WRITING PROBLEM John and Susan Verba sold a Vermont

lakeshore lot to Shane and Deborah Rancourt for $115,000. The Rancourts intended to build a

house on the property, but after preparing the land for construction, they learned that a wetland

protection law prevented building near the lake. They sued, seeking rescission of the contract. The

trial court concluded that the parties had reached their agreement under a “mutual, but innocent,

misunderstanding.” The trial judge gave the Verbas a choice: they could rescind the contract and

refund the purchase price, or they could give the Rancourts $55,000, the difference between the

sales price and the actual market value of the land. The Rancourts appealed. Were the Rancourts

entitled to rescission of the contract?

Argument for the Rancourts: When the parties have made a mutual mistake about an important

factual issue, either party is entitled to rescind the contract. The land is of no use to us and we

want our money back.

Argument for the Verbas: Both sides were acting in good faith and both sides made an honest

mistake. We are willing to acknowledge that the land is worth somewhat less than we all thought,

and we are willing to refund $55,000. The buyers shouldn’t complain—they are getting the

property at about half the original price, and the error was as much their fault as ours.

Answer: The Rancourts win, and are entitled to rescission. Both parties clearly intended that the

Discussion Questions

1. ETHICS The National Football League owns the copyright to the broadcasts of its games. It

licenses local television stations to telecast certain games and maintains a “blackout rule,” which

prohibits stations from broadcasting home games that are not sold out 72 hours before the game

starts. Certain home games of the Cleveland Browns team were not sold out, and the NFL blocked

local broadcast. But several bars in the Cleveland area were able to pick up the game’s signal by

using special antennas. The NFL wanted the bars to stop showing the games. What did it do? Was

it unethical of the bars to broadcast the games that they were able to pick up? Apart from the

NFL’s legal rights, do you think it had the moral right to stop the bars from broadcasting the

games?

2. Consequential damages can be many times higher than direct damages. Consider the “Farmer Ted”

scenario raised in multiple choice question 3, which is based on a real case. 3 Is it fair if

consequential damages are 60 times higher than direct damages? The Supreme Court is skeptical

that punitive damages should be more than nine times compensatory damages in a tort case.

Should a similar “soft limit” apply to consequential damages in contract cases?

3. PepsiCo entered into a contract to sell its corporate jet to Klein for $4.6 million. Before the deal

closed, the plane was sent to pick up PepsiCo’s chairman of the board, who was stranded at Dulles

airport. The chairman then decided that the company should not part with the plane. Klein sued

PepsiCo for specific performance, arguing that he could not find a similar jet on the market for that

price. Should a court force PepsiCo to sell its plane?

Answer: Based on Klein v. PepsiCo 845 F.2d 76 (4th Cir. 1988). The court said that specific

4. Walgreens operated a pharmacy in the Sara Creek mall. As part of this long-term lease, Sara Creek

agreed not to lease mall space to another pharmacy. During an economic recession, Sara Creek’s

largest tenant left and the landlord informed Walgreens that it intended to rent that space out to a

“deep discount” store that would contain a pharmacy. It was the only way to remain profitable,

according to Sara Creek. Walgreens sued for an injunction against Sara Creek until its contract

expired in 10 years. Should a court hold Sara Creek to its contract, even if this decision means

bankrupting it?

Answer: Based on Walgreen Co. v. Sara Creek Property Co. 966 F. 2d 273 (7th Cir. 1992). Judge

5. Is it reasonable to require the mitigation of damages? If a person is wronged because the other side

breached a contract, should she have any obligations at all? For example, suppose that a tenant

breaches a lease by leaving early. Should the landlord have an obligation to try to find another

tenant before the end of the lease?

3 Prutch v. Ford 574 P.2d 102 (Colo. 1977)