Management Chapter 7 Seven Contracts Managers Dilemma Putting Into

Chapter Seven

Contracts

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

Trials and Tribulations

Issues Presented: Could the HEM manager legally refuse to provide the one-year supply of

Ampligen to participants in the clinical trial? Would the refusal be ethical?

In Dahl v. HEM Pharmaceuticals Corp., 7 F.3d 1399 (9th Cir. 1993), HEM decided to refuse

to provide the one-year supply to participants in the trial. HEM argued that its contract with

the participants was illusory because there was no consideration from the participants, who

were free to withdraw from the trial at any time. While the U.S. Court of Appeals for the Ninth

Even if HEM had attempted to unilaterally terminate the trial two days before the first

anniversary of their commencement, HEM would still have had a binding obligation to the

patients. Once the offeree tenders part of the requested performance, the offeror is bound, even

though the offer is withdrawn prior to complete performance. If HEM had unilaterally

terminated the trial two days before the first anniversary of its commencement, HEM would be

in breach of the agreement.

QUESTIONS AND CASE PROBLEMS

Question 1

Issue Presented: Is Olson entitled to receive more than his 2005 earned compensation and

capital account?

The Vice Chancellor of the Court of Chancery first found that the statute of frauds

applies to LLC operating agreements. The Delaware statute of frauds states that parties must

reduce to writing, and the defending party must have signed, any agreement that cannot be

completed within one year from its making. The Vice Chancellor held that the statute of frauds

prevents enforcement of oral LLC agreements that require more than one year to complete.

On appeal, Olson claimed that the Vice Chancellor’s holding that the statute of frauds

applies to LLC operating agreements was irreconcilable with the Delaware LLC Act. In Olson’s

view, the policy and provisions of the LLC Act, which allow parties to enforce unwritten,

unsigned LLC agreements, evidence the General Assembly’s intent to preclude the statute of

frauds from LLC agreements.

The court determined that it could construe the LLC Act and the statute of frauds

together, and thus must give effect to both statutes. The court found that the LLC Act’s explicit

recognition of oral and implied LLC agreements does not preclude application of the statute of

frauds. Rather, such legislative recognition indicates that an LLC agreement operates like any

other oral, written, or implied contract, i.e., it requires compliance with the statute of frauds.

Further, the LLC Act could not – and did not – render LLC agreements impervious to all other

rules and laws relating to contract law.

Next, the court noted that an implied repeal would be found only if the General

Assembly clearly intended LLC agreements to be insulated from the operation of the statute of

frauds. The court observed several amendments to the LLC Act giving contracting parties’

Question 2

Issue Presented: Do e-mail transmissions that bear the typed name of the sender at the foot

of the message constitute “signed writings” sufficient to modify an employment agreement?

The statute of frauds requires that if a contract, by its terms, cannot be performed within

one year, then it must be evidenced by some form of written communication signed by the

party to be charged. In Stevens v. Publicis, S.A., 854 N.Y.S.2d 690 (2008), Stevens, the plaintiff,

Publicis next argued that the modified agreement was enforceable under the statute of

frauds because the signature requirement had been met. Publicis argued that the e-mails from

Stevens constituted “signed writings” since Steven’s name at the end of the e–mails signified his

Question 3

Issue Presented: Is a clause on the front of a seller’s invoice that limits its liability to $25

enforceable?

Factors claimed that it never accepted the limitation of liability clause, but Unisearch

argued that both trade practice and the course of dealing between the parties established that

the clause was part of the contract. Unisearch presented numerous examples of liability

Having concluded that the limitation of liability was a part of the contract, the court then

had to determine whether it was unenforceable because it was unconscionable. The court noted

that such disclaimers in consumer cases must be both (1) explicitly negotiated and (2) set forth

with particularity. However, in commercial cases like this one, the court applied a “totality of

circumstances” test and concluded that the liability limitation was not unconscionable for the

following reasons:

(1) The invoice was a single sheet of paper with the disclaimer printed on the front right

hand corner in a shaded box that the court found was sufficiently conspicuous;

Question 4

Issue Presented: Should an insured driver be able to void a settlement with his insurance

company because he was unaware of the policy limits at the time that he agreed to the

settlement?

Whether relief should be granted to a party who is adversely affected by a mutual

mistake in a written contract depends on the nature and the effect of such a mistake. The

Question 5

Issues Presented: Can an out-of-state contractor who was not licensed in California but

nonetheless was fraudulently induced to provide goods and services to a California company

sue to recover amounts due under contract or for fraud?

Oasis’s actions here were entirely unethical. Knowing that Section 7031 would otherwise

prevent Hydrotech from collecting under the contract, Oasis promised Hydrotech that a

California-licensed contractor would work with Hydrotech to enable Hydrotech to work on the

project. When Hydrotech sought to recover the contract price, Oasis hid behind Section 7031.

Question 6

Issues Presented: Can the obligations of a contract be discharged for impossibility or

impracticability when the subject matter of the contract is for the purchase of pollution

credits and the party intending to sell the credits had its credits invalidated by a government

agency after the contract was formed?

In Tractebel Energy Marketers, Inc. v. E.I. DuPont DeNemours & Co., 118 S.W.3d 60 (Tex.

App. 2003), Tractebel appealed from an adverse judgment in its breach of contract action

against DuPont. Although a jury had found DuPont breached the contract and caused

Tractebel damages of $1.2 million, the jury found DuPont’s failure to perform was due to

The court then considered whether DuPont’s performance was excused on the basis of

impracticability. Unlike impossibility, impracticability applies where performance is still

possible, but would be very burdensome for the party whose performance is due.

Impracticability requires that a party encounter extreme and unreasonable difficulty or expense

In this case, the court held that for the impracticability defense to apply, both DuPont

and Tractebel had to be found to have shared a mutual intent to buy and sell only DuPont’s

EPA credits and no others. However, the court found there was no evidence to support this

assumption of exclusivity because the parties had dealt through a broker that did not disclose

Question 7

Questions Presented: (a) If you had been the manager of GECC in charge of the USL account,

what would you have done once the typo was discovered? (b) Is Prudential legally entitled to

a $92,885,000 first mortgage? (c) What would be the ethical thing to do?

(a) GECC learned of the typo when USL defaulted on the notes secured by the amended

mortgage. Prior to its discovery, the typo had no effect. No one was mistaken, at any point,

about the extent of USL’s indebtedness to Prudential. GECC had been intimately involved in

If the missing zeros had been held to reduce the amount of Prudential’s first mortgage

from $92,885,000 to $92,885, the net effect (given the proceeds of the collateral and the parties’

respective holdings of the second-mortgage notes) would reportedly have been to transfer

Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989).

(b) The court concluded that Prudential was legally entitled to a $92,885,000 first

mortgage because the relevant case law requires only that the mortgagee make a good faith

security interest would unjustly enrich USL’s other creditors at Prudential’s expense.

(c) GECC would likely say that it was just asserting rights that it was advised were

given to it by the law. On the other hand, Andrew Kull, In Zero-Based Morality: The Case of the

$31 Million Typo, 1 BUS. L. TODAY 11 (July-Aug 1992), poses the question whether GECC’s

position is morally distinguishable from theft. To give legal effect to the typo would only enrich

Question 8

Issue Presented: Is the Wachovia-Citigroup exclusivity agreement enforceable?

The court in Wachovia Corp. v. Citigroup, Inc., 634 F. Supp. 2d 445 (S.D.N.Y. 2009), held

that the Wachovia-Citigroup exclusivity agreement was unenforceable. The court based its

decision in large part on the definition of the term “transaction” within the meaning of section

The court ultimately sided with Wachovia, determining that “transaction” referred

generally to the competitive sale of Wachovia, not to any one particular purchaser. As support

for its interpretation, the court noted that the FDIC may exercise its authority pursuant to the

“systemic risk” provision of section 13. The “systemic risk” provision allows the FDIC to act