CONTRACTS FINAL EXAM - PROF. FERRIELL - SPRING 1997

Question I - 40 Points - 70 Minutes

Confine your answers to 4 pages in a Bluebook

Acme Industries Corp. (AIC) was in the business of manufacturing cabinets to be used for big ticket consumer appliances such as stoves, dishwashers, refrigerators, & freezers. Much of the manufacturing equipment it used to build these cabinets was outdated, in need of frequent repair. It needed to be replaced in order for Acme to profitable. After making preliminary inquiries of several alternative suppliers, Acme's purchasing manager (Betty Bivens) decided that AIC should purchase the equipment it needed from Equipment Fabricators Co. (EFC). She called its sales department to describe the items Acme needed and to discuss both price and possible delivery dates.

During Betty's discussion with Sam Salresrep, of EFC, Sam advised Betty that his firm could supply the necessary equipment, "by the end of November", for a price of $1,000,000, installed, "if AIC placed its order before the end of May." Betty responded that her firm would be willing to "pay $1,000,000 for the items if delivery could be made by September," but that she was "unsure if November would be sufficient." Sam responded that "September would be difficult at any price." Betty concluded the conversation by thanking Sam for his efforts and by advising him that she hoped he was right about being able to complete installation by November because her job depended on her ability to start production with the new equipment by the beginning of December. Betty further explained that if AIC purchased the equipment from EFC it would expect EFC to supply a $2,000,000 bond to guarantee the delivery and operation of the equipment for 2 years from the date of its delivery. Sam said "you can count on me!"

Based on this discussion and because of her confidence in EFC, Betty was able to convince her superiors that it would be best to purchase the necessary equipment from EFC despite the November delivery date. AIC quickly adjusted its manufacturing schedule to allow for disruption of its factory during the month of November and entered into a contract with City Salvage for the removal and purchase of AIC's old equipment during the first week of November. At the same time, on May 25, Betty prepared and sent a purchase order to Sam at EFC. That purchase order is attached as "Exhibit A".

The purchase order was received by EFC on May 28. Sam immediately prepared and sent a confirmation of the purchase order, attached below as "Exhibit B".

Following the exchange of forms, EFC began work on the equipment which was specially designed for AIC. In late September, EFC had completed manufacture of the Steel Bending machines . It arranged for their shipment to AIC together with a letter advising AIC that an EFC crew would arrive on October 10 to begin installation of these initial items. The letter further advised AIC that it could expect delivery of Metal Finishing Machines and the Special Fabricating Machines during the first week of November, with installation scheduled for the following two weeks. The Metal Punches, the letter indicated, would be delivered on November 30, with installation to be completed during the first week of December.

Upon receipt of this letter, on October 2, Betty went ballistic. She immediately called Sam and asked "What are you trying to do to me!? Don't you know I'll lose my job if this isn't done right?" Oblivious to Betty's concerns for her own welfare, Sam explained that the contract called for delivery by November 30, 1997 and that, because of the quantity of equipment purchased, it would be necessary to begin installation in mid-October if all of the equipment was expected to be fully installed and operable anytime before the end of the year. Betty angrily replied that this had never been explained to her and that her firm's purchase order had called for installation during November. Sam explained again that installation had to begin in October. Betty told Sam "we'll just see about that" and hung up.

The next day, October 3, Sam sent a letter to AIC containing the following:

"We will perform pursuant to the terms of our agreement, entered into on May, 28, 1997, and ensure delivery by the end of November, provided we can begin installation on October 10."

When, on October 7, Betty received this letter, she called Sam and said: "I guess we don't have much of a choice, go ahead and start deliveries on October 10. But you haven't heard the end of this, I guarantee you."

When the Steel Bending Machines arrived on October 10, workers at the AIC took delivery. Accompanying the delivery was an invoice, for $150,000, calling for payment for this delivery within 10 days. Betty called Sam and advised it that AIC would not pay the invoice. As justification she claimed that 1) the good had been delivered prematurely, and 2) that in any event, payment was not due until all of the goods had been delivered and installed.

As a result of AIC's refusal to pay the invoice, EFC refused to complete delivery of the remaining items or to install the Steel Bending Machines. Betty, of course, was fired! Subsequent inspection of the Steel Bending Machines revealed that they were defective and that it would cost $100,000 to make the necessary corrections.

In the wake of these developments AIC brought suit against EFC for breach of contract, seeking damages of $2,000,000 as specified in the contract. EFC counterclaimed, and asserted its right to the full purchase price because the equipment was designed specially for AIC and was not suitable for sale to others. In addition, Betty brought suit against EFC, asserting rights under the EFC-AIC contract on her own behalf.

Assume that you are the judge assigned to these cases -- draft an opinion deciding how the cases will be resolved explaining your reasoning as completely as possible within the time and space allotted.

Exhibit A

Exhibit B