Here is another typical service contract essay with a Professional Responsibilities crossover and an answer that covers some common contracts and remedies issues. I've cleaned up and fixed some of the errors from the model answer.
Lab V. Disposal Specialists Co. (Disco)
California Bar Exam - Copyright - July 1995
In 1991, Lab entered into a written, signed contract with Disposal Specialists Co. (Disco) providing for disposal of Lab's hazardous waste products for 5 years at a cost to Lab of $40,000 per year. Paragraph 8(d) provides: "Disco agrees to remove the specified waste products from the Lab site within 48 hours of being notified that Lab's waste containment vessel is 80% filled."
At 4:30 p.m. on Friday, May 26, 1995 Lab notified Disco that the waste containment vessel was 90% full and that it was important that it be emptied. The Disco manager responded that the waste could not be picked up until the following Tuesday because the Memorial Day holiday was to be observed on Monday, May 29. Disco emptied the container on early Tuesday morning, but Lab's work was interrupted because, until then, the container was completely full. As a result, Lab incurred losses of $9,000.
On June 10, 1995, Lab informed Disco that it was terminating the contract because of the delayed pickup. In reply, Disco's manager asserted that the 48 hour deadline did not apply over holiday weekends and that he had mentioned this during the 1991 contract negotiations. In fact, Disco has gone beyond the 48 hour period on at least four holiday weekends during the last 3 years without complaint from Lab, and, twice, the Lab waste manager has approved a holiday weekend pickup that was 96 hours after notice. Disco's manager threatened to sue if Lab tried to terminate the contract.
The Lab waste manager tells Lab's attorney that Disco has committed criminal violations of environmental laws in its waste disposal operations and that he expects the attorney to use this information to convince Disco to agree to cancel the contract.
1. Is Lab entitled to terminate the contract with Disco? Discuss.
2. What ethical issues arise from Lab's request that its attorney use the information regarding Disco's violations of environmental regulations to encourage Disco not to press its contract claim? Discuss.
1. Can Lab Terminate the Contract With Disco?
Applicable Law
Common law governs this contract because it is a service contract for waste disposal.
Contract Validity
A valid contract requires mutual assent (offer and acceptance), bargained for consideration (or a valid substitute), and no defenses. Furthermore, the Statute of Frauds requires that a services contract that cannot be performed within one year be in writing. Here, the facts indicate that the contract was a valid written agreement. Thus, in order for Lab to be able to legally terminate the contract, they must show that Disco materially breached the contract.
Condition Precedent to Performance
The first issue is whether Disco's duty to perform had ripened. A condition precedent is an event that must occur before the other party's duty to perform arises. Here, Paragraph 8(d) states that Disco's duty to remove waste did not arise until it was notified of the vessel becoming 80% full. Thus, when Lab notified Disco on Friday, May 26, 1995 at 4:30 PM that the vessel was 90% full, Lab completed the condition precedent that must occur to raise Disco's present duty to perform. Thus, this duty was breached on Sunday at 4:30 PM when Disco had not completed its duty to perform within 48 hours of being notified. Disco will argue that the condition was not met, because Lab notified Disco at 90% rather than 80% and because the term "within 48 hours" is intended to mean "within 48 business hours". The court will likely determine that Paragraph 8(d) is vague, and will look to Parol evidence to seek guidance.
Parol Evidence Rule
The Parol Evidence Rule states that extrinsic communication or agreements regarding the contract that were made prior or contemporaneous to the contract may not be used to contradict the terms of a fully integrated contract except under certain exceptions. Although the facts do not indicate whether this was a fully integrated contract, it most likely is. The court will either employ the "four corners" approach and determine that the contract includes all of the terms, was written, and contains at least 8 paragraphs. Thus, it is a substantial agreement and was likely intended by the parties to be a complete integration of their agreement. The court could also employ the general approach, and examine the contract, as well as the history of the parties' performance, industry norms, etc. Utilizing this approach, the court would also find that this was fully integrated, as the parties had been performing satisfactorily for 4 years under a 5 year agreement. Thus, parol evidence will not be admissible unless an exception applies.
Ambiguous Term Exception
Disco will claim that the "within 48 hours" term was ambiguous and the parties did not intend for it to mean 48 actual hours, but rather 2 working days. This could go either way, but the court will likely consider the specificity in using a specified amount of hours rather than using the term "business days" and rule that this was not in fact ambiguous.
Past Performance Exception
Courts often consider past performance under a contract as the best evidence of what the parties intended to agree upon. Here Disco will claim that because Lab had not complained on at least 4 holiday weekends during the past 3 years when Disco had performed beyond the 48 hour period, Lab showed by its actions that it did not really intend for the term to actually mean 48 hours. Furthermore, the fact that Lab's manager had approved a holiday weekend pickup that was 96 hours after notice, longer than the delay in this case, also supports Disco's position. The court will likely consider this and rule that the parties did not intend for 48 hours to include weekend hours.
Waiver of the Term
Even if the court determines that the parties did intend for 48 hours to include holiday hours, the past performance discussed in the prior paragraph demonstrates that Lab waived this condition. By not objecting to the late performance on holidays for at least four weekends and accepting at least two 96 hour performances, Lab's actions demonstrated a waiver of precise performance of the 48 hours. If Lab would have wanted to begin enforcing this condition, they would have to notify Disco, which would then reactivate the condition for future performances. They did not do this. In fact, when Disco told Lab on Friday at 4:30 PM that they would pick up the waste on Tuesday, Lab did not object. The court would find that Lab waived the term.
Materiality of the Breach
Material Breach
Even if the court finds that this term was breached, Lab's performance is not excused unless the breach is material. A material breach is a breach that reaches to the heart of the contract's subject matter and negatively affects the outcome of the agreement. The essential requirement for a material breach is that the non-breaching party did not receive the “substantial benefit” of the bargain. Here, the parties had a 5 year contract that they had been performing without complaint for approximately 4 years. A single delay does not amount to a material breach because Lab still received the substantial benefit of the bargain.
Minor/Partial Breach
This is, however, a partial breach. The remedy for a partial breach is damages for the losses incurred. Thus, Lab will be entitled for damages for the partial breach, but will not be entitled to terminate the contract.
2. Ethical Issues from Lab's Request of its Attorney
The ABA Model Rules of Professional Conduct and the California Rules of Professional Responsibility govern the actions of an attorney in the practice of law, the Model Rules or Code in states where the applicable provisions have been adopted and given the force of law in those states. Under the Model Rules, an attorney may use a threat of criminal prosecution in settlement negotiations if the attorney believes that the prosecution would be well founded, but under the California Rules, such a threat cannot be used.
Use of the Criminal Prosecution Threat
If Lab's attorney was practicing in California, use of the criminal violations as part of the settlement negotiations would violate the rule against using such information and would constitute a breach of professional ethics, and the attorney would be subject to discipline. The result would be the same if the attorney did not have a good faith belief in the validity of the claims in a state following the ABA approach. In either case, the attorney should do more than just rely on the lab waste manager's word before using such a bargaining chip in negotiations.
Proper Course of Conduct if Use Insisted Upon
If the Lab waste manager insists that the attorney use the criminal prosecution threat in California, or in another state without a good faith belief in its validity, the attorney should remember that he represents the organization, not the manager. The attorney should request that Lab's manager get a second opinion. If this fails, the attorney should personally appeal to higher level officers in the company. If the most senior officers insist that the attorney use the threat, the attorney should withdraw from representation of this client.
Lab V. Disposal Specialists Co. (Disco)
California Bar Exam - Copyright - July 1995
In 1991, Lab entered into a written, signed contract with Disposal Specialists Co. (Disco) providing for disposal of Lab's hazardous waste products for 5 years at a cost to Lab of $40,000 per year. Paragraph 8(d) provides: "Disco agrees to remove the specified waste products from the Lab site within 48 hours of being notified that Lab's waste containment vessel is 80% filled."
At 4:30 p.m. on Friday, May 26, 1995 Lab notified Disco that the waste containment vessel was 90% full and that it was important that it be emptied. The Disco manager responded that the waste could not be picked up until the following Tuesday because the Memorial Day holiday was to be observed on Monday, May 29. Disco emptied the container on early Tuesday morning, but Lab's work was interrupted because, until then, the container was completely full. As a result, Lab incurred losses of $9,000.
On June 10, 1995, Lab informed Disco that it was terminating the contract because of the delayed pickup. In reply, Disco's manager asserted that the 48 hour deadline did not apply over holiday weekends and that he had mentioned this during the 1991 contract negotiations. In fact, Disco has gone beyond the 48 hour period on at least four holiday weekends during the last 3 years without complaint from Lab, and, twice, the Lab waste manager has approved a holiday weekend pickup that was 96 hours after notice. Disco's manager threatened to sue if Lab tried to terminate the contract.
The Lab waste manager tells Lab's attorney that Disco has committed criminal violations of environmental laws in its waste disposal operations and that he expects the attorney to use this information to convince Disco to agree to cancel the contract.
1. Is Lab entitled to terminate the contract with Disco? Discuss.
2. What ethical issues arise from Lab's request that its attorney use the information regarding Disco's violations of environmental regulations to encourage Disco not to press its contract claim? Discuss.
1. Can Lab Terminate the Contract With Disco?
Applicable Law
Common law governs this contract because it is a service contract for waste disposal.
Contract Validity
A valid contract requires mutual assent (offer and acceptance), bargained for consideration (or a valid substitute), and no defenses. Furthermore, the Statute of Frauds requires that a services contract that cannot be performed within one year be in writing. Here, the facts indicate that the contract was a valid written agreement. Thus, in order for Lab to be able to legally terminate the contract, they must show that Disco materially breached the contract.
Condition Precedent to Performance
The first issue is whether Disco's duty to perform had ripened. A condition precedent is an event that must occur before the other party's duty to perform arises. Here, Paragraph 8(d) states that Disco's duty to remove waste did not arise until it was notified of the vessel becoming 80% full. Thus, when Lab notified Disco on Friday, May 26, 1995 at 4:30 PM that the vessel was 90% full, Lab completed the condition precedent that must occur to raise Disco's present duty to perform. Thus, this duty was breached on Sunday at 4:30 PM when Disco had not completed its duty to perform within 48 hours of being notified. Disco will argue that the condition was not met, because Lab notified Disco at 90% rather than 80% and because the term "within 48 hours" is intended to mean "within 48 business hours". The court will likely determine that Paragraph 8(d) is vague, and will look to Parol evidence to seek guidance.
Parol Evidence Rule
The Parol Evidence Rule states that extrinsic communication or agreements regarding the contract that were made prior or contemporaneous to the contract may not be used to contradict the terms of a fully integrated contract except under certain exceptions. Although the facts do not indicate whether this was a fully integrated contract, it most likely is. The court will either employ the "four corners" approach and determine that the contract includes all of the terms, was written, and contains at least 8 paragraphs. Thus, it is a substantial agreement and was likely intended by the parties to be a complete integration of their agreement. The court could also employ the general approach, and examine the contract, as well as the history of the parties' performance, industry norms, etc. Utilizing this approach, the court would also find that this was fully integrated, as the parties had been performing satisfactorily for 4 years under a 5 year agreement. Thus, parol evidence will not be admissible unless an exception applies.
Ambiguous Term Exception
Disco will claim that the "within 48 hours" term was ambiguous and the parties did not intend for it to mean 48 actual hours, but rather 2 working days. This could go either way, but the court will likely consider the specificity in using a specified amount of hours rather than using the term "business days" and rule that this was not in fact ambiguous.
Past Performance Exception
Courts often consider past performance under a contract as the best evidence of what the parties intended to agree upon. Here Disco will claim that because Lab had not complained on at least 4 holiday weekends during the past 3 years when Disco had performed beyond the 48 hour period, Lab showed by its actions that it did not really intend for the term to actually mean 48 hours. Furthermore, the fact that Lab's manager had approved a holiday weekend pickup that was 96 hours after notice, longer than the delay in this case, also supports Disco's position. The court will likely consider this and rule that the parties did not intend for 48 hours to include weekend hours.
Waiver of the Term
Even if the court determines that the parties did intend for 48 hours to include holiday hours, the past performance discussed in the prior paragraph demonstrates that Lab waived this condition. By not objecting to the late performance on holidays for at least four weekends and accepting at least two 96 hour performances, Lab's actions demonstrated a waiver of precise performance of the 48 hours. If Lab would have wanted to begin enforcing this condition, they would have to notify Disco, which would then reactivate the condition for future performances. They did not do this. In fact, when Disco told Lab on Friday at 4:30 PM that they would pick up the waste on Tuesday, Lab did not object. The court would find that Lab waived the term.
Materiality of the Breach
Material Breach
Even if the court finds that this term was breached, Lab's performance is not excused unless the breach is material. A material breach is a breach that reaches to the heart of the contract's subject matter and negatively affects the outcome of the agreement. The essential requirement for a material breach is that the non-breaching party did not receive the “substantial benefit” of the bargain. Here, the parties had a 5 year contract that they had been performing without complaint for approximately 4 years. A single delay does not amount to a material breach because Lab still received the substantial benefit of the bargain.
Minor/Partial Breach
This is, however, a partial breach. The remedy for a partial breach is damages for the losses incurred. Thus, Lab will be entitled for damages for the partial breach, but will not be entitled to terminate the contract.
2. Ethical Issues from Lab's Request of its Attorney
The ABA Model Rules of Professional Conduct and the California Rules of Professional Responsibility govern the actions of an attorney in the practice of law, the Model Rules or Code in states where the applicable provisions have been adopted and given the force of law in those states. Under the Model Rules, an attorney may use a threat of criminal prosecution in settlement negotiations if the attorney believes that the prosecution would be well founded, but under the California Rules, such a threat cannot be used.
Use of the Criminal Prosecution Threat
If Lab's attorney was practicing in California, use of the criminal violations as part of the settlement negotiations would violate the rule against using such information and would constitute a breach of professional ethics, and the attorney would be subject to discipline. The result would be the same if the attorney did not have a good faith belief in the validity of the claims in a state following the ABA approach. In either case, the attorney should do more than just rely on the lab waste manager's word before using such a bargaining chip in negotiations.
Proper Course of Conduct if Use Insisted Upon
If the Lab waste manager insists that the attorney use the criminal prosecution threat in California, or in another state without a good faith belief in its validity, the attorney should remember that he represents the organization, not the manager. The attorney should request that Lab's manager get a second opinion. If this fails, the attorney should personally appeal to higher level officers in the company. If the most senior officers insist that the attorney use the threat, the attorney should withdraw from representation of this client.