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					Student Examination Number: _______________________                                            Contracts
                                                                               Autumn 2004 - Spring 2005
                                                                                      Professor Patterson



                                         FINAL EXAMINATION


        1.      Please enter your examination number above.

        2.      This is a three-hour examination. It has six pages, with three essay questions. Forty
percent of your examination grade will be based on Question I, thirty-five percent on Question II, and
twenty-five percent on Question III.

        3.       The examination is open-book: you may use any books, notes, outlines, or other
printed or written materials.

       4.      Use examination books (“blue books”) and write your examination number on the front
cover of each book. Do not identify yourself in any other way.

        5.      Please begin a new examination book for the answer to each question.

       6.       Please write on only one side of each page. And please write legibly; if I cannot read it,
you cannot get credit for it.

        7.       Please take time to organize your answer, and remember to discuss only contract law
and only the specific issues raised by the questions. Keep in mind that you will receive no credit for
discussing law, even contract law, that is not relevant to the questions, and you will receive credit for
discussing relevant law only if you explain how it is relevant to the specific facts set out by the questions.

        8.      If you believe that an additional fact is needed to answer a question, describe the
missing fact and its significance.


                                   Good luck, and have a great summer!




                                                      1
                                              QUESTION I


         In 2002, Pepsi began developing a new flavored-water product, which it called “Aquagusta.”
Aquagusta was to be prepared at Pepsi’s bottling facilities by mixing a bottled flavor concentrate with
water. Pepsi engaged another company, Sapore, Inc., to prepare the concentrate exclusively for sale to
Pepsi. Under their arrangement, Sapore would order and purchase the raw ingredients for the flavor
concentrate from other suppliers. Then, at the Sapore plant in Albany, New York, it would blend the
ingredients to make the concentrate. The parties did not enter into a written agreement setting out this
arrangement, but Sapore signed a five-year agreement not to disclose any of Pepsi’s confidential or
proprietary information regarding Aquagusta or its flavoring.
         Sapore began producing the Aquagusta flavor concentrate in April 2003. With this initial
production of concentrate, Pepsi prepared a test batch of Aquagusta, but was not satisfied with the
flavor. Consequently, Pepsi revised the formula and discarded the test batch of Aquagusta. Pepsi also
paid Sapore for its inventory of the unsatisfactory flavor concentrate. Sapore then worked overtime to
produce new quantities of the reformulated flavor concentrate to stock Pepsi’s warehouses in
anticipation of a May 19, 2003 start of retail sales.
         When retail sales began, Pepsi ordered flavor concentrate as its needs arose. That is, when its
bottling facilities ran low on the concentrate, Pepsi sent purchase orders to Sapore for flavor
concentrate, and Sapore filled those orders by sending Pepsi the flavor concentrate, together with
invoices billing Pepsi for it.
         In the parties’ conversations regarding the Aquagusta project, they discussed the importance of
ensuring that Sapore had one month’s supply of flavor concentrate on hand at any given time. They also
discussed the importance of Sapore manufacturing the next month’s anticipated supply in the current
month. Thus, the parties contemplated that Sapore would purchase the raw materials for the
manufacture of the flavor concentrate a month or more before the concentrate would be used. Indeed,
Sapore referred to its interpretation of this arrangement in the invoices that it submitted to Pepsi when it
shipped the flavor concentrate, with the following language: “As agreed, Seller [i.e., Sapore] is
preparing for and manufacturing additional quantities of flavor concentrate in expectation of future
orders. This requires the purchase of raw materials in advance of orders. If the expected orders are not
received, and the raw materials are not used, Buyer [i.e., Pepsi] will be billed for the raw materials.”
Pepsi never acknowledged or responded to this language in any way.
         The Pepsi-Sapore arrangement worked well during the first few months of sales. But the parties
were concerned that, other than the confidentiality agreement and individual Aquagusta concentrate
transactions, they had no written contractual relationship. Beginning in June 2003, they began
negotiating a Supplier Agreement (SA). Their plan was that the SA would, among other things, commit
Sapore to provide the flavor concentrate for a specified period of time and would make clear when
Pepsi was liable for unused raw materials purchased by Sapore. On July 14, 2003, Pepsi sent to
Sapore a final draft, which provided that Sapore would supply Pepsi with flavor concentrate through
December 2004, but that the SA could be terminated by either party with one month’s notice. The
draft SA also provided that Pepsi would purchase from Sapore any Aquagusta raw materials that could
not be used by Sapore if (1) the SA was terminated, and (2) the raw materials were reasonably
purchased based on historical usage.


                                                     2
         But Sapore did not sign the SA. It delayed, telling Pepsi that it was bogged down due to its
impending sale of a West Coast facility. Actually, though, Sapore was trying to sell its Albany-based
juice and concentrate business. For strategic reasons, Sapore’s president did not want to enter into a
contract with Pepsi that might interfere with the sale of the business.
         In the meantime, July demand for Aquagusta exceeded Pepsi’s expectations. Pepsi began
scrambling to replace dwindling quantities of concentrate to prevent its bottling facilities from running
out. Pepsi faxed purchase orders with tight turnarounds — sometimes as short as twenty-four hours.
This quickly depleted Sapore’s inventories. Given Pepsi’s demand, and in view of Sapore’s inventory
situation at the end of July, Sapore needed more raw materials to fill expected Pepsi purchase orders.
Sapore thus issued two flavor ingredient purchase orders to its supplier on July 29, 2003. These orders
were for certain quantities to be delivered on August 12 and during the first week of September,
intended for production runs on August 20 and 21 and on September 17 and 18. Pepsi was not aware
of these purchases, as it did not involve itself directly in Sapore’s raw materials purchases.
         By late August Aquagusta sales had slowed to below forecast. Sapore did not produce any
more Aquagusta flavor concentrate after the August 20 and 21 production runs, because Pepsi’s
bottling facilities had sufficient concentrate to meet demand. But Sapore still had a large inventory of
unused flavor ingredients from the July 29 orders. Due to spoilage of fruit juices, the shelf life of these
ingredients was three months, and therefore, since there were no more orders from Pepsi after August,
they had to be destroyed in November 2003.
         Sapore sold the Albany plant in January 2004, thus terminating the Sapore-Pepsi relationship.
Soon after the sale, Sapore began demanding that Pepsi pay it for the unused and destroyed flavor
ingredients. Pepsi refused.

         Discuss whether Sapore could show that Pepsi had a contractual obligation to pay for the
unused flavor ingredients. Please note the specificity of the question. You should not discuss any other
issues, unless they bear on whether Pepsi would be obligated to pay for the ingredients.




                                                     3
                                            QUESTION II


        Hal Jordan operates a small motel in Dana Point, California, called the Green Lantern Inn. A
dispute has arisen over the relationship between Jordan’s motel and Guardian Hotels, a franchising
organization for hotels and motels.
        The relationship began when Jordan was visited by Alan Scott, a representative of Guardian.
Jordan describes the visit in this way:

        What I recall is Alan coming into my office and representing himself to me as a salesman for the
        Guardian franchise. He told me he could bring me at least 15 percent reservations by getting me
        into their central reservation system. He told me about the Internet program they were
        developing, and he said it would go nationwide. All you would do is click, and my property
        would be on that if I chose to franchise. He spoke of the benefits of having a Guardian sign,
        which has that interesting shape, with a ring and bars on the top and bottom, on our marquee
        out by the road. He specifically said that he could generate at least 15 percent of my
        reservations and they even looked at my numbers, which showed that we usually get more than
        100 reservations a month.

         Following this conversation, the Green Lantern Inn and Guardian Hotels entered into a
contract. The contract provided that the Green Lantern Inn would operate as a Guardian motel for
fifteen years in Dana Point, California. In exchange for converting the Green Lantern Inn to a Guardian
hotel, Green Lantern Inn, among other things, would receive the benefit of participating in Guardian’s
central reservations system. Section 3.1 of the contract specifically provided that the Green Lantern Inn
would “receive reservations through participation in Guardian’s Central Reservation System” for the full
term of the contract. Under Section 10.2 of the contract, Guardian had the power to suspend Green
Lantern Inn’s access to the reservations system upon failure to pay or perform under the contract.
         Green Lantern Inn also had various obligations to Guardian. Sections 5 and 9 required Green
Lantern Inn to make periodic payments for royalties, reservation system user fees, and other fees.
Section 6.2 obligated Green Lantern Inn to prepare and submit to Guardian monthly reports concerning
gross room revenue, on which the fees due from Green Lantern Inn to Guardian were based.
         Section 20 was entitled “Special Acknowledgments and Disclaimers.” In Section 20.1, Green
Lantern Inn agreed that it had “received Guardian’s Uniform Franchise Offering Circular (“UFOC”) for
prospective licensees at least 10 business days before paying any fee to Guardian or signing any
contract with Guardian.” The UFOC stated in part that “GUARDIAN DOES NOT FURNISH OR
AUTHORIZE OUR SALES PERSONS TO FURNISH ANY ORAL OR WRITTEN
INFORMATION CONCERNING ACTUAL, PROJECTED, OR POTENTIAL COSTS,
EXPENSES, OR PROFITS OF A PROPOSED FACILITY.”
         Section 20.2 of the contract was another “special acknowledgment”: “This Agreement, together
with the exhibits and schedules attached, is the entire agreement superseding all previous oral and
written representations, agreements, and understandings of the parties.”




                                                    4
         By its terms, the contract became effective on April 1, 2004. But in the first few months after
that date, the Green Lantern Inn received only about one reservation a month through the Guardian
system. Indeed, Jordan called Guardian’s 800 number for its reservation system several times in April
and May, and went to the Guardian site on the Web, and he claimed that “we were not in the
reservation system, nor were we on the Internet as promised.” Because Jordan believed that the Green
Lantern Inn was getting nothing from the deal with Guardian, the Green Lantern Inn submitted no
payments to Guardian.
         On August 21, 2004, Guardian wrote a letter to the Green Lantern Inn, stating that the Inn had
not filed its monthly revenue reports from April through July 2004, and that the Inn owed $35,912.91 in
unpaid fees. In addition, the letter said that Guardian would take action under Section 10.2 of the
contract: “Because the Facility [i.e., the Green Lantern Inn] has failed to remit royalties and other fees
in accordance with the terms of the Agreement since April 2004, the Facility has been removed from
the Central Reservation System as of August 16, 2004.” In a subsequent letter, dated December 18,
2004, Guardian stated that it had terminated the contract.
         Guardian has sued the Green Lantern Inn for breach of contract, seeking as damages the fees
that Guardian says were due and unpaid under the contract prior to its termination.

       Discuss any arguments that the Green Lantern Inn could raise in defending against this suit by
Guardian.




                                                    5
                                            QUESTION III


         I have recently been involved in a case concerning Monsanto Company’s licensing of certain of
its patent rights to farmers. The farmers entered into these agreements in various years between 1997
and 2004. Assume that a farmer enters into an agreement only in the first year that it uses Monsanto’s
patented technology, so that the same agreement governs the parties’ relationship in that and
subsequent years.
         In each year, the license agreements included this language: “Once you enroll, information
regarding any new terms will be mailed to you each year.” Starting in 2001, the agreements also
included this language: “Continuing to use Monsanto’s technologies after receipt of any new terms
constitutes your agreement to be bound by the terms.” Prior to 2001, neither that latter language nor
any language of similar effect was included in the agreements.

        Discuss whether any new terms sent by Monsanto to farmers would bind the farmers, and
discuss whether it matters whether they entered into the agreement before or after January 2001.
        (In general, a patent licensing agreement is governed by normal principles of contract law. In
any event, do not consider any special issues that might be raised because the license agreement
involves patent rights. Patent license agreements are not governed by the U.C.C.)




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