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Unwritten Contracts in Purchasing and Supplies

Unwritten Contracts in Purchasing and Supplies

Please use the paragraphs below to answer the next 3 questions.

Saul owns Supplier Inc., a small seller of sensors. Peter, President of Purchaser Inc., says to Saul “My current supplier charges $10,000 for 300 sensors.” Saul replies, “I will charge 80% of what your supplier charges.” Saul and Peter shake hands and Peter says, “I will be in touch.” The next day, Supplier sends 300 sensors to Purchaser together with an $8,000 invoice on which Supplier’s bookkeeper hand writes, “First order earns a 10% discount; please deliver $7,200 within 15 days of receipt to receive this deal – Thanks, Saul.”

Purchaser receives and distributes the sensors to its operating units. Fifteen days after receipt, Purchaser’s accounting clerk mails a $7,200 check to Supplier. On the check subject line, he writes “Thank you for the sensors.” Three weeks later, Saul e-mails Peter: “I received your $7,200 check. We sent you 300 sensors at the agreed price of $8,000. I need the balance within five days.” Peter calls Saul and says, “We never had a deal. We will return the 100 unused sensors.” Saul demands $800.

 

Question 1

As Purchaser, what are the two most convincing legal point(s) and related fact(s) that support your view that a contract has not been formed?

Be sure to select the TWO most convincing answers to receive full credit.

 

1. Purchaser and Supplier have never worked together in the past and the contract is not in writing.
2. Supplier sent the products before Purchaser sent a written acceptance, so the sensors are considered a gift and Purchaser is not obligated to pay Saul.

 

3. No contract was formed because Purchaser did not accept Supplier’s offer; Peter’s response “I will be in touch” does not constitute an acceptance. And although Purchaser used the sensors, Purchaser offered to return the unused sensors.
4. There is an offer and acceptance, but there is no consideration; Purchaser did not receive a benefit of the sensors because the sensors were distributed to “its operating units.”

 

5. The price of the goods is ambiguous, so there is no clear offer for Purchaser to accept: Supplier’s bookkeeper sent Purchaser an offer of a reduced price that is different from the price Saul stated.
6. Peter did not state that he accepted the offer.

 

7. Peter tried to accept the offer of the supplier’s bookkeeper, but that offer was not authorized or it lapsed, therefore there was no offer accepted.
8. All of the responses above are equally convincing.

 

Question 2

As Supplier, what are the most convincing legal points and related facts that support your view that there is a binding contract? Rank these answers, where 1 is the best answer and 4 is the worst answer.

 

  1. Supplier’s offer to reduce the price is the best contract deal that Purchaser would receive in this market and therefore is the best choice for Purchaser. Evidence of this could be found in trade journals and advertisements or obtained through subpoenas issued to 3rd parties under Federal Rules of Civil Procedure 30 and 45.

[ Choose ]             3             1             4             2

  1. Supplier made an oral offer to sell the sensors at a price below what Purchaser usually paid and Purchaser accepted the offer when Purchaser sent the check.

[ Choose ]             3             1             4             2

  1. Supplier’s and Purchaser’s agreement is a binding and written contract because Saul’s email message — “I received your $7,200.00 check. We sent you 300 sensors at the agreed price of $8,000.00. I need the balance within five days” — is the contract.

[ Choose ]             3             1             4             2

  1. Saul offered to sell the sensors and Purchaser sent a check that states – “Thank you for the sensors.” Purchaser’s “thank you” constitutes an acceptance.

[ Choose ]             3             1             4             2

 

Question 3

If there is a contract, is the price $8,000? Why or why not? Pick the best answer.

1. Yes, the price is $8,000.00 because that was the price both parties originally agreed to. Supplier’s bookkeeper does not have authority to alter the contract and it is not business practice to offer discounts via a handwritten note.
2. Yes, the price is $8,000.00 because Purchaser sent the check after the 15-day period and is no longer eligible for the discount.

 

3. No, the price is $7,200.00 because that is the same amount as the check written and sent by Purchaser’s account clerk.
4. No, the price is $4800 (two-thirds of $7200) because Purchaser agreed to return 100 unused sensors.

 

Question 4

Logistics Inc. is the developer and licensor of “TruckIT” software. TruckIT enabled development of a national logistics industry segment. Eighty-five logistics companies, 89% of the industry segment, rely entirely on TruckIT for all essential functions of their businesses. Because of this, Logistics charges very high license and support fees and is very profitable. When introduced 10 years ago, TruckIT was unique and innovative. Now, Logistics has learned that two potential competitors’ web-based alternatives to TruckIT will be released within eight months. These alternatives could render TruckIT obsolete; Logistics’ own web-based application “TruckIT Online” is two years from release.

You are the new CEO of Logistics. Your management team plans to leverage your customers’ current reliance on TruckIT to protect Logistics’ market share until TruckIT Online is released. They intend to immediately (i) renegotiate TruckIT licenses to reduce license and support fees to well below the expected price of the competitors’ services and below Logistics’ cost for customers who agree to use Truck IT exclusively for two years and (ii) delay or withhold support services critical to the day-to-day operation of TruckIT for customers that do not agree to use TruckIT exclusively for two years. Before approving these steps, you consult with your lawyer.

What points of law and related explanations will your lawyer likely tell you? Briefly identify and explain these points, in sentence or bullet form. Your answer is limited to 350 words or less.

Question 5

You are the CIO of TechCo Inc., a small, U.S based inventor of proprietary, silicon chip designs that can be used in millions of products and facilitate the Internet of Things revolution. You are about to begin negotiations with a U.S based parent company of a multi-national chip manufacturer (“Vendor”) whose operations are ideal for your business plans. Your products will be made by Vendor’s foreign manufacturing subsidiaries. You will provide Vendor and its subsidiaries with your manufacturing know-how and customer information and your products will be shipped from the manufacturer directly to your customers. Prior to negotiations, the Vendor sends you its form confidentiality agreement, which you sign. The full confidentiality agreement reads:

“Vendor shall not knowingly disclose Confidential Information to anyone other than its affiliates or to its or their agents and representatives. Vendor shall use the same level of protection against unauthorized disclosure of Confidential Information as Vendor normally uses to protect its own information. Vendor shall inform its agents and representatives of the confidential nature of the Confidential Information. “Confidential Information” means proprietary and confidential information belonging to TechCo which is furnished or disclosed to Vendor by TechCo that is (i) marked or designated in writing in a manner to indicate it is confidential or (ii) identified as confidential in a writing provided to Vendor within (10) business days after disclosure. Upon TechCo’s request, Vendor will return to TechCo or destroy all copies of Confidential Information. This agreement will terminate three years following the date hereof.”

Please identify all correct statements:

1. Vendor informs its manufacturing subsidiaries of the confidential nature of TechCo’s Confidential Information. The subsidiaries are bound by the TechCo confidentiality agreement.
2. Vendor provides its chip design personnel with TechCo’s Confidential Information. Vendor has violated the agreement.

 

3. Vendor uses TechCo’s Confidential Information to manufacture products other than TechCo’s. Vendor has violated the agreement.
4. Vendor manufactures and sells chips to TechCo’s customers using TechCo’s Confidential Information. Vendor has not violated the agreement.

 

5. Intending to email its affiliate, Vendor instead mistakenly e-mails to a competitor Vendor information together with TechCo’s Confidential Information. Vendor has not violated the agreement.
6. Vendor’s lawyer is informed of the confidential nature of Confidential Information but discloses the information to his son who puts it on his website. Vendor has disclosed Confidential Information in violation of the agreement.

 

7. Vendor informs its manufacturing subsidiary of the confidential nature of TechCo’s Confidential Information. Vendor is responsible for TechCo’s damages resulting from disclosure of TechCo’s Confidential Information by the subsidiary.
8. Vendor’s IT systems are infiltrated and the intruder copies TechCo Confidential Information. Vendor has violated the agreement.

 

9. TechCo may require Vendor to destroy all copies of Confidential Information in Vendor’s electronic archives.
10. Before entering the agreement, Vendor developed and kept confidential a chip design identical to TechCo’s. Vendor discloses its design to its licensee after receipt of TechCo’s design marked “confidential.” Vendor has violated the agreement.

 

11. Unless marked as confidential, electronic copies of TechCo information provided to Vendor cannot be Confidential Information.
12. All information marked by TechCo as confidential is Confidential Information.

 

13. Confidential Information provided by TechCo to Vendor during the three-year term of the agreement can never be disclosed by Vendor.
14. Vendor’s obligations under the agreement are terminated if TechCo provides Confidential Information on a non-confidential basis to a company other than Vendor.

 

Question 6

Please use the paragraphs below to answer the following 8 questions. Choose the answer that best applies.

For the products being made for TechCo by Vendor in Question 5, the Vendor will be developing a software driver that will permit TechCo’s chips to interface with third-party components. This driver is critical to the success of TechCo’s products. The Vendor’s form of development agreement contains the following warranty with respect to Vendor’s work on the driver:

“Vendor warrants that it shall perform the services in a professional manner using personnel with requisite skill, experience and qualifications and shall devote reasonably adequate resources to meet its obligations under this Agreement. All work product, including all updates, upgrades, new versions, new releases, improvements and other modifications, is or will be the original creation of Vendor, except for open source software incorporated by Vendor into the driver.”

You (CIO of TechCo), try to understand the implications of these terms. You imagine the following scenarios. Identify the correct answer for each scenario.

  1. Software drivers do not work in TechCo’s product.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

  1. Despite using a very experienced development staff, Vendor is unable to integrate the selected open source code effectively into the drivers; the functioning of the drivers is of unacceptable quality.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

  1. Although Vendor used a very experienced development staff, none of the staff had any knowledge of how to integrate the selected open source code. As a result, the drivers contained unresolved bugs when delivered.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

4.TechCo discovers that the software drivers contain a backdoor vulnerability associated with the open source code that Vendor correctly integrated into the drivers. TechCo needs the backdoor closed.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

5.Vendor’s business is soaring, and its internal infrastructure is overburdened and sluggish. The quality testing of the product is delayed as a result. The delivery of the drivers is therefore delayed (costing TechCo losses), but once received, they are of excellent quality.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

6.Vendor does not backup the server that holds the software code and code is inadvertently lost, delaying the delivery of the drivers.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

7.Despite abundant promises by Vendor’s superb sales team, and diligent efforts by Vendor’s team of energetic, and hardworking developers, TechCo needs to reject the first three deliveries of drivers because there are too many bugs.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

8.Despite convincing explanations by Vendor’s sales team of Vendor’s sophisticated code-writing experience, the drivers are developed entirely using open source software. Once the drivers are installed in the chips, a performance issue is found that is attributable to a software bug in the open source software license, which is subject to the laws of the Ukraine, with all dispute resolution to occur in the Ukraine.

[ Select ]                          [“Vendor will be responsible under stated warranty”, “Vendor will not be responsible under stated warranty”, “Unclear if Vendor will be responsible under stated warranty”, “Vendor will be responsible under stated warranty, but TechCo will not be able to recover damages”]

 

Question 7

For the software driver being developed for TechCo in Question 6, the Vendor’s form of development agreement contains the following indemnity for intellectual property infringement:

“For three (3) years following the effective date of this Agreement, Vendor will hold TechCo harmless against all damages, losses and costs (including attorney’s fees) finally awarded arising from claims alleging that the developed driver, when used within the scope of this Agreement, infringes a valid third party U.S. or European Union patent or patent application published as of the effective date of this Agreement, provided that Vendor is notified in writing within ten (10) days of TechCo becoming aware of the claims. Vendor shall have the exclusive right to control and/or settle any such claim and related action. Vendor will not be obligated to hold TechCo harmless to the extent any infringement arises out of the use by Vendor of open source software incorporated by Vendor into the driver.

Again, you (CIO of TechCo) have some concerns with these terms. (Note that there are other indemnities in the agreement; you should only focus on the intellectual property infringement indemnity here.)

Please identify all correct answers, considering the stated concerns, the stated reasons for the concerns, and proposed changes.

1. The three year time period of the indemnity is too long. The Vendor needs to be able to cut off risk after a shorter time.
2. The three year time period of the indemnity is a reasonable exposure for the Vendor, because the Vendor can buy insurance.

 

3. The three year time period of the indemnity is too short, because a third party might not discover the infringement within that time.
4. The time period for the indemnity properly starts when the agreement is signed, because all parties know what that date is.

 

5. The time period for the indemnity should start when the software driver is designed, because that is when any planned infringement would originate.
6. The time period for the indemnity should start when the software driver code is written or compiled, because that is when the infringement would occur.

 

7. The time period for the indemnity should start when the software is delivered, because that is when the customer’s risk would start.
8. The time period for the indemnity should start when the software driver is delivered, because that is when the third party might learn of the infringement.

 

9. The reference to use of the driver “within the scope of this Agreement” is specific enough because it properly limits the indemnity to the Agreement.
10. The reference to use of the driver “within the scope of this Agreement” is not specific enough and is too narrow a limitation. The indemnity should apply to any use of the driver.

 

11. The reference to use of the driver “within the scope of this Agreement” properly limits the indemnity to uses described in the Agreement and it is fair that only uses described in the Agreement should be covered.
12. The geographic scope of the US and EU is appropriate because the Customer is a US company and this scope permits expansion into the EU.

 

13. The geographic scope of the US and EU is too broad, because patents are geographically limited and it is too expensive for the Vendor to be aware of all EU patents. This scope should be limited to the US or the Customer should pay for expansion to the EU.
14. The geographic scope of just the US and EU may not be appropriate in light of TechCo’s planned product distribution and Vendor’s manufacturing locations. This must be negotiated.

 

15. Liability for infringement should be expanded to include patents and any patent applications, because the Vendor should bear the risk of infringing any patents, including unpublished patents (which are confidential until granted).
16. Liability for infringement is properly limited to patents and published patent applications because this is reasonable scope for the Vendor to search.

 

17. Liability for infringement should be expanded to include trade secrets, copyrights and trademarks and not be limited only to patents and published patent applications.
18. In addition to the indemnity for infringement of patents and published patent applications, liability for infringement should be expanded to include trademarks, but not trade secrets (because the Vendor can’t know of trade secrets) and not copyrights (because either party could check copyrights equally), and not unpublished patent applications (because they are confidential).

 

19. The stated 10 day notice requirement is the right length. It runs from the Customer becoming aware of the claim, so it is reasonable for Customer to give notice promptly.
20. The stated 10 day notice requirement is too short. It should be much longer, perhaps 30 or 60 days, as long as the Vendor isn’t hurt by the delay. It is difficult for knowledge of a claim the business receives to get reported to legal within 10 days.

 

21. The stated l10 day notice requirement is the right length. The Customer must notify of the claim immediatey so that the Vendor can terminate the contract with the Customer.
22. Vendor’s exclusive right to control and/or settle any infringement claim and related action is reasonable, because Vendor is obligated to pay for the defense of the case and will pay for any loss.

 

23. Vendor’s exclusive right to control and/or settle any infringement claim and related action should be subject to Customer’s oversight and settlement approval because Customer might owe any damages or settlement amount over any liability cap in the limitations of liability clause.
24. The limitation relating to open source software is not acceptable. The use of and potential liabilities related to open source software must be negotiated and allocated between the parties.

 

25. The limitation relating to open source software is reasonable. Either party can look up the licenses associated with use of open source software.

 

Question 8

For the software driver being developed for TechCo in Question 6, the Vendor’s development agreement includes the limitation of liability provision below:

“To the extent Vendor is found to have any liability hereunder whatsoever, such liability shall not exceed the aggregate dollar amount paid by TechCo to Vendor. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, VENDOR SHALL NOT BE LIABLE FOR LOST PROFITS, LOSS OF REVENUE OR ANY OTHER INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, OR OTHER CONSEQUENTIAL DAMAGES ARISING IN ANY WAY FROM VENDOR’S BREACH OF THIS AGREEMENT.”

Again, you (CIO of TechCo) need to consider this provision. Please identify if each answer is correct or incorrect, considering the stated concerns, the stated reasons for the concerns, and any proposed changes.

  1. Vendor must always have a liability limit amount to justify the risk of taking on a project.

[ Select ]                          [“Correct”, “Incorrect”]

  1. The liability limit amount in the first sentence is standard and therefore reasonable.

[ Select ]                          [“Correct”, “Incorrect”]

  1. The liability limit amount in the first sentence is too low, but would be acceptable if it were raised to a fixed amount of $1 million.

[ Select ]                          [“Correct”, “Incorrect”]

  1. The elimination of types of damages in the second sentence is standard and the Vendor needs it to justify the risk of taking on a project.

[ Select ]                          [“Correct”, “Incorrect”]

  1. You imagine that the software driver Vendor develops infringes a patent owned by DriverCo. That isn’t a concern, because Vendor will pay any damages associated with that infringement.

[ Select ]                          [“Correct”, “Incorrect”]

  1. Vendor is warranting that the software drivers will work in TechCo’s products. If the drivers don’t work, Vendor will have no liability for TechCo’s financial losses.

[ Select ]                          [“Correct”, “Incorrect”]

  1. TechCo’s chips caused its customer’s refrigerator product to shut off because of a bug in the driver Vendor developed. The customer paid its customers $50,000 for spoiled food. TechCo’s product warranty required TechCo to indemnify its customer for the $50,000. Vendor is not required to indemnify TechCo for the $50,000.

[ Select ]                          [“Correct”, “Incorrect”]

  1. TechCo will not be able to collect from Vendor any damage to TechCo’s reputation that comes from an intentional breach of its obligations under the contract by Vendor.

[ Select ]                          [“Correct”, “Incorrect”]

  1. If Vendor delivers the software late, TechCo can recover from Vendor the profits TechCo lost because of the delay.

[ Select ]                          [“Correct”, “Incorrect”]

  1. Vendor refuses to change the provision. A possible solution is for TechCo to obtain insurance to cover the excluded types of damages and amounts in excess of the liability limit amount.

[ Select ]                          [“Correct”, “Incorrect”]

  1. If TechCo contracts to make monthly payments over the course of the contract, and Vendor were to breach its obligation of confidentiality on the first day of the project, TechCo would be able to collect from Vendor the full value of the contract.

[ Select ]                          [“Correct”, “Incorrect”]

  1. The phrase “notwithstanding anything in this agreement to the contrary” would override all other provisions in the agreement, including specific promises to indemnify TechCo for infringement of intellectual property.

[ Select ]                          [“Correct”, “Incorrect”]

 

 

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Category: Sample Questions