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Let’s Make a Deal Marla is a manufacturer of widgets. Larry is a lawyer who regularly represents Marla in legal matters relating to her manufacturing business. Larry is also the sole owner and operator of a business called Supply Source (“SS”), in which he acts as an independent broker of surplus goods. SS is operated independently from Larry’s law practice and from a separate office. At a time when the market for widgets was suffering from over-supply, Marla called Larry at his SS office. During their telephone conversation, Marla told Larry that, if he could find a buyer for her excess inventory of 100,000 widgets, Larry could keep anything he obtained over $1.00 per widget. Although Marla thought it unlikely that Larry would be able to sell them for more than $1.25 per widget, she said, “. . . and, if you get more than $1.25 each, we’ll talk about how to split the excess.” Larry replied, “Okay,” and undertook to market the widgets. During a brief period when market demand for widgets increased, Larry found a buyer, Ben. In a written agreement with Larry, Ben agreed to purchase all 100,000 widgets for $2.50 each. Ben paid Larry $250,000. Larry then sent Marla a check for $100,000 with a cover letter stating, “I have sold all of the 100,000 widgets to Ben. Here is your $100,000 as we agreed.” When Marla learned that Ben had paid $2.50 per widget, she called Larry and said, “You lied to me about what you got for the widgets. I don’t think the deal we made over the telephone is enforceable. I want you to send me the other $150,000 you received from Ben, and then we’ll talk about a reasonable commission for you. But right now, we don’t have a deal.” Larry refused to remit any part of the $150,000 to Marla. 1. To what extent, if any, is the agreement between Larry and Marla enforceable? Discuss. 2. In his conduct toward Marla, what ethical violations, if any, has Larry committed? Discuss.
Answer 5 This answer was provided by Cal Bar Tutorial Review, 800-348-2401 or 800-783-6168, www.cbtronline.com. I. Enforceability of Larry (L) and Marla’s (M) Agreement In order to prove the enforceability of L&M’s agreement, the following elements must be assessed: First, the (1) applicable law to govern the transaction, (2) offer, (3) acceptance, (4) consideration, and (5) no available defenses. Each of these is considered, below: A.Validity of Contract 1.Applicable Law a.Goods At issue, is whether the possible agreement between L and M should be governed by the common law or Uniform Commercial Code (UCC). More precisely, whether the agreement is for L’s services to broker the widgets or the sale of goods involving the widgets themselves. The UCC will apply when an agreement involves the sale of goods. Here, the sale will be interpreted as occurring where title to goods passes from the seller to the buyer for a set price. Goods are interpreted as applying to most tangible items � and where a sale involves both goods and services, a court will determine which aspect is dominant and apply the law governing that aspect to the whole contract. First, it is clear from the facts that L is the broker for the sale of the widgets to Ben who is the actual buyer of these goods. Second, while it is clear that the widgets are themselves tangible items, it seems similarly evident that the possible agreement between L and M involves his services to broker the widgets for the best possible price. Given this potential ambiguity in interpreting the subject matter of their agreement for goods or services, a court may be inclined to solve this problem by interpreting which aspect � goods or services � is dominant in determining whether to apply the UCC or common law to the whole contract. Given that the initial agreement seemed to result in L making up to $25,000 by brokering a deal for $1.25 per widget � so that by selling the 100,000 total widgets he would receive as compensation everything over $1.00 per widget � a case could be made that the UCC should apply to L and M’s agreement because the sale of all the widgets as goods rather than his more limited compensation would predominate. In contrast, L might argue that the actual sale of the widgets to Ben for $250,000 � with his compensation for his services in brokering them totaling $150,000 and the widgets themselves only totaling $100,000 � should result in the common law applying. This interpretation seems less likely, however, given the apparent ambiguity of L and M’s agreement as to how to divide any “excess” profit over and above the $1.25 price for the widgets. L’s better argument would be that the UCC should apply between Marla as the seller and Ben as the buyer of the widgets as goods � and that the common law should apply between him and M, given the fact she was actually bargaining for his services to broker the widgets. b.Merchants If the UCC applies as noted above, next at issue is whether L and M should be considered merchants � in which event other rules would apply governing the enforceability of their agreement. Here, the UCC generally defines a merchant as one whom regularly deals in goods of the kind sold or whom otherwise represents himself within his profession as having special knowledge or skills as to the practices or goods involved. While it is clear that M qualifies as a merchant given the fact she is a “manufacturer of widgets” who regularly deals in the kind of goods sold to Ben, at issue is whether L would also qualify. Although it is clear L does not regularly deal in widgets, it is also evident that as an “independent broker of surplus goods” “operating independently in a separate office” from his law firm operation, that he could be considered to have special knowledge or skills in brokering surplus goods. This is additionally supported given the fact he sold the widgets for double their estimated selling potential “during the brief period when the market demand increased.” 2. Offer In order to constitute a valid offer under the common law or UCC, M as the offeror must have shown sufficient intent, definite and certain terms, and it must have been communicated to L as the offeree. While M might argue that the initial telephone conversation did not evidence her intent to enter into a bilateral contract � and was rather a preliminary negotiation given the uncertainty of how to “split the excess” profit of widgets selling for more than $1.25, L will counter that this was not the case because of M’s willingness to accept at least the minimum $1.25 price. M will have a better argument that the terms of the agreement regarding L’s payment beyond the $1.25 amount failed to meet the definite and certain requirement because there was no objective criteria specified in the offer to determine how to “split the excess” profits. If the UCC applies, L would argue that only the quantity term regarding the subject matter of the contract is required � which is satisfied given the fact that 100,000 widgets were to be sold. Regardless of these difficulties, it is at least clear that the offer was fully communicated between L and M. 3. Acceptance If the contract is governed by the UCC, the fact that one or more terms are left open will not prevent the formation of a contract if it appears the parties intended to make a contract and there is a reasonably certain basis for a court to supply the missing terms, including price. Here, the court will apply the good-faith requirement in assessing a reasonable price standard � and if this is lacking, cancellation may occur. Here, M would argue that L did not act in good faith despite their intent to fix the “excess profit” term in the future. She would contend that L’s decision to keep all the excess profits � $125,000 � was unreasonable given the fact that they had at least agreed to “split” such profits. If this is the case, she would have a good argument to cancel the contract or counter by asserting a reasonable term for the price as she seemed to indicate when she requested that L return the $150,000 to her pending their discussion regarding a “reasonable commission.” 4. Consideration As noted above, there must be reasonably definite and certain terms governing the transaction � and each party must mutually incur both benefit and detriment as consideration under the terms of the contract. While it is clear that M and L have agreed to definite and certain consideration for that part of their agreement involving the sale of the widgets for the $1.25 price, there is an argument that the remainder of the agreement pertaining to the “excess profits” was illusory given the fact each of their splits could not be objectively determined by any criteria specified in the telephone conversation. Absent the good-faith argument noted above, an argument could be made that only that part of the agreement that was definite and certain was enforceable and that the defective portion was not. 5. Defenses a. Statute of Frauds Presuming the agreement between L and M is governed by the UCC, the statute of frauds would require that it be in writing given the fact goods for more than $500 are involved. Although there was no initial writing between L and M regarding their telephone conversation, L would undoubtedly contend that the widgets were specially manufactured goods so that the statute is invalid. He might also argue that having sent M a check for $100,000 accompanied by the letter constituted at least part performance so that the statute is unenforceable on this basis as well. b. Fraud in the Inducement M could contend that she justifiably relied on L’s assertion that they would later discuss how to split the excess profits when L replied “Okay.” Even if this is not viewed as misrepresentation by L, it is likely a court would void the transaction because M’s reliance was as to the material term involving her share in the profits of the widgets. c. Unconscionability M could also argue that the agreement should be voided because it was unfair when entered into, given L’s apparent lack of candor involving his intent to keep all the widget profits. L would counter that there was nothing unconscionable regarding his acceptance by stating “Okay” to the terms proposed by M at the time the agreement was made. d. Ambiguity Finally, M might argue that the term of the contract regarding how to split the excess profits was sufficiently ambiguous as discussed above so that at least this portion of the agreement should be unenforceable. If any of these defenses work for M, she could request the court to rescind the agreement and at least avoid L’s unjust enrichment through the equitable remedy of quasi-contract. II. Possible Ethical Violations by Larry A. Duty of Loyalty 1. Conflict of Interest A lawyer must always avoid conflicts of interest with his client � and must not enter into a business transaction or other pecuniary interest adverse to a client unless the transaction is fair and reasonable and all of the terms of the transaction are fully disclosed. In addition, the client must understand the role of the lawyer in the transaction and provide written informed consent. L’s refusal to return any part of the $150,000 that he retained as a result of his brokerage of the widgets would undoubtedly constitute a conflict of interest given his “regular representation” of M in legal matters relating to her widget manufacturing business. Further, his failure to fully disclose his intention to keep $150,000 of the widget sales � rather than split the profits equitably as he had apparently promised � would also constitute a breach of his duty of loyalty to M as her lawyer. Additionally, there are no facts showing that M provided L with written consent to enter into the widget business transaction. B. Duty of Candor L also owes a duty to provide both his client and the court candor in any of his business dealings that impact his professional lawyer relationship. L’s failure to do so in revealing his intention to keep all of the widget profits � rather than to split them equitably � would seem to be a breach of this duty as well. C. Duty of Competence L is also under a duty to competently represent M � and his apparent failure to properly inform her of the actual conflict of interest as discussed above could be viewed as a breach of this duty. L should have informed M of the conflict of interest that was created through the separate business transaction involving the brokerage of the widgets given his duty of loyalty to protect her business interests as her lawyer. D. Duty of Professional Integrity L’s duty to maintain the integrity of the legal profession may also have been breached given the violation of any of the duties discussed, above. As a result, L might have chosen to withdraw from his “regular representation” of M � and particularly in view of the actual conflict of interest posed by his business transaction with her.

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