Santa Clara University
School of Law

1. There are two questions on this examination, each of which is based on one set of introductory facts. First read the introductory facts. Then answer both questions. The amount of points for each question will be roughly proportional to the amount time suggested for each question.

2. Support your conclusions with legal authority and analysis. In supporting your conclusions with legal authority, you should rely on general common law, not statutory law. You need not cite specific case names or specific sections of the Restatement 2d of Contracts but should accurately and precisely articulate the content of the common law on which you rely and should use the vocabulary in which the common law is expressed.

3. If you find any portion of a question ambiguous or otherwise unclear, identify that portion of the question and describe how a clarification would affect your answer. If you believe that more facts would enable a more complete analysis of an issue, identify the facts you would like to know and how they would affect your analysis.

4. Before writing your answer, take sufficient time to organize your thoughts to enable an answer which addresses issues in a coherent and logical sequence.

Please feel free to insert new ideas into text you have already written by writing an addition on the side or back of a page and by placing an asterisk in the text where you would like the insertion to be read.

5. Proper use of paragraphs and transitions helps convey a sense of your understanding of concepts and of the relationship of concepts to one another.

Tikes manufactures and sells small bean bag type animal characters. Tikes originally developed these characters for the United States children’s market, but now sees a potential worldwide market among both children and adults. Tikes entered contract negotiations with World On Line (WOL), a marketing agency specializing in the development of interactive web sites which enable consumers to shop and purchase on line. Several months of negotiations, and the exchange of multiple drafts between lawyers for both parties, led to the execution of a contract between Tikes and WOL which was roughly double the length of the Rachel Electronics-Robert Fullerman contract which you drafted. The Tikes-WOL contract included the following provisions, among others: (Note: There are no typographical errors in the quoted provisions.)

12. WOL is to conduct market research and furnish a written report of its research to Tikes, design and create a web site and select a web site address, launch the web site, and report on performance of the web site and furnish recommendations for improvement. This work is to proceed in the stages identified in paragraph 15.

13. The written report of market research will be comparable to reports prepared by WOL for previous WOL clients, samples of which Tikes has examined.

15. Tikes shall pay WOL $250,000:

15.1. $100,000 is payable upon submission to Tikes by WOL of a written report of its marketing research.

15.2. $100,000 is payable upon design and creation of the web site, consistent with the conclusions of the WOL written report, and the completion of steps to launch it on the World Wide Web by November 15, 1998 (in time for 1998 Christmas shopping), including the creation of a web site address, suitable to Tikes.

15.3. $50,000 is payable upon submission to Tikes by WOL of a report on performance of the web site with appropriate and suitable recommendations for modifications of the web site.

22. The terms of this agreement are final.

Pursuant to the requirements of the contract, WOL undertook market research and furnished a written report to Tikes. Tikes is reluctant to pay the first $100,000 installment under the contract for two reasons and has approached you for legal advice.

Its first concern derives from information shared with a Tikes executive by a friend who works for WOL. Tikes learned that WOL has recently suspended its two web site graphic designers pending an internal investigation of charges of sexual harassment against those designers. When Tikes called WOL to inquire about this problem, the following conversation between executives of the two companies occurred:

WOL: "We have interviews set up to hire some replacements and believe that we can still get your job done no later than November 20, 1998."

Tikes: "That may not be soon enough."

WOL: "We’ll do the best we can, but we want to make sure to hire qualified people because its better to have the job done right than to get a poor job done on time."

Tikes: "Well, keep us posted."

Tikes’ second concern relates to the written report of market research provided by WOL. The written report does not address marketing issues posed by global access to the World Wide Web and Tikes doubts that the research can now be completed in time to enable WOL to meet the November 15, 1998 deadline.

The provisions of the Tikes-WOL contract quoted in the introductory facts are the only provisions in that document which refer to market research. The sample written reports referred to in paragraph 13 of the contract did not address marketing issues posed by global access to the World Wide Web. Nonetheless, Tikes thinks that the report should have addressed those issues because of what transpired at the beginning of contract negotiations.

At that time, the President of Tikes read a newspaper article, written by an executive of another marketing agency, entitled "Online Sensitivity: Icons and Symbols Don’t Have the Same Meaning to Everyone." Among other things, the article gave the following example:

One web site uses a "thumbs up" icon to symbolize a good buy. Although the symbol is popular in the United States, it is a rude gesture to Iranians. This web site may work well with a U.S. audience. But the internet is a global communication mechanism and one must consider the impact of the web site on other cultures.

Immediately after reading the article, the President of Tikes had sent a copy of the article to the President of WOL with the following handwritten notation: "Because we are marketing worldwide, we want this covered. [Signed by President of Tikes]" The President of WOL returned the same copy of the article to the President of Tikes with the handwritten notation: "O.K. [Signed by President of WOL]."

Tikes wants to know its rights and liabilities if it pursues any of the following alternative courses of action: (1) terminate its relationship with WOL without paying any money, and hiring another marketing agency to complete the job (building on the written report prepared by WOL); (2) refuse to pay the $100,000 until WOL completes the additional research which Tikes believes is required, and pursue a claim for damages if WOL either refuses to undertake the additional research or if WOL completes the additional research but is unable to launch the web site on November 15, 1998; or, (3) pay the $100,000, demand that WOL complete the additional research which Tikes believes is required, and pursue a claim for damages if WOL either refuses to undertake the additional research or if WOL completes the additional research but is unable to launch the web site on November 15, 1998. How do you advise Tikes? Be sure to include an appropriate discussion of damages.

Alteration to introductory facts for this question: Paragraph 15.2 of the contract includes the following additional sentence: "The amount payable shall be reduced $5,000 per day for each day of delay in launching the web site."

Disregard the additional facts stated in Question 1.

Following completion of the written report of market research, with which Tikes was satisfied, Tikes paid WOL $100,000. WOL then designed and created a web site, chose the address "ToysbyTikes.com," and, by November 1, 1998, completed steps necessary to launch the web site.

Tikes previewed the completed web site. Tikes liked the address, but didn’t like the appearance and function of the web site ("too sterile," one executive remarked; "too confusing," remarked another). Tikes requested WOL to undertake design changes. WOL said that such changes would be beyond its obligations under the contract but that it would be happy to undertake design changes for an additional $25,000, once Tikes paid the $100,000 due under paragraph 15.2 of the contract.

Tikes insisted upon design changes without additional compensation and refused to pay $100,000 to WOL.

It is November 10, 1998. WOL consults you for advice. It is fearful of not launching the web site by November 15 and fearful of launching it without the authorization of Tikes. What is your analysis of WOL’s rights and liabilities if it refrains from further action pending: (1) receipt of $100,000 pursuant to paragraph 15.2 of the contract; (2) receipt of a written promise from Tikes that Tikes will pay an additional $25,000 for design changes in the web site; and, (3) receipt from Tikes of a written extension of the deadline for launching the web site until November 30, 1998.

End of examination