STANFORD UNIVERSITY WINTER 2000 DEPT. OF MANAGEMENT SCIENCE MS&E 281AND ENGINEERING LEGAL STRATEGY & ANALYSIS MidTerm ExaminationTime: 2 HoursPlease return your completed exam to Vicki Fahrenholz, Terman Room 321, at or before 12 noon, Monday,February 14.1. Mike Michelangelo makes Betty Rembrandt an offer of $5,000 for a painting Mike thinks is an original.Betty accepts. Mike doesn't realize Betty actually steamed the painting off the lid of a cigar box, and that itis only worth 50 cents. Before the transaction takes place, Mike discovers the mistake, and refuses to gothrough with the agreement. When Betty sues, Mike defends on the grounds of "mistake." Betty claimsunilateral mistake does not excuse performance. What is the legal position of each party?1. Answer: The general requirements of a contract, offer, acceptance and consideration have been met. Acontract has been formed betwen the parties. One party, however, wants to void the contract on grounds ofmistake of fact. The general rule is that unilateral mistake (that is, of one party) does not excuseperformance. However, where the other party knew or should have known of the mistake, the mistake isgrounds for non-performance. Mike's offer of $5,000 for the painting must have put Betty on notice thatMike thinks the painting is an original. Hence, the contract is voidable.2. SJ is building a monument to himself, and needs a rock cutting machine. He finds one in the StanfordDaily Trader, offered by M for $10,000. S goes to M's house to inspect the machine, and offers her $10,000for it. She accepts the offer. Before the transaction takes place, S finds out the rock cutter will not cutmarble, which is the type of stone he would be using (unbeknownst to M). Can S avoid the contract due tohis mistake?2. Answer. No, he cannot, because it is a unilateral mistake. M neither knew nor had reason to know of it.Thus, S is bound by the contract.3. Common gossip had it that Ripov McSleaze ("Rip" to his friends, "R.I.P." to his enemies) was a leader inthe emerging field of mathematical investment technology. Rip was a colorful character who had started hiscareer as a professor of Mathematical Engineering at The Palo Alto Institute of Technology and Science(The P.I.T.S.) When his investment theories started making money just at the time of a general stock marketboom (through no fault of his own - but he neglected to broadcast this), he resigned from P.I.T.S. andstarted his own consulting firm in a thirty story building in the business dictrict of San Francisco. His officeoccupied the entire thirtieth floor, with a commanding view of the Bay, from the Golden Gate all the way tothe fragrant garlic fields of Gilroy. On one wall hung the speaking trumpet through which Admiral Nelsonhad gasped his last command at Trafalgar. Fixed to the floor was a steering wheel recovered from thewreckage of the Titanic. Rip thought of himself as a great captain of finance and a navigator of the turbulentinvestment waters. Often, late at night, he would stand at the Titanic wheel, Nelson's megaphone in hand,and bark investment commands to the foggy San Francisco night sky.Jan Heiress, who had just inherited a minor family fortune, approached Rip and offered him $200to design a computerized investment strategy to convert her inheritance into a lifelong stream of regular,very large cash flows. Rip declined, explaining that Kolmogorov's Law of Large Numbers does not workwith numbers that small. Jan then raised her offer to $300, but Rip again declined, pleading that he hadmore important projects to take care of. Jan was undeterred, and said, "if you deliver my investment systemby February 14, I will pay you $500." Rip's eyes lit up and he replied, "you're on!"Rip started working on the system, and by February 12 he had designed a prototype, although hehadn't started writing any code yet, when he received a call from Jan. She informed him that she haddecided to spend her entire inheritance on a cruise to Alaska and that he should therefore not create theinvestment system.What is Rip's legal position?3. Answer. Bilateral vs. Unilateral Contract: Initial question: Did Rip and Jan enter into a bilateralcontract or did Jan merely make an offer to enter into a unilateral contract? If the latter (i.e., unilateral),then then the offer could be accepted only by performance of an act. In the case of a bilateral contract, Jan'srevocation is clearly ineffective. If the offer is considered unulateral, the situation is less clear-cut. Jan'splain words seem to call for an act, delivery of the completed system by February 14. This interpretationwould make it a unilateral contract. You may also interpret her words as less decisive, i.e. as calling for apromise from Rip in exchange for her promise of $500. Rip's response of "right on" may be interpreted ashis acceptance. Under this interpretation the contract would be bilateral.If interpreted as a unilateral contract: First issue is whether Jan knew or should have known that Rip hadalready begun designing the system. Assuming a unilateral contract, Rip accepts Jan's offer when hedelivers the system and until then she could revoke her offer. However, Rip started performing in relianceon Jan's promise, and hence she must keep the promise open if she knew or should have known about hisreliance. You may argue that Rip's enthusiatic response ("right on!") should have put Jan on notice that hewas ready to rip into the project in reliance on her promise. Hence, her revocation would put her in breachof contract.Changed circumstances: Jan may argue that she was excused from performance because of her changedcircumstances. She no longer needed the investment system because she was about to blow the money on acruise. This is not a case of impossibility, because Rip could still finish the system and Jan could still payfor it. Jan may argue that it is a case of frustration of purpose: the system would no longer serve its intendedpurpose to her, à la Krell v. Henry (the King Edward VII coronation case.) This argument is unlikely to beaccepted by the courts. The changed circumstance was a result of Jan's own decision (she caused the"frustration of purpose," unlike Mr. Henry in Krell v. Henry, where an exeogenous circumstance, the illnessof King Edward VII, caused the purpose of the contract to be frustrated) and does not seem to be the kindof risk that Rip should bear.Statute of frauds: