TITLE: PAULA – MUSEUM – SALLY

SUBJECT: CONTRACTS

FILE: CONT07J.QUE

Paula, a recent art-school graduate, was trying to establish a reputation as an art acquisition agent, i.e., one who finds works of art for collectors interested in buying particular works. It is a business where reliability and confidentiality are critical.

Paula’s first commission was to find for City Museum (“Museum”) any one of the three originals in a series of paintings by Monay, titled “The Pond.” Museum agreed to pay as much as $300,000 for it and to pay Paula $15,000 upon acquisition. The works of Monay are rare and held by private collectors, and none had been on the market in recent years.

Paula eventually tracked down Sally, a private collector who owned the three originals of Monay’s “The Pond.” After some negotiations, in which Sally expressed offhandedly how proud she was that she only sold to private collectors, Sally orally agreed to sell to Paula for $200,000 whichever of the three paintings she selected. Paula agreed that, as soon as she could make the selection, she would transfer the purchase money into Sally’s bank account. Paula immediately called the curator at Museum, who told her to select the first of the three in the series, and the curator immediately caused Museum’s bank to wire-transfer $200,000 into Sally’s account to cover the purchase.

The next day, when Paula went to tell Sally which painting she had selected and to pick it up, Sally declined to go through with the sale. Sally accused Paula of deceit, saying it was only when she learned that the money for the purchase had come from Museum, that she realized that the painting would no longer be held privately. Sally tendered to Paula a certified check, which she had signed and drawn from her bank account, refunding the $200,000. In the notation line of the check, Sally had written, “Refund on 1st of Monay Pond series.”

Paula refused to accept the check and insisted on getting the painting. She explained that she had not disclosed her principal’s identity because she was bound by confidentiality and that, unless she could deliver the painting to Museum, her budding career as an art acquisition agent was over. Sally told Paula, “That’s too bad. Our contract wasn’t in writing, so you can’t force me to sell the painting. Besides, you deceived me about why you wanted to buy it.”

Can Paula obtain specific performance of Sally’s agreement to sell Paula the painting?

Discuss.

TITLE: PAULA – MUSEUM – SALLY

SUBJECT: CONTRACTS

FILE: CONT07J.ANS

Specific performance is an equitable remedy for breach of contract. To obtain specific performance Paula must prove she has a legal remedy which is inadequate. Additionally, the decree must be feasible to enforce, and not subject to equitable defenses.

I. DID PAULA AND SALLY HAVE A CONTRACT?

To establish a legal remedy, Paula will claim she and Sally had a contract, and Sally breached it. The formation and breach of contract will be determined by applying the UCC because the sale of a painting is a transaction in goods.

Under the UCC, formation of a contract requires (1) intent to contract, (2) mutual assent on the essential terms, (3)and consideration.

The “Intent to contract” element is satisfied because, according to the facts, it was “after some negotiations ...that Sally agreed to sell.” Clearly, both parties intended to contract.

“Agreement on the essential terms” is also satisfied. The essential terms of a contract are the parties (Paula and Sally), price ($200,000), quantity (1), and time for performance (Reasonable time). The subject matter of the contract, the particular Monay, had not been yet selected. However, Sally gave Paula the power to choose any one of the three originals of Monay’s “The Pond.” This is sufficient identification of the subject matter, assuming Paula chooses one of the paintings in her formal pleadings. Thus, all the essential terms are definite.

The “consideration” element is satisfied by the bargained-for exchange.

Conclusion - Paula and Sally formed a contract.

II. WAS THE CONTRACT ENFORCEABLE?

Sally will raise three affirmative defenses to enforcement of this contract:

1. Statute of Frauds- The UCC provides that a contract for the sale of goods for the price of $500 or more is unenforceable unless there is a writing sufficient to show a contract was formed, signed by the party who denies. it.

Here, the painting is a good because it is movable tangible personal property. The price greatly exceeds $500. Sally denies the contract. Therefore Paula must produce a writing, signed by Sally sufficient to show a contract was formed.

Paula will offer the note and signature on Sally’s check. The note read “Refund on 1st Monay Pond Series.” This writing is probably not sufficient. “Refunds” can be sent to return any overpayment for any reason. The note, along with the refund check, does show that some business activity took place between Paula and Sally. It does not show a contract had been formed.

The contract is not enforceable because it does not satisfy the statute of frauds.

2. Fraud in the Inducement- Fraud is a defense to enforcement of a contract. It is also grounds for rescission. Either of these consequences will prevent Paula from enforcing the contract, which in tern will prevent her from obtaining the specific performance she seeks.

Fraud is also called intentional misrepresentation. The misrepresentation can occur thru failure to disclose where there is a duty to disclose. There is a duty to disclose to one’s fiduciary. Here, Paula may be Sally’s fiduciary. According to the facts, being an art acquisition agent is “a business where reliability and confidentiality are critical.” Sally will argue that art customers rely heavily on representations made by agents. She will contend that the nature of the business is such that agents are in effect fiduciaries, and owe a duty of full disclosure.

Thus, when “Sally expressed offhandedly how proud she was that she only sold to private collectors,” Paula had a duty to disclose that this sale was to Museum, and would violate her wishes. This nondisclosure is a “misrepresentation.” Sally even told Paula that she was “deceived.” Paula’s defense is that she was bound by a confidentiality agreement with Museum. However, her agreement with Museum that they will both commit fraud together is not a defense for either of them.

Thus, Sally was induced to enter into the contract by fraud. The contract is not enforceable.

Even if Paula’s misleading silence is not fraud, her deception results in unclean hands, which is a defense to equitable relief. Equitable relief is discussed below.

3. Non Disclosure of Principal- This defense would fail. An agent, such a Paula, has no duty to disclose her principal, Museum. Paula and Museum are principal and agent because Paula is acting on behalf of Museum and under Museum’s control. The purchase is for the benefit of Museum. Paula is acting under Museum’s control because, according to the facts, Museum is making the selection as to which painting Paula should purchase.

Conclusion - Paula does not have a legal remedy because the contract is not enforceable because of fraud in the inducement, and because the statute of frauds was not satisfied.

III. IF THE CONTRACT WAS ENFORCEABLE. DID SALLY BREACH IT?

If the contract was enforceable, Sally will contend she did not breach it. Sally will point out that this was an oral contract. There were no specific words which Paula and Sally specifically carved out as “The contract.” As a consequence, the contract terms were the entire understanding which came from the meeting between Paula and Sally.

A part of the understanding which came from their discussion was that Paula’s principal was a private collector. This is, in effect, a condition precedent to the contract being effective at all. Since this condition failed, the contract never became effective. Sally never had a duty to perform.

IV. IF SALLY BREACHED, IS PAULA ENTITLED TO SPECIFIC PERFORMANCE?

If the contract was enforceable and Sally breached it, Paula may nevertheless not be entitled to specific performance.

The court’s order would be sufficiently definite, “Deliver the painting.” It is feasible to enforce this order by a contempt proceeding. However, the defense of unclean hands, as discussed above, may be sufficient to deny specific performance to Paula. The equity courts are courts of justice and fairness. Here it would not be fair and just to give Paula the benefit of her deception.

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