Running a successful business

Business Law - Issues in Contract Law and Agency Law

Business Law - Analyses of Issues

Jose always admired successful entrepreneurs who have started their own businesses and then expanded them successfully. Among those ventures that he most wanted to emulate is Starbucks Coffee; it seemed to Jose that a new Starbucks opened up every week in the community where he attended college. Jose also admired those who managed to profit from Internet technology and he noticed that more and more people were taking their laptop computers to places like Starbucks to do their work. Unlike the college town where Jose went to school, his home town is much more rural and somewhat behind the times: there were no businesses like Starbucks in his home town and many households were still not connected to the Internet. The local library had

Internet connections but only a few terminals and they were always being used by local students. Jose decided to return to his hometown after graduation and to start a business modeled after the "books on wheels" concept in which mobile library buses provided library-type services to communities without their own libraries. Jose's idea was to open up a coffee shop modeled after Starbucks, in conjunction with which he would also offer mobile Internet cafe with wireless computers linked to the Internet. In that way, Jose hoped to serve the same market as Starbucks, while also bringing the Internet to those who might not fit the Starbucks customer profile, who would like to use the Internet if it were more accessible to them.

About nine months after his own graduation, Jose leased a former pool hall in his home town and hired a local contractor to convert the facility for its new use. He signed standard agreement with the contractor specifying the nature of the conversion work including the removal of the old furniture and lighting and the installation of everything for the new Internet cafe except the computer equipment. The contract specified a completion date of September 1st, just in time to open up for the beginning of the high school academic year.

Jose also responded to the following ad in a local paper: "Used Winnebago -- good condition -- $60,000 value -- priced to sell for $30,000 (firm)." Jose met the owner and had they had the following exchange after looking over the vehicle together:

Jose: I want it, but the highest I can go is $20,000.

Seller: I'm sorry but the ad says "firm." I'll take $25,000 but not a penny less.

Jose: OK. If you change your mind, please call me.

Later that day, Jose decided not to quibble about the difference for such a good value and he called back but there was no answer. Jose then drove out to the owner and left a certified $25,000 check under his door with the following note: "I decided to accept your last offer price. Please call me to arrange the pickup ASAP. Thanks, Jose." The next day, the Winnebago owner called Jose to say that he could not accept Jose's payment because more people had called and he had decided to stick to his original firm price of $30,000. Jose responded that he had already accepted the seller's last offer of 25,000 and tendered payment in full and that if the owner refused to turn it over to him, he would have no choice but to sue him for the difference between $25,000 and the 60,000 Blue Book value of the vehicle. The owner just said "I'm returning your check by certified mail and then hung up the phone.

On September 1st, Jose's Internet cafe was nowhere close to being ready for opening. The contractor had encountered some difficulties with his material supplier and advised Jose that he would need about one extra month to complete the job. Meanwhile,

Jose had lease payments to make and he was counting on his profits to pay off his student loans. When the job was finally finished one month late, Jose withheld $10,000 from his final payment to the contractor, which fairly approximated his net losses caused by the delay. In late November, the contractor sued Jose and Jose hired a local attorney to answer the complaint and also to file a claim against the owner of the Winnebago for 2,750 for breach of contract. Jose received his certified check back by mail and had ended up purchasing the exact same model vehicle from someone else for $27,500.

In Jose's mind, he had accepted the Winnebago owner's final offer to sell the Winnebago for $25,000. According to the Winnebago owner, his original offer was to sell the vehicle for $30,000. When Jose offered $20,000 instead, that was a counteroffer which he rejected immediately. The Winnebago owner had then made a new offer to sell the vehicle to Jose for $25,000 which Jose never accepted, because when Jose responded

OK. If you change your mind, please call me," that was a rejection of his last offer. As of that rejection, the parties no longer had any outstanding offers or counteroffers on the table any longer except for the seller's original published offer of $30,000. Unfortunately for Jose, the lawyer he consulted confirmed the Winnebago owner's point-of-view and advised Jose to forget about any claim against him for breach of contract (Halbert, 24).

On the matter of the delayed work on the Internet cafe, Jose brought the contract to the lawyer to review, along with documentation of all the profits that the Internet cafe earned in the months of October and November. It turns out that the construction delay had actually cost Jose more in lost profits than the amount of the claim by the contractor against him for the $10,000 Jose had withheld from his final payment because of the delay. Jose wanted the lawyer to answer the claim against him with a counterclaim of his own for an additional $7,500 in lost profits which his income reports for the subsequent months supported.

The lawyer advised Jose that he had no valid defense against the contractor's claim despite the fact that the contractor had failed to meet the completion date.

According to the lawyer, the contractor was in breach of the contract when he advised

Jose of the delay, but the only remedy available to Jose would have been to invoke the doctrine of anticipatory repudiation (Dawson, 57-8) hold him in breach at that time, terminate the contract and find someone else willing and able to complete the work immediately. In reality, that would not have been advisable, because Jose would still have been liable to the first contractor for the work he had already performed and finding second contractor would have probably delayed completion even further at that point.

The lawyer gave Jose better news about his counterclaim for lost profits, because Jose could prove his actual damages with documentation of profits from the following months. According to the lawyer, the provision in the contract specifying the completion date would have been grounds to hold the contractor in breach on September 1st, or to justify a breach by Jose (via anticipatory repudiation) whenever the contractor first communicated his anticipated delay before September 1st.

On the other hand, once Jose elected not to do so, the completion date provision did not entitle him to withhold any portion of the construction fees but would entitle him to damages for lost profits under certain circumstances. Under liability concepts first established by Hadley v. Baxendale, liability for reasonably foreseeable damages arising from a breach of contract would support a claim for those damages reasonably within the ability of both parties to anticipate (Friedman 406-7).