You are vice-president and general counsel for Associated Department Stores, Inc., which owns and operates Schweitzer's, a
Question:
You are vice-president and general counsel for Associated Department Stores, Inc., which owns and operates "Schweitzer's," a large department store in your city. Schweitzer's has recently been in the throes of some remodeling, reorganizing, and overall image-upgrading, dropping some lines of goods, adding others, and generally attempting to create a more high-fashion atmosphere in the store. Today you receive a call from Edna Carmody, another Associated p. 772executive, who has general responsibility for planning and coordinating the organization and remodeling of the various women's apparel departments. She tells you the following story:
"You probably know that the new women's designer salon on three is scheduled to open at the end of this month; we've had promotions in the papers and on local TV for days about the celebrity fashion show and the charity cocktail party we're throwing for the benefit of the county historical society. Well, virtually everything is done except the laying of the new flooring, which we purposely had left until after the new ceiling tiles and lighting tracks had been installed, and the wallpaper hung, so it wouldn't get the wear of several sets of workmen over it right away. Waller Brothers agreed to do the floor for us to provide the labor and flooring material and to have the whole job done by next Thursday at the latest. They are the local distributors for EverWare floor tile, which is probably the best product for our needs, and they contracted to install EverWare in the 'Starship' pattern, which we picked to complement the wallpaper and lighting fixtures we had selected.
"Just now I had a call from Jack Waller, who told me that the EverWare Company has notified them that every shipment of EverWare tile from now on including the lot for our store, which is on its way to the Wallers' now will be billed to them at a 30 percent increase over the previous prices, due to a settlement EverWare had to make with its employees to prevent a strike, they said. Jack told me that the increase was more than he and Ralph could absorb, and that they had talked it over and agreed that they would have to charge us at least 20 percent more per foot for the Starship tile we ordered. I told him I certainly sympathized with their problem, but I didn't feel they had any right to ask us to agree to a price increase at this point, since for five weeks we had had a firm written contract with them for an agreed price. Jack didn't exactly quarrel with that, but he said he was surely sorry we didn't see things their way, and then he went on to say that these rising costs really had them in a bind, and they thought they'd probably have to lay off some of their help, and it might be pretty difficult to get their work done on schedule under those conditions. Then he said why didn't I think it over for a while, and talk it over with some of the other people here at Schweitzer's; he said he felt sure then I'd see things his way, and that he'd expect me to call him back in a few hours.
"Even if he's telling me the truth about their being hit with a surprise price increase, it seems to me they're way out of line in expecting us to absorb it. Do we have to? And if we say no, what happens if they pull a slowdown on us? Lots of faces are going to be red around here, mine in particular, if all that promotion effort for the new women's shop goes out the window because the redecorating isn't done. I haven't tried yet, of course, but I'm sure we can't get someone else to do the floor on such short notice. Even if we could, no one else stocks the pattern we need to do the job right; the Wallers are exclusive distributors for EverWare in this town. Do they have us over a barrel?"
Obviously, before attempting to advise Ms. Carmody how she might proceed in this situation, you will want to consider the effect of the original agreement with Waller Brothers. You know that there is indeed a "firm written contract . . . for an agreed price" between Associated Department Stores, Inc., and Waller Brothers, because at your direction all agreements with contractors for the renovation were made on purchasing order forms used by Associated. You know that this form contains a standard "force majeure" clause, and also that it contains the following language: "This is the entire agreement of the parties, superseding all prior agreements. No additions or modifications to, or any waivers of provisions contained in, this agreement shall be binding unless in writing and signed by both parties."
Before deciding on the course of action Associated should pursue, consider the following questions (and perhaps others as well): (1) Can Waller Brothers rely on changes in circumstance occurring since the agreement was made to justify nonperformance on its part? (2) If Associated should (for whatever combination of legal and/or practical reasons) agree to pay Waller Brothers a higher price for the tile work, could it later refuse to pay the amount of the increase, on the ground that its agreement to that increase either was void for lack of consideration, or was entered into as a product of bad faith or duress on Waller Brothers' part? (3) Even if an agreement to pay the increased price would otherwise be enforceable, if you can avoid putting it in writing, can Associated later refuse to pay on the basis of the contractual language quoted above?
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay