Smith and Associates

Smith and Associates Group 3 2 – 3:15 pm 03-21-07

Case Analysis: Sierra Nevada Trees, Inc.

M. Myers R. Neal D. Surfas M. Vaisman DATE: March 21, 2007

TO: Erica Marcus, Supervisor, sales Department, Sierra Nevada Trees, Inc.

FROM: Daniel Martinez, Manager of Risk Management Department

SUBJECT: ANALYSIS OF LIABILITY INVOLVING BURGER RANCH CASE

Here is the analysis that was assigned to our team. We analyzed Sierra Nevada Trees, Inc.’s potential for liability of fire damages caused to the Burger Ranch Canoga Hills location. As always, if you have any questions regarding this case you can call our department at extension

#555. Sierra Nevada Trees, Inc. Group 3

Executive Summary:

Burger Ranch, Inc. placed an order for one hundred and thirty-seven Christmas trees from Sierra Nevada, Inc. The trees were to be delivered and decorated at Burger Ranch locations during the month of December 2005.

A Purchase Order was placed on September 20th, 2005, and a Purchase Order Acknowledgement was sent back to Burger Ranch on September 25th, 2005. The Purchase Order Acknowledgement included a supplementary waiver, freeing Sierra Nevada from any claims for consequential damages and lost profits by Burger Ranch.

On December 2nd, 2005, a Christmas tree was delivered and decorated at Burger Ranch’s Canoga Hills location. Later that night, a fire started in the facility. The fire was caused by the decorative lights on the Christmas tree. The fire, creating severe damages in the store, forced the Canoga Hills location to shut down for a total of six months for renovation. Mr. Washington, manager of the Burger Ranch location, is now seeking compensation for the losses.

After reviewing the Purchase Order Acknowledgement between Burger Ranch and Sierra Nevada, our firm believes the disclaimer of consequential damages could be part of the agreement. Our findings are supported by the Gould Commercial Code, Section 2-207.

Using several statistical methods, our firm determined the expected exposure on lost profits claims is $1,344,225.

To determine Sierra Nevada’s possible exposure to liability, two conditions must to be met. Since our firm believes both of these conditions were met, Sierra Nevada could be held liable for Burger Ranch’s lost profits.

As a result of statistical analysis of the provided profit data, our firm determined the null hypothesis should be rejected. Therefore, another method of computing lost profits may provide a more balanced outcome. Our firm suggests using the Full Year method described above.

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Material Summary:

Sierra Nevada Trees (“Sierra”) entered into a contract with Burger Ranch (Burger) in 2005. Beginning in December, Sierra agreed to provide and decorate a Christmas tree at one hundred and thirty-seven Burger locations in Gould County.

On December, the Christmas tree at the Canoga Hills location caught on fire. The resulting fire damaged much of the Burger location, especially the kitchen and dining area.

The tree was delivered by Sierra on time on Friday, December 2nd. Sierra employees installed the tree as specified by the acting Burger manager, Richard Simon. Mr. Simon then signed a form indicating his receipt of the tree, and his full satisfaction with the installment. Mr. Simon proceeded to pay for Sierra’s services in full with a company check.

On December 2nd, a fire started as the last employee was departing the Canoga Hills location. After a tentative inspection, the local fire department filed a report indicating the Christmas tree as the origin of the fire. As the report explained, the socket in use could not provide the amount of power required by the lights present on the tree. As a result, the socket shorted, and a fire ensued. The employee in charge of shutting off the lights entered a state of shock, and immediately exited the building. Forgetting his cell phone inside, it took the employee a few minutes to find a phone, giving the fire time to exacerbate.

As a result of the fire, the store was forced to close for a total of 6 months as burger renovated the damaged areas.

Mr. Washington demanded compensation for losses resulting from the fire caused by Sierra’s Christmas tree. Mr. Washington requested payment for the store renovation, $464,900, and for lost profit while the location was closed. He provided financial data for the Canoga Hills location dating 2004 and 2005.

Sierra responded, stating that as a result of the Purchase Order Acknowledgement, Burger waived any consequential damages resulting from the installed Christmas tree. Mr. Washington replied, explaining that since Burger never signed the Purchase Order Acknowledgment, the clause was not part of the agreed upon contract.

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Disclaimer of Consequential Damages

After reviewing Purchase Order number: 865 and the Purchase Order Acknowledgement between Burger Ranch, Inc.(Burger) and Sierra Nevada Trees, Inc.(Sierra), our firm believes the disclaimer of consequential damages in the Purchase Order Acknowledgement may be part of the agreement.

The Purchase Order Acknowledgement states, “buyer waives any claim for consequential damages arising out of this purchase order, including, but not limited to lost profits.” According to the Gould Commercial Code, Section 2-207 (Appendix 1), these provisions may be legally enforceable. Our firm used Aguilar Manufacturing, Inc. vs. Richfield, Inc. as precedent. In this case, it states, “section 2207 of the Commercial Code (infra) as it operates to permit an offeree seller to accept an offer to purchase on terms not contained in the offer, which are yet binding on the offerer or buyer, provided such terms do not represent a ‘material alteration’ of the contract.”

Furthermore, Subdivision (1) of Section 2-207 (Appendix 1) states that even if the additional terms differ from the original contract, a written conformation sent within a reasonable time could function as an agreement between the parties. Sierra added the disclaimer to the Purchase

Order Acknowledgement, providing new terms to the original agreement. Sierra sent the disclaimer to Burger Ranch, Inc. on September 25th, 2005, five days after receiving the original order. Our firm believes the disclaimer may not have altered any ‘material information.’

Furthermore, the process was completed in a timely fashion. Sierra never received an objection from Burger, Inc. prior to installation on December 5, 2005.

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Hence, all provisions present in the contract may be legally enforceable, including the disclaimer for consequential damages. If proven, Burger would waive the right to claim any ‘consequential damages’ or ‘lost profits’ as a result of the fire.

The term ‘material information’ may be open to interpretation. Aguilar Manufacturing, Inc. vs.

Richfield, Inc. defines ‘material information’ as “Examples of typical clause… Containing terms limiting remedies.” Since Sierra added a clause waiving claims for consequential damages, it could be determined as an alteration to the original agreement.

Analysis of Weekly Profits Data:

Compiling the Data provided by Burger Ranch, our firm used six equally sized bins while creating a histogram of weekly operating profits from the prior year. As shown in Graph A,

Appendix 3, the mode of the histogram was $41,474 to $62,211, with a frequency of 17.

Furthermore, the histogram reveals the probability distribution as one tailed. Hence, the weekly profits almost had more of a chance to be on the left side of the mode.

Using these results, our firm computed the average weekly profit, variation, and standard deviation for the prior 12-month period. The average weekly profit is the amount of money made, on average, each week during the 12-month period. The variance and standard deviation are both average distances each point may be located relative to the expected value of the sample. As shown in Appendix 2, the average weekly profit is $33820.21, the variance of weekly profit is 5.27E + 08, and the standard deviation of weekly profit is $22948.45.

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Using these calculations, our firm created a 99% confidence interval for where weekly profits may lie. Assuming the sigma is unknown, and the error = 8515.157 (Appendix 2), our firm calculated the confidence interval as such: mean – error < P < mean – error. As a result, our firm has 99% confidence the amount of weekly profits is between $25,305.053 and $42,335.367.

This data provides an estimate of weekly profit lost by Burger Ranch while closed for six months.

Based on the information obtained by our team, it is our opinion that the expected lost profits claim for the 6 month (26 week) period is 1,344,225 (as calculated in Appendix 5).

Liability for Profits Lost:

If the consequential damages clause is not deemed as part of the contract, the delivery crew could be found as negligent in causing the fire. Based on these assumptions, our firm must determine Sierra Nevada Trees’ potential liability. Included are the profits lost while Burger

Ranch was unable to conduct business at their Canoga Hills location.

Looking at the case Grube v. Glick (1945), our firm found the law concerning lost profits from damages incurred defined as “…preventing an operation of an established business by a tort or breach of contract or warranty causing loss of profits that would have otherwise been made from operation…” (Roberts 175).

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In order to show that Sierra may be held liable, we must ascertain the following information:

1) Were regular operations prevented or interrupted by a tort.

2) Based on prior sales data, the cause and extent of the loss can be concluded with

reasonable certainty.

If the fire was caused by the negligence of the employees of Sierra Nevada Trees, it would have been the direct cause of Burger Ranch being unable to continue its normal operations. Burger

Ranch suffered damages that were so severe, the location had to halt operations for a period of six months.

If the fire did not occur, our firm believes Burger Ranch could have been able to conduct business as usual. Given the prior sales data provided by Burger Ranch, our firm can estimate the extent of loss with reasonable certainty. Our firm will use statistical methods to estimate lost profit based on the previous six months, twelve months, and a weighted average method.

Our firm concludes that if the consequential damages clause is not deemed part of the contract, and the delivery crew was negligent in decorating the tree, Sierra Nevada Trees, Inc. may be held liable for lost profits.

Methods of Computing Lost Profit

When using a null hypothesis test, our firm statistically determines whether the hypothesis being challenged is valid. In this case, the hypothesis being challenged is if the most efficient method

Page 6 of 16 Sierra Nevada Trees, Inc. Group 3 of determining lost profits is using the first six months of Burger Ranch’s profit data. When viewing the data, our firm notices that the P-Value is less than .05. Furthermore, the absolute value of the t-stat is greater than the critical value. These results reveal a significant difference in the means between the first and last six months of operation. Hence, the null hypothesis is rejected. Therefore, our firm’s statistical results favor with Mr. Washington’s claim. However, our firm suggests the parties not to rely solely on the null hypothesis test when making a decision. The difference in mean profits between the first six months and the last six months could be due to factors not recognized in the null hypothesis test; such as seasonality, or an uncharacterized consumer purchasing power. Therefore, further testing could be required to determine the amount of compensation for lost profits.

There are several different alternative methods for determining the proper compensation for lost damages. Our firm concentrated on Full Year, Last 6 Months, Weighted Average Method, and an

Alternative Weighted Average Method. We calculated each of these (Appendix 6), and decided our firm suggests the parties use the Full Year method when estimating lost profits. This seems the most reasonable balance between the arguments that profits are seasonal and that profits rise over time. As a result, a middle ground may be reached. This would allow both parties to compromise, speeding up the resolution of their conflict.

Conclusion:

During our teams review of the Purchase Order Acknowledgement between Burger Ranch, Inc. and Sierra Nevada Trees, Inc., we believe the disclaimer of consequential damages contained in

Page 7 of 16 Sierra Nevada Trees, Inc. Group 3 the Purchase Order Acknowledgement could be contained in the agreement; supported by the

Gould Commercial Code, Section 2-207.

Using several statistical methods, we found the expected exposure on lost profit claims could reach up to $1,344,225.

To determine Sierra Nevada’s possible exposure to liability, two conditions needed to be met.

Our firm believes both of these conditions were met. As a result, our firm concludes Sierra

Nevada Trees could be held liable for Burger Ranch’s lost profits.

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Appendix 1

Gould Commercial Code

Section 2-207: Additional Terms in Acceptance or Confirmation

(1) A definite and reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract between merchants such terms become part of the contract unless: a. The offer expressly limits acceptance to the terms of the offer; b. They materially alter it; or c. Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

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Appendix 2

Weekly profit for the prior year of sales.

First 6 Months of Last Year Last 6 Months of Last Year Expense Revenue Expense Week of s s Profit Week of s Revenues Profit 6-Dec-04 103,084 122,533 19,449 6-Jun-05 101,201 153,171 51,970 13-Dec- 13-Jun- 04 99,584 131,036 31,452 05 99,726 136,244 36,518 20-Dec- 20-Jun- 04 94,936 137,813 42,877 05 96,206 101,012 4,806 27-Dec- 27-Jun- 04 100,757 114,495 13,738 05 100,878 156,135 55,257 3-Jan-05 102,736 120,579 17,843 4-Jul-05 99,439 125,567 26,128 11-Jul- 10-Jan-05 94,866 182,122 87,256 05 95,537 154,901 59,364 18-Jul- 17-Jan-05 96,158 137,983 41,825 05 105,354 128,439 23,085 25-Jul- 24-Jan-05 97,013 104,668 7,655 05 89,897 116,745 26,848 31-Jan-05 97,796 117,807 20,011 1-Aug-05 91,257 168,639 77,382 7-Feb-05 106,315 157,735 51,420 8-Aug-05 104,675 148,706 44,031 14-Feb- 15-Aug- 05 92,307 145,685 53,378 05 93,216 141,687 48,471 21-Feb- 22-Aug- 05 89,923 129,758 39,835 05 102,284 141,879 39,595 28-Feb- 29-Aug- 05 100,546 130,642 30,096 05 103,959 106,889 2,930 7-Mar-05 99,270 85,895 (13,375) 5-Sep-05 97,823 169,328 71,505 14-Mar- 12-Sep- 05 98,632 125,994 27,362 05 97,765 126,747 28,982 21-Mar- 19-Sep- 05 100,273 113,194 12,921 05 108,032 154,728 46,696 28-Mar- 26-Sep- 05 100,006 127,209 27,203 05 101,433 162,576 61,143 4-Apr-05 105,531 114,713 9,182 3-Oct-05 96,548 138,661 42,113 10-Oct- 11-Apr-05 92,774 145,468 52,694 05 93,295 158,689 65,394 17-Oct- 18-Apr-05 103,169 151,959 48,790 05 100,227 135,165 34,938 24-Oct- 25-Apr-05 105,794 68,623 (37,171) 05 97,876 112,240 14,364 31-Oct- 2-May-05 98,534 126,485 27,951 05 102,985 118,904 15,919 9-May-05 97,474 97,000 (474) 7-Nov-05 100,099 141,778 41,679 16-May- 14-Nov- 05 102,492 121,350 18,858 05 102,245 161,104 58,859 23-May- 21-Nov- 05 105,295 137,074 31,779 05 102,353 140,226 37,873 30-May- 28-Nov- 05 99,640 152,589 52,949 05 105,811 133,108 27,297

Appendix 3

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Graph A

Stats for the Above Graph Frequenc y in Profit in $ Weeks Less than -20,737 1 -20,737 to 0 2 0 to 20,737 12 20,737 to 41,474 16 41,474 to 62,211 17 62,211 to 82,948 3 More than 82,948 1

*Profit numbers taken from Appendix 2* To find the bin we used the high minus the low divided by 6. 87256 – (-37171) = 124427 / 6 = 20737.83333

So we made our lowest bin -20737, then the difference between each 20737, resulting in the 6 bins above.

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Appendix 4

Statistical Data for Weekly Profit During Given Times Periods. All data taken from Appendix 2.

Data Set A Data Set B First 6 Months (Dec 04 – May 05) Last 6 Months (June 05 – Nov 05) Mean 27519.38 Mean 40121.04 Standard Error 4841.941 Standard Error 3834.041 Median 27656.5 Median 40637 Standard Deviation 24689.15 Standard Deviation 19549.85 Sample Variance 6.1E+08 Sample Variance 3.82E+08 Range 124427 Range 74452 Minimum -37171 Minimum 2930 Maximum 87256 Maximum 77382 Sum 715504 Sum 1043147 Count 26 Count 26 Confidence Confidence Level(99.0%) 13496.6 Level(99.0%) 10687.14

Data Set C All 12 Months (Dec 04 – May 05) *Information below taken from Data Set C* Mean 33820.21 Standard Error 3182.377 Average Weekly Profit for the prior 12 month Median 33358.5 period: 33820.21 Standard Deviation 22948.45 Sample Variance 5.27E+08 Variance (formula stated below): 5.27E + 08 Range 124427 Minimum -37171 Standard Deviation (formula stated below): 22948.45 Maximum 87256 Sum 1758651 E = 8515.157 Count 52 Confidence Level (99.0%) (E) 8515.157 99% confidence Interval for weekly profits

Mean – E < P < Mean + E

33820.21 - 8515.157 < P < 33820.21 + 8515.157

25305.053 < P < 42335.367

Variance:

Standard Deviation:

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Appendix 5

To find expected exposure one must find the following - The expected costs of lost profits - The reconstruction costs

Then compute the following Expected costs of lost profits + Reconstruction Costs

Expected costs of lost profits = Average lost profits per week multiplied by weeks profit was lost.

$33,820.21 x 26 weeks = $879,325.46

Reconstruction costs = $464,900

$879,325.46 + $464,900 = $1,344,225.46

Therefore expected exposure = $1,344,225.46

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Appendix 6

Data Set D t-Test: Two-Sample Assuming Equal Variances Variable 1 Variable 2 Mean 27519.38 40121.04 Variance 6.1E+08 3.82E+08 Observations 26 26 Pooled Variance 4.96E+08 Hypothesized Mean Difference 0 df 50 t Stat -2.04039 P(T<=t) one-tail 0.023305 t Critical one-tail 1.675905 P(T<=t) two-tail 0.04661 t Critical two-tail 2.008559 a. Since the p value is less than 0.05 (our given alpha) then we can assume that there is a significant difference between the two variables. b. Key Average weekly profit of last year = 33820.21 Average weekly profit of last 6 months = 40121.04 Average weekly profit of first 6 months = 27519.38

*note that there are 26 weeks in each 6 month period

Full Year Average weekly profit of last year x 26 weeks 33820.21 x 26 = 879325.46

Last 6 Months Only Average weekly profit of last 6 months x 26 weeks 40121.04 x 26 = 1043147.04

Weighted Average Method (2x average weekly profit of last 6 months + average weekly profit first 6 months) / 3 x 26 weeks (2 x 40121.04 + 27519.38) / 3 x 26 = 933932.6533

Alternative Weighted Average Method (2 x average weekly profit of first 6 months + average weekly profit of last 26 months) / 3 x 26 weeks (2 x 27519.38 + 40121.04) / 3 x 6 = 824718.2667

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Works Cited:

1. Gunther, Richard. Course Pack for Bus 302 – Gateway. Spring 2007 ed. California: Quick Copies, 2007.

2. Wright, Justice. Sierra Nevada Trees, Inc. Library - Lee P. Cao and Louann P. “Aguilar Manufacturing, Inc. v. Richfield, Inc.,” Efrat, Rafi, Klassen, Kenneth, and Gunther, Richard. 2006. 170 – 172..

3. Wright, Justice. Sierra Nevada Trees, Inc. Library - Lee P. Cao and Louann P. “Kids’ World Inc. v. Labs Etc. Inc.” Efrat, Rafi, Klassen, Kenneth, and Gunther, Richard. 2006. 173 – 176.

4. Wright, Justice. Sierra Nevada Trees, Inc. Library - Lee P. Cao and Louann P. “Gould Commercial Code.” Efrat, Rafi, Klassen, Kenneth, and Gunther, Richard. 2006. 177.

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