This is going to require a little reading, so take yourtime.
Storybook Homes, Inc. developed the following formula forbonuses: [T]he bonus shall be computed in the following manner
a. 0 to $10,000 Net Profit No Bonus
b. $10,000 to $20,000 a maximum bonus of 5% shall be paid toboth [employees]
c. $20,000 and over a maximum bonus of 22% shall be paid toeach
The firm earned $25,000 in profits, and the employees and firmdiffered over how to compute the bonus!
The employees believed the bonus should be computed this way:Net Profit $25,000 Bonus 22% x $25,000 = $5,500
2. The firm believed that each bonus percentage was to be on theincremental portion of Net Profits, like this:
Profit portion Resulting bonus Net profits â1 st interval Netprofits â 2 nd interval Net profits â 3 rd interval $10,000$20,000-$10,000 = $10,000 $25,000 -$20,000 =$ 5,000 $ 0 5% x$10,000= $ 500 22% x $5,000=$1,100 Total bonus $1,600
Storybook Homes, Inc. v. Carlson is a famous case because itseems that the bonus description is ambiguous. Eitherinterpretation could be correct and in contract law, ambiguity isgenerally interpreted against the contract writer. In this case,the contract writer would be the company. The jury ruled for theemployees. The judge entered a âJudgment notwithstanding theverdictâ in favor of the company. So, the company was able to paythe bonuses according to their interpretation. This was odd becausethe judge went against the jury and ambiguity should have goneagainst the company.
a. Suppose you were an employee and believed that you would bepaid based on the employee interpretation (22% x Net Profits), andprofits were $19,900 in the week before year end. Would it pay topurchase enough merchandise yourself to bump the profits to$20,000?
b. It seems to me that we have multiple challenges to paying anemployee according to their work. Todd Henderson illustrated a lotof challenges. The Storybook Homes, Inc illustrated ambiguity inthe bonus scheme. Does ambiguity create more incentive to workdiligently or less incentive to work diligently?
c. Comment on the judge ruling against the employees. Part ofthe judge's argument was that it wouldn't make business sense toview the bonus provision according to the employee interpretation.Was the judge reasonable?
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