Orkin Extermination Company

Case Summary: Between 1966 and 1975, Orkin Exterminating Company contracted with their customers a “lifetime” termite protection control if the contracted customers continue to pay the annual renewal fee. But, this contract became too expensive for Orkin when US suffered price inflation. It decided to increase annual renewal fee by 40 Percent.

Few persistent customers were able to escape the rate increase through an accommodation plan, while most customers were not informed about this possibility. Ethical and Legal Implication of Orkin’s BehaviorEthical Dilemma: Is it Ethical for Orkin to increase the price, while the customers have been paying the annual renewal fee regularly as per the contractual agreement in return for Orkin to provide lifetime termite protection control? Unless there is a 100 percent increase in cost, it is unethical if Orkin increases the price for reasons such as ‘profit is lesser after cost increase’. However, it might be ethical in very few cases where they suffer loss. And committed contracted service is impractical to meet anymore.In such cases, Orkin could reconsider and attempt to negotiate a new contract explaining the changed situation to all the affected customers. Is it appropriate to conceal and not inform about the accommodation plan to all the customers equally? No, it is NEVER ethical to conceal facts that benefit only few customers while most other customers are affected.

All customers must to be treated equally and there should not be any bias in the decisions or consideration. Is it fair allowing few customers to escape the price increase while most of them were affected? It is not a mistake on the customers who made their way out escaping the price.However, it is not ethical on the part of Orkin not informing about the same ‘accommodation plan’ to all the customers who entered the lifetime contract during 1966-1975. Legal Implication: I have highlighted various angles of legal issues with specific references and examples with regard to Orkin’s behavior in this case. Let us start from ‘contract’. Orkin has entered into explicit contract with its customers for lifetime guarantee of termite control protection and the customers have been paying the annual renewal fee regularly.

So customers can sue Orkin’s if they fail to keep up the promise.Mistake of Judgment: As stated in Chapter 7 of Bagley, C. E & Savage D. W.

, (2010), the situation with Orkin’s contract during 1966 is a mistake of judgment when the parties make an erroneous assessment about some aspects of what is bargained for. Orkin’s failed to consider cost increase factors at the time of entering into a contract. Cost increase is an expected circumstance as the years go by, when offering a lifetime guarantee, a business must have considered the possible cost increase in establishing the contract. The annual renewal fee should have been decided based on the future cost situations and not merely the present cost.

Whereas, Orkin’s made an error in business judgment, mistakes in business are not excused from the contractual obligation unless there is an intentional manipulation of facts and fraud from the other party when the contract was made. So the future contract will still be valid. Commercial Impracticability: Section 2-615 of UCC states under the doctrine of commercial impracticability that unless the contract provides otherwise, a failure to perform is not a breach if performance is made impractical by an event unforeseen by the contract.If Orkin is seeking a discharge of its lifetime service agreement with its customers, it must show evidences, out of which, Orkin might attempt to argue reasoning Unforeseen Contingency and Impracticable performance.

However, every occurrence is somewhat foreseeable. Market fluctuations are not considered as Unforeseen Contingency and price inflation is somewhat foreseeable too. Chapter 8 Bagley, C. E & Savage D.

W. , (2010) also quotes that “Increased cost alone is not sufficient reason to excuse performance unless it is a marked increase. For example, in Publicker Indus Inc. vs Union Carbide Corp Case, the court observed, “We are not aware of any cases where something is less than a 100% cost increase has been held to make a seller’s performance impracticable. ” Transactions that have merely become unprofitable will not be excused.

Sellers cannot rely on Section 2-615 to get them out of a bad bargain. So Orkin’s will have a chance to use Section 2-615 only if cost increased 100% or more to win a favorable response from legal standpoint. ? Conclusion:Formal Change or Contract Modification: The legal way to address Orkin’s matter is to announce about the price inflation to all the affected customers and try to enter into a mutually agreed new contract explaining the marketing condition and price inflation. It is mentioned in the case that Orkin’s revised plan still comes out to be cheaper than their competitors’ price and many customers have already agreed.

Given this circumstance, there is less chance for customers to get upset and approach legally considering the known Market price and price inflation.So, being open to the customers might get Orkin’s a better chance to settle this matter peacefully within. Also, doing so will increase loyalty with its long time customers. However, if Orkin only allow few customers to escape the price increase through the ‘accommodation plan’, it will definitely rage all other affected customers and they will sue Orkin’s for their biased behavior and concealing facts. Reference: Bagley C. E.

, Savage D. W. , (2010). Managers and the Legal Environment, 6e. Strategies for the 21st Century.

Ohio: Mason Publicker Indus. , Inc. v. Union Carbide Corp. , 17 U. C.

C. Rep. Serv. 989 (E. D.

Pa. 1975).