November 26, 2005
Outsourcing of business operations is a growing trend in the U.S. In-house employees are replaced by a firm which handles the business using its own staff. Such agreements, writes Dennis F. Penepacker of Chicago’s Meyer Brown Rowe & Maw LLP, require the closest kind of relationships between the parties. He argues that neither the command-and-control mechanisms of in-house operations nor the arms’-length contacts typical of ordinary supplier contracts are appropriate.
November 25, 2005
Parol Evidence in South Africa
A surety who believed he had a prior oral agreement that his liability would be limited but who nevertheless signed an unlimited surety agreement, was entitled to claim the benefit of the earlier oral agreement, according to a recent decision by the Cape High Court in South Africa, Davids and Another v. ABSA Bank Ltd. According to a report by Dawie Malan of Johannesburg’s Cliffe Dekker Inc., the court held that the bankers who presented the agreement to the surety failed to explain the unlimited nature of the liability, despite a recitation in the agreement that it had been explained.
Today in History: What Do You Do With a Drunken Sailor?
On this date, November 25, 1795, young Levi Wyman is born in Shrewsbury, Massachusetts, the fourth son and seventh child of 38-year-old farmer and militia officer Seth Wyman and his wife, Mary Brown Wyman.
Unlike most of the Wymans, who will not settle far from home, Levi will develop a roving streak and go away to sea. And, unlike his sober siblings, he’ll become a drunkard and a spendthrift. When he lands ashore in Hartford, Connecticut, aged 25 and destitute, he’ll fall dangerously ill and into delirium -- no one knows why -- and will be tended by innkeeper Daniel Mills. Mills’s suit to claim recompense from Seth will enter the world of contracts casebooks as Mills v. Wyman in C.C. Langdell’s first edition in 1881.
The classic treatment of the case is the Tulane Law Review piece by Geoffrey R. Watson (Catholic), In the Tribunal of Conscience: Mills v. Wyman Reconsidered. The case is also the one that in law school inspired Lisa Bernstein (Chicago) with the desire to become a contracts professor.
November 24, 2005
Today in History: Senate Confirms Posner
On this date, November 24, 1981, the U.S. Senate confirmed 42-year-old Richard Allen Posner, a law professor at the University of Chicago, to the U.S. Court of Appeals for the Seventh Circuit. Given the fact that he had written the book The Economics of Contract Law with Anthony Kronman in 1978, it’s not surprising he would go on to be probably the most influential judge in contract law issues at least since Roger Traynor, and perhaps since Benjamin Cardozo. For a mano-a-mano slugfest between Posner and Cardozo, see Larry Cunningham’s Cardozo and Posner: A Study in Contracts.
November 23, 2005
Can't Get No Satisfaction
A previous post summarized Srour v. Dwelling Quest Corp., a New York case concerning when a real estate broker’s job is fully performed, entitling her to a fee. There, the parties’ contract defined the broker’s job as “assisting in the location and renting of a suitable apartment.”
The New York Court of Appeals decided the case yesterday, unanimously reversing the appellate decision in a summary memorandum. The lesson: you have to satisfy the conditions of your agreement to earn a brokerage fee. The court held:
Here, the rental agreement obligated the defendant-broker to assist plaintiff in renting a "suitable apartment" and provided that the broker's commission was to be paid "at the time of lease signing"; however, the apartment had become uninhabitable by the time the landlord signed the lease. Accordingly, the defendant-broker did not satisfy the brokerage agreement's condition, and is not entitled to any commission.
[Meredith R. Miller]
Contracting in Law's Shadow
It's a truism that all contracting occurs in the context of the legal regime that governs contract enforcement. But what are the implications of that statement? In Contracting in the Shadow of the Law, Nicola Gennaioli of the Institute for International Economic Studies at Stockholm University offers a model of how different judicial approaches lead to different contracting practices. Here's the abstract:
I study how law shapes the form and efficiency of contracts. I build a model where judges subject to personal biases try to subvert contracts by distorting fact-finding and interpretation. I consider two adjudication regimes, one where judges wield discretion and another where they must follow a code. I find that, by affecting judicial behavior, the law shapes the form of optimal contracts: discretion fosters the use of contingent contracts, codification the use of non-contingent contracts. Beyond contract form, I find that adjudication regimes fundamentally differ in their ability to enforce complex transactions, where performance is hard-to verify. The code's bias is the cost of codification, the arbitrariness of judges and juries and their incompetence are the costs of discretion. I illustrate the costs and benefits of discretion across areas of law by discussing findings from law and finance and product liability.
Today in History: Mansfield Admitted to Bar
On this date, November 23, 1730, twenty-five year-old William Murray of Lincoln's Inn is called to the Bar. The fourth son of the Scottish noble Viscount Stormont, his political connections will keep him in business during his early years. His marriage to the daughter of the Earl of Winchelsea, a former secretary of state and Lord President of the Council, won't hurt his advancement, either. (Image: Private collection.)
Murray will be Solicitor General at 37, Attorney General and Leader of the House of Commons at 49, and Chief Justice of the King's Bench at 51, where, as 1st Earl of Mansfield, he’ll go on to become the most famous (if not actually the most influential) commercial law judge in British history.
By the way, the Murrays, a canny Scots clan, will play both sides of the fence in true Master of Ballantrae style in the decades that follow the “Glorious Revolution” of 1688. While William is working his way up the ladder in King George’s government, his brother James Murray will go with the Jacobites and be made Earl of Dunbar by the exiled king, an honor he'll never enjoy.
November 22, 2005
Speaking of Allegheny . . .
As noted in this post, today is the 78th anniversary of Judge Cardozo's decision in Allegheny College v. National Chautauqua County Bank, 246 N.Y. 369 (1927). Coincidentally, today, the New York Court of Appeals issued a decision in Matter of the Estate of Wirth. Matter of the Estate of Wirth was described in a previous post because it calls to mind Allegheny College -- it addresses whether a promise to pledge money to a Pennsylvania college is enforceable. (Image source: Historical Society of the Courts of the State of New York portrait gallery ).
Today, the New York Court of Appeals held that the pledge was enforceable. The result was consistent with Allegheny College, but a statute enacted that same year drove the court's reasoning. The New York court recognized that Pennsylvania's Uniform Written Obligations Act, enacted in 1927, provided that a written promise is not unenforceable for lack of consideration if the writing contains an additional, express statement by the signer that he intends to be bound. In a unanimous memorandum, the court held:
By the plain terms of the statute, Wirth's pledge was not "invalid or unenforceable for lack of consideration," and Wirth's estate has no other defense to Drexel's claim. The estate argues that there was a "failure" rather than a "lack" of consideration, but this argument rests only on confusion. A "failure of consideration" means a failure to render the performance the parties agreed on (citation to Corbin omitted). In this case, there is no basis for asserting that Drexel failed to render any required performance.
Most interesting is not the reasoning or the result, but the rich history: Allegheny College is listed in the New York court's memorandum as amicus curiae.
[Meredith R. Miller]
Testamentary Promise is Not a Contract Claim
A claimed oral "contract" that a testator would leave money to a nephew was not a “creditor’s claim,” but rather a “contest” of the will’s provisions, according to a recent decision by the California Court of Appeals.
In the case, Nephew claimed that Aunt and Uncle, with whom he had lived, had promised to leave him 50 percent of their joint estate. Uncle died first, and Aunt subsequently changed her will, giving Nephew considerably less. Aunt also put a “no contest” clause in the will, providing that if anyone challenged the will, he or she would lose all rights under it. Nephew nevertheless filed a claim, based on the oral contract, noting that contract claims are by statute not within the scope of a “no contest” clause.
One interesting thing about the claim is that the court recited no consideration for the purported “contract.” The court didn’t go off on that ground, however, finding that where the alleged contractual promise is to leave money, a claim based on it is not a “creditor’s claim,” but rather a challenge to the distribution system itself. Accordingly, it fell within the “no contest” clause. (Although the court noted that the case was “more complex” than previous decisions, and that there was no case exactly on point, it nevertheless decided not to publish it.)
Zwirn v. Schweizer, 2005 Cal. App. Unpub. LEXIS 10429 (2d Dist. Nov. 14, 2005)
Law Firms Focus on Color
A piece today from Law.com examines the way law firms use color in their web site. Most firms use blue, a color "that conveys authority and royalty, as well as a sense of calm." But like the law schools that produce their lawyers, many national and international firms have their own colors:
Wilmer Cutler (Black & White)
Ropes & Gray (Blue & Gray)
Covington & Burling (Black & Red)
Sullivan & Cromwell (Navy & White)
Latham & Watkins (Maroon & Gray)
Skadden Arps (Cardinal & White)
Wachtell Lipton (Black & Green)
Jones Day (Blue & White)
Sidley Austin (Black & Gold)
Kirkland & Ellis (Gray & White)
Cleary Gottlieb (Crimson & White)
Holland & Knight (Orange & White)
Paul Weiss (Sky Blue & White)
Fulbright & Jaworski (Red & Gray)
Plaintiffs firms can be a little less traditional. The securities firm of Milberg Weiss uses Teal & Gray.
Today in History: Allegheny College
On this date, November 22, 1927, Judge Cardozo made a major dent in the doctrine of consideration and ensured himself an even bigger place in contracts casebooks when he issued the opinion in Allegheny College v. National Chautauqua County Bank, 246 N.Y. 369 (1927).
In the case, Mrs. Mary Yates Johnston made a $5,000 pledge to the college’s fund drive, to be paid from her estate. She subsequently revoked the gift. After she died, the college sued to collect. Held: The college won. Ordinarily, uncompleted gifts can be revoked by the giver, and Mrs. Johnston had plainly revoked. The promise could be enforced only if Cardozo could find a contract. He did:
The promisor wished to have a memorial to perpetuate her name. She imposed a condition that the "gift" should "be known as the Mary Yates Johnston Memorial Fund." The moment that the college accepted $1,000 as a payment on account, there was an assumption of a duty to do whatever acts were customary or reasonably necessary to maintain the memorial fairly and justly in the spirit of its creation. The college could not accept the money, and hold itself free thereafter from personal responsibility to give effect to the condition. More is involved in the receipt of such a fund than a mere acceptance of money to be held to a corporate use. The purpose of the founder would be unfairly thwarted or at least inadequately served if the college failed to communicate to the world, or in any event to applicants for the scholarship, the title of the memorial. By implication it undertook, when it accepted a portion of the "gift," that in its circulars of information and in other customary ways, when making announcement of this scholarship, it would couple with the announcement the name of the donor.
Cardozo seems to be (deliberately or not) confusing a conditional gift (“I’ll give you a car if you promise never to drive over the speed limit”) with a contract. But while the reasoning is suspect, the rule that you don’t need consideration to support a charitable pledge has gone into the books.
Allegheny College (top left), by the way, is still educating students in Meadville, Pa., a town known for being equally distant from Pittsburgh, Cleveland, and Buffalo. Allegheny is a small (2,100 students) liberal arts college, loosely affiliated with the Methodist Church. Its annual tuition these days is $31,000, and its current endowment is $113 million.
November 21, 2005
One Sided Contracts
"One Sided Contracts in Competitive Consumer Markets"
Before you go out for your holiday shopping, you may want to read this paper. It is a theory about why stores print out pages of sheets along with your receipt whenever you buy things.
The authors state:
This discussion paper shows that "one-sided" terms in standard contracts, which deny consumers a contractual benefit that seems efficient on average, may arise in competitive markets without informational problems (other than those of courts). A one-sided term might be an efficient response to situations in which courts cannot perfectly observe all the contingencies needed for an accurate implementation of a "balanced" contractual term when firms are more concerned about their reputation, and thus less inclined to behave opportunistically, than consumers are. We develop this explanation, discuss its positive and nor-mative implications, and compare them to those of information-based explanations for one-sided terms.
Bebchuk, Lucian Arye and Posner, Richard A., "One-Sided Contracts in competitive Consumer Markets" (November 9, 2005). Harvard Law and Economics Discussion Paper No. 533 http://ssrn.com/abstract=845108
Managing Public Image in Star-for-Hire Contracts
The N.Y. Times reports on a "growing trend": the very rich are increasingly hiring superstars to perform at their private parties. These "star-for-hire" private performances can command up to $1 million, and because of the "cheese factor" many stars demand that the performances be kept private. The article explains:
Before committing to a private date most stars or their representatives carefully read the guest list and demand a clause in the contract forbidding publicity: no press, no cameras, no video. The secrecy, say people involved in these functions, stems in part from the stars' insecurity. They worry that cashing a six-figure check for a couple of hours of rocking out for Aunt Alice or Cousin Bobby will make them look like sellouts - or, maybe worse, wedding singers. The last thing they want is to be associated in the gossip pages with an event that smacks of elitist excess.
Presumably, no hot ticket performer wants to be seen as a wedding singer. This is likely why a spokeswoman for Sir Elton John refused to comment on rumors that the artist had performed at the wedding of a British financier. Instead, she explained to the newspaper that "‘private concerts’ are private." It raises an important question, though: how many six-figure "private performances" does it take for a superstar to become a wedding singer?
[Meredith R. Miller]
Lipshaw on Rational Frogs
Jeffrey M. Lipshaw (Wake Forest) has been doing a lot of work lately exploring the ethical aspects of transactional law. His latest, Reason, Self-Deception and Rational Frogs: Reconciling Comprehension and Responsibility in Law and Business Ethics, is now up on SSRN. Here's the abstract:
This is my attempt to dig deeply into the descriptive and normative aspect of our study of business law and ethics. The possibility of conflation of the descriptive and normative is reflected in no discipline as much as law. The coincidence of legal positivism (a view I largely endorse) and the adoption of a social science approach has, it seems to me, not only created some questionable social science, but has left a significant void in the way legal academics (and perhaps lawyers) look at ethical duties and responsibilities, particularly in business. I am particularly concerned with two topics that go to the heart of what business lawyers do: (a) justifying harm to others, and (b) resolving inter-firm or inter-personal conflicts, where there may be wide variances in legitimately-held professional and personal values. Hence, this is an epistemological search for a satisfying secular business ethic.
Although it appears to me this will approach book length, I have finished (at least, I hope, to the point of a moderately professional standard) a preface, an introductory Chapter 1 that at least outlines the entire argument, and Chapter 2, which is the bulk of the theory that will be applied in later chapters. At this point, I am willing to make it public for purposes of scholarly reaction.
Weekly Top Ten
There are few changes this week in the Top Ten. Following are the top ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending November 20, 2005. (Last week's position in parentheses.)
1 (1) Risk Management in Long-Term Contracts, Victor P. Goldberg (Columbia).
2 (2) Katrina's Continuing Impact on Procurement - Emergency Procurement Powers in H.R. 3766, Christopher R. Yukins & Joshua I. Schwartz (Geo. Washington).
3 (3) Resolving the Paradox of the Consideration Doctrine: The Implications of Inefficient Signaling and of Anti-Commodification Norms, David Scott Gamage (Texas) & Allon Kedem (Independent).
4 (4) In Memoriam, John Cibinic, Jr., Ralph C. Nash (Geo. Washington), et al.
5 (5) Rethinking Spyware: Questioning the Propriety of Contractual Consent to Online Surveillance, Wayne Barnes (Texas Wesleyan).
6 (6) Are Heuristics a Problem or a Solution?, Douglas A. Kysar (Cornell).
7 (7) The Hidden Roles of Boilerplate and Standard Form Contracts: Strategic Imposition of Transaction Costs, Segmentation of Consumers and Anticompetitive Effects, David Gilo & Ariel Porat (Tel Aviv).
8 (8) Contracting in the Shadow of the Law, Nicola Gennaioli (IIES-Stockholm).
9 (-) Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere, Richard Craswell (Stanford).
10 (9) Effective vs. Nominal Valuations in Venture Capital Investing, Michael Woronoff (Proskauer Rose) & Jonathan Rosen (Shelter Capital).
Contract Doesn't Require "Pointless" Hearing
A physician had a contractual right to a hearing before his hospital privileges were terminated, but the right didn't apply where the termination was purely a business matter that did not cast doubt on his competence, according to a recent decision by the Florida Court of Appeals.
In the case, the plaintiff physician had enjoyed privileges for pain management services at Naples Community Hospital. The hospital bylaws provided that physicians are entitled to a hearing before their privileges are terminated. The hospital subsequently entered into an exclusive contract with another provider, and the physician’s privileges were terminated without a hearing.
Florida had previously held that such bylaws create a contract with the physician. The district court accordingly ruled for the physician, issuing an injunction restoring his privileges. The Court of Appeals reversed. The bylaws did create a contract, the court agreed, but the question was one of interpretation. Read as a whole, the hearing procedures clearly contemplate a situation where privileges are being withdrawn for cause, such as incompetence. Such an action has a potentially serious effect on the physician and his reputation. Here, a hearing would seem to be pointless:
We cannot imagine how Dr. Hussey's hearing, if he were to get one, would proceed. There would be no statement of acts or omissions, no patients records, and no testimony casting doubt on his skill -- no accusations against which to defend himself. Ultimately, the decision of reappointment would fall to the Board of Directors of the Hospital, the very body that made the business decision that adversely affected Dr. Hussey's clinical privileges at the Hospital. According to the Policy, the express purpose of a hearing "shall be to recommend a course of action to those acting for the hospital corporation." Here, those acting for the corporation have already entered into an exclusive contract with another provider, thus making the recommendation and hearing process useless. The hearing process described in the Bylaws clearly does not apply when a staff member is denied reappointment because of a business decision to enter into an exclusive contract with another provider.
Naples Community Hospital, Inc. v. Hussey, 2005 Fla. App. LEXIS 17657 (2d Dist. Nov. 9, 2005).
Today in History: The Mayflower Compact
On this date, November 21, 1620, the first English written contract in North America is executed aboard the Mayflower off Cape Cod, Massachusetts. Forty-one men sign what will come to be known as the Mayflower Compact:
In ye name of God, Amen. We whose names are underwriten, the loyall subjects of our dread soveraigne Lord King James by ye grace of God, of Great Britaine, Franc, & Ireland king, defender of ye faith, &c.
Haveing undertaken, for ye glorie of God, and advancemente of ye Christian faith, and honour of our king & countrie, a voyage to plant ye first colonie in ye Northerne parts of Virginia, doe by these presents solemnly & mutualy in ye presence of God, and one of another, covenant & combine our selves togeather into a civill body politick; for our better ordering & preservation & furtherance of ye ends aforesaid; and by vertue hearof, to enacte, constitute, and frame shuch just & equall lawes, ordinances, acts, constitutions, & offices, from time to time, as shall be thought most meete & convenient for ye generall good of ye Colonie: unto which we promise all due submission and obedience. In witnes wherof we have hereunder subscribed our names at Cap-Codd ye .11. of November, in ye year of the raigne of our soveraigne lord King James of England, France, & Ireland ye eighteenth, and of Scotland ye fiftie fourth. Ano: Dom .1620.
November 20, 2005
Looking Like a Harvard Professor
[Beat poet Cappy (Morey Amsterdam) and sociology professor Dr. Robert Sutwell (Bob Cummings) are talking. Sutwell has an extremely prominent beard]
Cappy: Just one thing, Professor, will you level with me? What's with the feather duster? The beard? You think it moves the chicks?
Sutwell: No, it usually works the other way.
Cappy: I don't dig. You don't want to level with me?
Sutwell: All right I'll level with you. When I first started out a Harvard, I was the youngest professor at the university. I was so young that it was sickening. No one took me seriously. Every time when I opened my mouth to speak, my students laughed, the other professors laughed, even the janitors laughed. Well, I knew it couldn't go on for long before I was fired, so one day at lunch, I sat down in the student cafeteria and presented my problem to this old professor friend of mine. And without even glancing up from his soup, he said to me: "buy yourself a pair of glasses and grow a beard." So you see, all of this is just 18 years of professor window dressing.
Cappy: Amazing how our lives parallel. You have that, and I have this. [points to his chin, which has a beatnik beard] You know why I grew this? I got a dimple in my chin and I didn't want anyone mistaking me for Kirk Douglas.
Sutwell: But you don't look anything like Kirk Douglas.
Cappy: See? It works.
From Beach Party (1963)
Today in History: November 20
Four hundred years ago today, February 20, 1605, the first known Europeans set eyes on the continent that would come to be known as Australia. The Dutch East India Co.'s (Verenigde Oost-Indische Compagnie) sailing ship Duyfken, under the command of company employee, Willem Janszoon, enters the Gulf of Carpenteria. Janszoon names the place "Nieu Zelandt." The name doesn’t catch on, though, and so will be available later for a different country. (Left: Corporate logo of the Dutch East India Co.)