ContractsProf Blog

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Tuesday, May 23, 2006

A Nice Deal if You Can Get It

No one can accurately measure how much value a good CEO adds to a large public company.  No one knows how many people there are out there who have the skills and training to run large public companies.  No one can accurately tell, even after the fact, whether a particular CEO was good or bad, or merely lucky or unlucky.  When you couple this with the fact that the employment relationship is the ultimate relational contract, where the parties are not bargaining at arms' length, it's not surprising that you see people getting paid very large amounts of money.  Our colleage Richard Bales over at Workplace Prof Blog has an interesting post about a method companies are using to mask exactly how much money the CEO gets.

[Frank Snyder]

May 23, 2006 in Labor Contracts | Permalink | TrackBack (0)

Monday, May 22, 2006

Even Castles Made of Sand...

744pxflag_of_indianasvg_1 Why build a home for your retirement when you could build a medieval castle? That was the Gunkels' attitude when they contracted with a construction company to build a 44-foot-high, 3,400-square-foot castle on Snow Lake in Indiana.  However, it wasn't all fun and games when, according to the couple, the castle developed structural problems that delayed them from moving in.  In 2000, the couple sued their contractor; at the time, they still owed the contractor $92,435 on another constructon contract. 

The case made its way up to the Supreme Court of Indiana, which remanded it back to the trial court.  The AP reports that the trial judge had to decide "if the contractor was responsible for work ordered by the Gunkels through other contractors, such as a new roof, carpet replacement and many doors and windows and furniture refinishing."  The trial courtrecently published a ruling, awarding the contractor $211,935 for damages due to breach of contract, attorney fees and interest.  The Gunkels were awarded $31,826 for attorney fees, repair work on windows and doors and interest.

A picture of the castle can be seen here.

[Meredith R. Miller]

May 22, 2006 in In the News | Permalink | TrackBack (0)

Friday, May 19, 2006

The Replacements' SNL Contract

This contract tale about the Replacements from anecdotage.com:

"Saturday Night Live" producers were so worried about an appearance by Paul Westerberg and the Replacements (who once sang their song "Shut up!" with a "F--- you!" chorus after disagreeing with a nightclub manager) that they forced the band to sign a $20,000 agreement not to swear on the air.

Westerberg endeavored to sneak in as much profanity as possible with subtle replacements. During their performance of "Kiss Me on the Bus," for example, he replaced the word "bus" with a mumbled "butt."

[He also mouthed the words "F--- you" as he stepped back from the mike. But because they were inaudible, Westerberg's words, while greatly annoying to the show's producers, did not violate the band's contract.]

[Meredith R. Miller]

May 19, 2006 in Miscellaneous | Permalink | TrackBack (0)

Wednesday, May 17, 2006

North Dakota Contractor Wins Appeal in Street Paving Case

NdmapdotonbismarckMariner Construction, Inc. agreed to undertake road work for the city of Bismarck, North Dakota. Within five months of Mariner’s completion of the work, the seal coating on the asphalt of the city’s streets began to deteriorate. Mariner blames its supplier for defective asphalt; the supplier blames Mariner for defective application of the asphalt. In either event, the contract between Mariner and Bismarck provided for a one-year warranty against defects in materials and workmanship:

WARRANTY. The Contractor shall guarantee all work against faulty materials and workmanship for a period of one year from the date of final payment and the performance bond shall remain in full force and effect for the period.

Bismarck claims that Mariner did not repair the pavement within this time frame. A jury agreed and awarded the city of Bismarck over $250,000 in damages, plus interest. The trial court rejected Mariner’s request for a new trial. However, this week, the North Dakota Supreme Court reversed and granted Mariner a new trial. The court unanimously held that the trial court erred in allowing the jury to interpret the parties’ contract. The court reasoned:

Although the district court held in a pre-trial ruling that the contract was "not ambiguous" and precluded the admission of evidence during trial about the parties' intent, the court's instructions effectively authorized the jury to interpret the contract. Our law for interpreting contracts requires the court to initially determine if the contract is ambiguous, which is a question of law…. In a breach of contract action, if the contract is unambiguous, the court interprets the meaning of the contract as a matter of law and the trier of fact determines if the contract, as construed by the court, has been breached…. If a contract is ambiguous, the trier of fact may consider extrinsic evidence about the parties' intent to determine the meaning of the contract…. After that preliminary step in which the trier of fact determines the meaning of the contract, the trier of fact then decides whether the parties have breached the contract….

Here, the district court did not follow that procedure; rather, the court held the contract was "not ambiguous" and sustained objections to proffered testimony about the meaning of the contract. The court nevertheless instructed the jury on rules for interpreting the contract and that the failure to perform all or any part of what was warranted or required in the contract was a breach of contract without instructing the jury what the contract required. Moreover, the special verdict only asked whether Mariner breached the contract without any specificity about faulty workmanship or materials. We conclude the court's instructions did not fairly and adequately advise the jury on the applicable law for a breach of contract claim. We therefore conclude the court misapplied the law for resolving Bismarck's breach of contract claim against Mariner and abused its discretion in denying Mariner's motion for a new trial.

City of Bismarck v. Mariner Construction, Inc., 2006 ND 108 (May 16, 2006).

[Meredith R. Miller]

May 17, 2006 in Recent Cases | Permalink | TrackBack (0)

Tuesday, May 16, 2006

Titan QB's Contract Claim Heard Today

Tennessee Titan quarterback Steve McNair's contract grievance against the team is going before an arbitrator today.  The Titans have refused to let McNair, who is under contract at $9 million a year, practice with the team, for fear that if he gets injured they will be on the hook for his salary.  But they are also refusing to release him, leaving McNair in limbo.

[Frank Snyder]

May 16, 2006 in In the News | Permalink | TrackBack (0)

Universities Afraid of Contract Claims

Aaa_50 There's a new problem looming for British universities whose faculty are refusing to grade papers and final exams:  breach of contract actions by angry students and by parents who foot the bills.  In addition to claims that students are entitled to get their degrees on schedule, there are potentially serious consequential damages, including decreased value of the degrees if employers perceive 2006 degrees to be somehow tainted.  Parents and family members are also on the hook for travel expenses to get to graduations that won't occur.  The Guardian has a recap of the current situation.

Meanwhile, Leeds University (upper left) is threatening to dock the wages of striking faculty and use the money to "ameliorate" the hardships that students are suffering.

[Frank Snyder]

May 16, 2006 in In the News | Permalink | TrackBack (0)

Contract Doctrine and Incomplete Contracts

Aaa_49 Lots of people are talking about the issue of incomplete contracts these days, but how many of them are looking for solutions to that old standby:  contract doctrine?  Well, North Carolina's Scott Baker and Kimberly Krawiec are.  In Incomplete Contracts in a Complete Contract World, forthcoming in the Florida State University Law Review, they examine what role doctrine can play in dealing with the issues.  Here's the abstract:

This paper considers the role that contract doctrine should play in facilitating optimal investment in contractual relationships. All contracts are incomplete in the sense that they do not specify the optimal actions for the buyer and seller in every future contingency. This incompleteness can lead to both under and over-investment in resources specifically targeted to the needs of the other contracting party. To solve these investment problems, economists and legal scholars have looked to complicated contractual solutions and the ownership of assets.

This Article offers another solution: contract doctrine.  Specifically, we propose a contractual default rule applicable to all contract interpretation, gap-filling, and good faith inquiries (a relationship-specific investment, or RSI default) that accounts for the renegotiation position of contracting parties. Because contractual default rules form the backdrop against which parties renegotiate, the RSI default allocates bargaining power to one party or the other in much the same manner as does ownership. The RSI default favors the contracting party making an RSI, while at the same time minimizing potential problems of over-investment through a notice requirement. We also offer some preliminary thoughts on the problem of two-sided RSIs.

[Frank Snyder]

May 16, 2006 in Recent Scholarship | Permalink | TrackBack (0)

There But For Fortune . . . .

It’s one of the contract lawyer’s worst nightmares: a drafting error that cost the client millions of dollars.  That’s the allegation facing Alston & Bird, which drafted the documents for a $16 million venture capital investment in an Atlanta high tech firm.  The documents were written to (naturally) give the venture capitalists a preference on liquidation, merger, or acquisition.  But the clients say the law firm inadvertently pasted a “tag-along” provision in the deal that gave the same preference to some other folks, which resulted in a $5.3 million loss to the clients.  Suit has been filed in state court in Atlanta.  The firm’s fees on the deal were reportedly about $71,000.

[Frank Snyder -- hat tip, Ben Templin]

May 16, 2006 in In the News | Permalink | TrackBack (0)

Monday, May 15, 2006

All with the Swipe of a Plastic Card . . . .

When a bank issues a credit card it enters into a vast network of commercial transactions and relationships, and many of the parties in that network are unknown to the bank. These numerous relationships are each governed by their own contracts. For example, Visa is a “membership association” owned and controlled by its members. To become a member of the Visa association, a financial institution must agree to abide by Visa’s operating regulations. Visa has “issuing members,” which are financial institutions that issue Visa cards to cardholders pursuant to a contract. There also “acquiring members,” which are financial institutions that enter into contracts with merchants to process card transactions at the retail end. Just as Visa members, merchants must agree to comply with Visa’s operating regulations. Within this vast network, who should be liable for losses when a cardholder’s data is stolen? On what legal theory?

In a recent case in the Middle District of Pennsylvania, Sovereign (an issuing bank) sued Fifth Third Bank (an acquiring bank) and BJ’s Wholesale Club (a merchant) for losses incurred when data was stolen from Sovereign’s cardholders. The cardholders made purchases at BJ’s when, with a swipe of their cards, a machine accessed account data from their magnetic stripes. After accessing the account data, BJ’s did not erase the cardholders’ information from its computers. BJ’s computer system was hacked, and the cardholders’ account numbers were stolen. As a consequence, Sovereign had to reissue the cards and reimburse cardholders for unauthorized charges. Sovereign sued Fifth Third and BJ’s to recover these losses. Visa’s operating regulations prohibit a merchant from storing or retaining cardholder data.

Sovereign asserted claims of breach of contract and promissory estoppel against Fifth Third. Among others, Sovereign asserted claims of promissory estoppel and breach of fiduciary duty against BJ’s. BJ’s and Fifth Third moved to dismiss these claims. (The breach of contract claim against Fifth Third was not a subject of the court's decision on the motions to dismiss).

The court dismissed both of the promissory estoppel claims.

Continue reading

May 15, 2006 in Recent Cases | Permalink | TrackBack (0)

Weekly Top 10

Ssrn_logo_58 One new paper joins the Top 10 this week, Mark Movsesian's new piece on formalism, which debuts at number nine.  Following are the ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the sixty days ending May 14, 2006.

1 (1) Emerging Policy and Practice Issues (2005), Steven L. Schooner & Christopher R. Yukins (Geo. Washington).

2 (2) Contract Law Theory, Brian Bix (Minnesota).

3 (3) The Best Puffery Article Ever, David A. Hoffman (Temple).

4 (4) Corporation and Contract, Henry Hansmann (Yale).

5 (5) Contract Formation Issues in Employment Arbitration, Richard A. Bales (Northern Kentucky).

6 (6) The Employment Due Process Protocol at Ten: Twenty Unresolved Issues, and a Focus on Conflicts of Interest, Richard A. Bales (Northern Kentucky).

7 (7) Constructing a Bid Protest Process: Choices Every Procurement Challenge System Must Make, Daniel I. Gordon (GAO).

8 (9) Managing Risk on a $25 Million Bet: Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, Robert P. Bartlett (Georgia).

9 (-) Formalism in American Contract Law: Classical and Contemporary, Mark L. Movsesian (Hofstra)

10 (10) The UNCITRAL Electronic Contracts Convention: Will it be Used or Avoided?, Charles H. Martin (UDC).

[Frank Snyder]

May 15, 2006 in Recent Scholarship | Permalink | TrackBack (0)

A Unified Theory of Contract Damages

Aaa_48 Contract damages are one of the hardest things for law students to understand.  Not coincidentally, they are one of the hardest things for their professors to teach.  This is due in part to the fact that there is little agreement over even fundamental questions, such as whether reliance and expectation remedies are cumulative or exclusive.

Two scholars whose work has focused recently on developing a coherent way of teaching damages, are Seton Hall's David Barnes (left) and CUNY's Deborah Zalesne.  We've mentioned their work before in some detail.  They've now moved on to offer A Unifying Theory of Contract Damages, forthcoming in the Syracuse Law Review, in which they propose a new approach to damage calculations, based on their "surplus-based" concept.  It's a thoughtful and challenging approach, and sure to spark some discussion.  Here's the abstract:

This article justifies a reformulation of modern contract damage rules articulated in a new restatement of contract damages, see Barnes and Zalesne, The Shadow Code, 56 South Carolina L. Rev. 93 (2004).  The unifying principles of the surplus-based approach offered here lies in the shadows of contract remedies as articulated in Article 2 of the Uniform Commercial Code (U.C.C.), the Restatement (Second) of Contracts.  The Shadow Code presented in this Article combines these principles and formulas into a new image of legal remedies for contract breach. This reconceptualization is based on the foundational principle that parties injured by contract breach are entitled to any surplus of benefits over costs those parties would have realized had the breaching parties performed. The Shadow Code reflects the modern understanding that damages are intended to ensure that the injured party is as well off as if the other party had performed as promised.

[Frank Snyder]

May 15, 2006 in Recent Scholarship | Permalink | TrackBack (0)

A Great New Way to Avoid Grading Papers

Aaa_47 The worst part of teaching at a college or university -- except perhaps for faculty meetings -- is grading papers.  Professors in the U.K. have turned this particular lemon into lemonade, by refusing to give exams or grade papers unless they get a pay raise.  About half the dons at British universities are apparently participating in the “industrial action,” refusing to mark papers or exams for their students.  Some universities (including the University of Wales, Aberystwyth, left) are already canceling finals and papers, and making plans to deal with the problem, including delaying degrees, awarding temporary degrees, or even granting degrees based on performance to date without the final exam or paper.

It will be interesting to see how students will respond to the fact that their faculties regard them as bargaining chips in a labor dispute.

[Frank Snyder]

May 15, 2006 in In the News | Permalink | TrackBack (0)

Today in History: Sherwood Buys a Cow

Aaa_45 Exactly 120 years ago today, May 15, 1886, at Walkerville (now part of Windsor), Ontario, distiller and cattle breeder Hiram ("Canadian Club") Walker and banker Theodore C. Sherwood struck a deal over a polled Angus cow named Rose.  Walker agreed to sell the cow, which he thought barren, for $80.  When she turned out to be with calf (and therefore worth as much as $1,000), Walker reneged, leading to the most famous "mutual mistake" case in U.S. history, Sherwood v. Walker.  In honor of the day, this lyric, to the tune of Bob Dylan's Just Like a Woman.

JUST LIKE A HEIFER
Now Sherwood needed a cow.
It's not clear if for breeding, or for chow.
He went to Walker's farm,
Thought there would be no harm --
But there he fell under Rose's fatal charm
And he knew --
She's the one.

CHORUS
She moos, just like a heifer (Yes she does)
And she chews grass just like a heifer (Yes she does)
And she woos bulls just like a heifer --
But she's priced just like a side of beef.

Now Sherwood offered to buy.
Old Walker pulled out a jug of rye.
Sherwood thought, "It's her I need!"
Walker thought, "She cannot breed."
The two men haggled and at last agreed
On a price --
For that Rose.

[CHORUS]

BRIDGE
Sherwood went to get his cow,
Walker said, "Ah, now,
I won't let her go!
Eighty bucks?  Don't make me laugh!
This cow is now with calf!
And I tell you here,
She's now too dear!
Let me make it clear -- that

I just won't sell.
And Sherwood, you can go to hell!
The contract I will break,
Advantage I will take
Of the doctrine known as ‘mutual mistake,'
And you -- you're just screwed."

[CHORUS]

[Frank Snyder]

May 15, 2006 in Famous Cases, Today in History | Permalink | TrackBack (0)

Sunday, May 14, 2006

City, Developer to Go to Mat

Aaa_39 Even the longest-running contractual relationships can go sour, as evidenced by a soap opera going on in West Covina, California, where a real estate developer and car dealer’s 25-year “partnership” with the city has turned south.

The city council has declared Zaid Alhassen in breach of contract over projects funded by some $13 million in city loans and incentives.  One of the projects in dispute is a new Hummer dealership (left), partly financed with $3.5 million in city incentives.

[Frank Snyder]

May 14, 2006 in In the News | Permalink | TrackBack (0)

"Unfair Advantage" and "Transactional Neglect"

Aab_34 Bargaining power is like money: you can never have too much.

Or can you?  Sometimes bargaining power, through no fault of your own, can shift to "unfair advantage," is in the classic case where the other party has absolutely no choice but to agree.  This differs from duress or undue influence in that the party getting the advantage didn't cause the situation that causes the pressure.   In a new paper, Contracts by Unfair Advantage: From Exploitation to Transactional Neglect, forthcoming in the Oxford Journal of Legal Studies, Rick Bigwood (Auckland) seeks to create a "paradigm shift" in how courts deal with the issue.  Here's the abstract:

This article aims to effectuate a paradigm shift in the way we view cases involving pure advantage-taking in contract formation. By “pure advantage-taking” it is meant that D in some sense took “unfair advantage of” a special bargaining weakness or vulnerability that D found “ready-made” in P: D neither caused P’s relevant weakness or vulnerability nor otherwise was legally responsible for relieving it.  Certain undue influence and unconscionable dealing cases (for example) fit this scenario perfectly, yet senior Commonwealth courts consistently assert (or imply) that the doctrines of undue influence and unconscionable dealing are ordered, ostensibly exclusively, by a common law precept against interpersonal exploitation, and that judges are, when they invoke those doctrines, responding precisely to that particular concern.  It is argued here, however, that the exploitation concept serves, or ought to be seen as serving, no necessary justificatory function in relation to state-assisted rescission or suppression of contracts objectively formed at common law. Instead, a principle of (what I shall call) “transactional neglect” should be seen to eclipse and subsume the exploitation concept as the prevailing justification for interference with apparent contracts in pure “unfair advantage” situations.  The advocated shift is thus away from “exploitation” towards “transactional neglect” -- D’s corrective liability for failure to take reasonable precautions against the risk of foreseeable transactional harm to P, when P and D were, knowingly to D at the time, bargaining under conditions that make “exploitation” possible.

[Frank Snyder]

May 14, 2006 in Recent Scholarship | Permalink | TrackBack (0)

Saturday, May 13, 2006

Handling Pre-Contractual Reliance

The situation where one or both parties to a contract have to start investing resources before the deal is struck has been the subject of much recent scholarship.  Some conclude that parties who make such investments should be given a right to recover; others argue that allowing recovery is a bad idea for various reasons, such as the fact that it would undercut the important signaling function that such investments serve.

A new entry into the debate is Regulating Contract Formation: Precontractual Reliance, Sunk Costs, and Market Structure, by Ofer Grosskopf (Tel-Aviv) and Barak Medina (Hebrew).  Here's the abstract:

This Article challenges the plausibility of the prospect of underinvestment in precontractual reliance (PCR). We show that a negotiating party is motivated to invest in PCR not only through her expectation to extract the benefits that the investment yields (Added-Value Motivation), but also through the effect of the investment on her position vis-a-vis her competitors (Competition-Based Motivation). We demonstrate that under plausible assumptions, when a negotiating party operates in a relatively competitive market, the Competition-Based Motivation is frequently sufficient to induce optimal PCR, even without appropriate contractual provisions or legal intervention.

We suggest several normative implications. First, legal intervention that is aimed at encouraging PCR is generally unwarranted. The forces of competition provide adequate investment incentives, and the regulation of contract formation should only facilitate their operation. We thus justify the reluctance of both positive law and commercial parties from imposing precontractual liability in cases of failed negotiations

Second, the analysis demonstrates that when one party (e.g., the supplier) operates in a competitive market of professional repeating players, the other party (e.g., the purchaser) is better off limiting the number of bidders (suppliers) with whom he negotiates. This result suggests that in such cases, from an efficiency perspective, a party (including a public authority) should be allowed to limit the number of suppliers with whom he conducts negotiations. By contrast, when suppliers operate in a competitive market of accidental, one-time players, the purchaser has an interest in encouraging excessive entry of suppliers into the negotiations, and legal intervention aimed at regulating the purchaser’s behavior can be justified.  This result may justify, for instance, imposing a duty on employers to pay for training periods of potential employees.

Third, legal intervention is justified in order to prevent manipulation of bidder’s assessment of their prospects to receive the contract. The analysis supports a rule that prohibits an auctioneer from receiving an offer that was submitted outside of the auction’s procedures, and a rule that disallows changing the rules of the game after the bidders already invested in PCR.

Fourth, we show that when legal intervention is justified in the negotiation stage, the appropriate measure of damages that should be awarded is the plaintiff’s expectation interest. We also demonstrate that the difficulty in assessing this value when a contract is not formed can be resolved by approximating this value according to the sum of PCR for all bidders

Finally, we offer a new rationale for imposing disclosure duties (as well as other mandatory requirements to invest in PCR). We show that, in certain cases, such investment is allocated to the party who operates in a competitive market, even if it is efficient for the other party to bear this cost. Legal intervention is essential in such cases to resolve this inefficiency in the allocation of PCR.  We refer in this respect to the case of Laidlaw v. Organ, and demonstrate why imposing a duty to disclose information is not expected to adversely affect a party’s incentive to invest in acquiring information.

[Frank Snyder]

May 13, 2006 in Recent Scholarship | Permalink | TrackBack (0)

Environmental Contracts

We don’t often think about contracts as a method of dealing with environmental problems, but emissions trading contracts are one of the tools authorized under the Kyoto Protocols to help countries reduce their own emissions.  What kinds of drafting issues are likely to come up in such contracts?   In Constructing Carbon Contracts -- The Building Blocks Of An Emissions Trading Contract, Selina Lee-Andersen of Toronto’s Blake, Cassels & Graydon LLP gives a north-of-the-border perspective on the issues that are of particular significance in such deals.

[Frank Snyder]

May 13, 2006 in Commentary | Permalink | TrackBack (0)

Friday, May 12, 2006

Rapper West Sued Over Mercedes Lease

Rap star Kanye West and his production company, Konman Entertainment, are being sued after Konman failed to return a leased Mercedes luxury SUV and haven't made the required payments.  The lease was for 39 months at $1,295 a month, but Konman stopped making payments in March and has refused to give the car back, according to a suit filed in Los Angeles.  West apparently personally guaranteed the lease.

[Frank Snyder]

May 12, 2006 in In the News | Permalink | TrackBack (0)

Soldier Headed To Iraq Despit Breach of K Claim

An Army reservist whose is suing the Army for breach of contract after it has repeatedly refused to let him resign and extended his service obligation is headed for Iraq.  Jonathan O'Reilly of Norton, Mass., had asked a federal appeals court to delay his assignment until his lawsuit could be resolved, but the court refused.

[Frank Snyder]

May 12, 2006 in In the News | Permalink | TrackBack (0)

How Important is Contract Enforcement?

It's something of an article of faith that contract law plays a positive role in promoting trade.  How big a role, though?  In a new paper, How Important is State Enforcement for Trade?, West Virginia University economist Peter T. Leeson examines that that question.  Here's the abstract:

This paper investigates the effect of state contract enforcement on international trade. I estimate a gravity model of bilateral trade using panel data that covers 157 countries over the last 50 years. I find that state enforcement increases trade between nations - but less impressively than its status as essential for flourishing trade suggests. My analysis provides the first direct evidence of state enforcement's impact on trade in general and international trade in particular.

[Frank Snyder]

May 12, 2006 in Recent Scholarship | Permalink | TrackBack (0)