ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

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)

New UK Standard Form Construction Contract

United_kingdom_flag_12 The United Kingdom’s Joint Contracts Tribunal has a new standard form out for construction contracts.  Some of the changes are cosmetic, say barristers Philip V. Boulding, Matthew Holt, and Calum Lamont of London’s Keating Chambers, but others reflect updates to deal with new developments.  They discuss the changes in The JCT 2005 Standard Forms of Construction Contract.

[Frank Snyder]

May 12, 2006 in Commentary | Permalink | TrackBack (0)

Thursday, May 11, 2006

CBS and Stern Reportedly Close to Settlement (& The Gammerman Factor)

Newsday reports that CBS and Howard Stern are close to settling their breach of contract spat:

CBS lawyer Irvin Nathan told Judicial Hearing Officer Ira Gammerman, "We have an agreement, but there are details that have to be worked out." He added that the parties were "very close" to a settlement.

It couldn't be any more befitting that the parties have consented to have the case heard by Justice Ira Gammerman - who is past formal retirement, and is now officially a "judicial hearing officer."  Justice Gammerman is Manhattan's closest version of the "rocket docket."  In fact, it is likely that a strong factor incentivizing settlement is the fear of attempting to try this case before Justice Gammerman. 

Back in an April 2004 N.Y. Times article ("Verdicts and Wisecracks at a Speedy Clip"), author David Carr described Justice Gammerman as:

[a] one-stop vending machine of justice, he empanels multiple juries, issues frequent decisions, wisecracks and, when he is in the mood, takes over from the lawyers before him and questions the witnesses himself, all while typing away on other matters on a computer.

Indeed, it is hard to imagine Howard Stern on the witness stand in Gammerman's courtroom.  Woody Allen could certainly attest that witnesses, no matter how famous, are never spared Gammerman's frequent and abrupt interruptions. 

In 2002, Woody Allen was testifying in a suit he brought against his former producer Jean Doumanian.  On the witness stand, he was asked whether he was currently making a film:

''Yes, and that's why I haven't been able to be here all the time, because ----''

''Yes is the answer,'' Justice Gammerman said. . .

Mr. Allen continued anyway. ''Because I have a film crew out now, shooting on the streets of New York, and I'm trying to ----''

''Stop talking,'' Justice Gammerman said.

'Stop talking?'' Mr. Allen said.

''I'm the director here,'' Justice Gammerman said.

Carr explained that "[l]awyers who have appeared before Justice Gammerman liken the process to entering a ferocious contraption where bells go off, smoke belches, the machine shakes, and then they are quickly thrown clear, verdict in hand." 

And Gammerman, in his mid-70's, describes jurisprudence as his hobby.  He doesn't golf; instead, he continues to hear complex commercial matters.  He has no real intention of seriously retiring.  His prediction: "I'm going to say, 'Motion denied,' and then keel over.''

[Meredith R. Miller]

May 11, 2006 in In the News | Permalink | TrackBack (0)

Wednesday, May 10, 2006

The True Story of Sister Antillico

Aaa_46 Aab_32 One of the great chestnuts of contract law is Kirksey v. Kirksey, the story of the Alabama widder woman and her brood who are invited to come and live with her dead husband's brother.  When they're subsequently evicted, the question -- you all remember -- is whether the brother's invitation was a contract offer or a gift of shelter.  Few cases have raised more speculation.  Why did the brother want his sister-in-law there?  Was he just looking out for the kin of his beloved sibling?  Seeking free labor?  Looking for a bedmate?

The answer, it turns out, is "none of the above."  In a wonderful recreation of the Kirksey story -- which turns out to be far more complicated than you'd expect -- Texas Tech's William D. Casto (left)and South Texas's Val D. Ricks (right) recreate what was really happening in backwoods Alabama at the time.  The answer turns out to be far more interesting than simple benevolence or even lust.  The paper is 'Dear Sister Antillico . . .': The Story of Kirksey v. Kirksey, and it's out now in the Georgetown Law Journal.  Here's the abstract:

Kirksey v. Kirksey (Ala. 1845) is one of the most famous cases in American contract law.  The simple, six-line opinion held, over a dissent, that only a promise of a conditional gift occurred, and was unenforceable. Yet the case is a puzzle.

First, its facts raise more questions than they answer.  Countless Contracts teachers ask -- Why did Isaac Kirksey invite his sister-in-law “Antillico” (an aberrant spelling of Angelico, we discovered) down to Talladega?  Was he actually bargaining for something?  How many children did Angelico bring?  Did Isaac mean for the children to work on his plantation (did he bargain for their labor)?  Did Isaac and Angelico have an affair (was the consideration meretricious)?  Why did Isaac move to evict his sister-in-law?  Was she unbearable as a neighbor?  Why did she sue?  What result was she seeking?  What evidence was presented at trial?  Did she have evidence of consideration other than her trip to Talladega?  Was her lawyer incompetent? Did the law of the time support Angelico’s legal position, or is the opinion’s conclusion based on  something other than legal authority?  Did the appellate court usurp the jury’s factfinding role?  Why did the dissenting judge write the majority opinion?  Whatever happened to Angelico and her small children?  These questions serve pedagogy. Our informal poll of contract law teachers revealed a long list of objectives for which professors use KirkseyKirksey’s ambiguities leave the professor free to take the case where she will.

Second, Kirksey is so ordinary -- why is it taught at all?  It announces no new doctrine.  It explains no doctrine.  Its author’s style is not impressive, and his reputation is obscure.  Today courts might reach the opposite result. Few courts have cited Kirksey, and none since 1949.

We resolve these puzzles. First, we answer all the questions raised by the facts. We were surprised by the answers and suggest that no one who has taught the case has had any idea what actually happened.  Second, we explain how Kirksey gained fame.  Briefly, Williston changed his mind about the case (“right” to “wrong”), and in the process talked about Kirksey so much that it became embedded in his teaching, his treatise, his mind, and his students’ minds -- until the case became one of contract law teaching’s primary sources.  Ironically, Williston’s change of mind, the reason for the case’s rise to fame (the second puzzle), was made possible by the case’s ambiguity (the first).

[Frank Snyder]

May 10, 2006 in Recent Scholarship | Permalink | TrackBack (0)

In-Vitro-Fertilization as Breach of Employment Contract

Kelly Romensko had served as a French teacher at a Catholic school for nearly 5 years when she informed the school’s principal that she needed a few days off to complete an IVF procedure. The principal told her to meet with her pastor to discuss Catholic doctrine and teaching on IVF. Why? Paragraph 16 of Ms. Romenesko’s employment contract with the school provided:

Both parties will teach and act in accordance with Catholic doctrine and Catholic moral and social teachings.

Ms. Romenesko found out that there is an official Catholic paper, authored in 1987 by then-Cardinal Ratzinger, which takes the position that IVF is a morally illicit procedure.  She went through with her IVF procedure anyway, and gave birth to two lovely twin girls. However, the school fired her for breach of her employment agreement. She appealed to the school’s Board of Trustees, but it determined (here and here) that she was in breach of Paragraph 16 of the employment agreement. Apparently, another administrative appeal is pending.

[Meredith R. Miller]

May 10, 2006 in In the News | Permalink | TrackBack (0)

Tuesday, May 9, 2006

How Much Does It Deserve?

United_kingdom_flag_11 The concept of quantum meruit is one of the slipperiest issues in damages law.  It's clear that when a party is entitled to such damages it is supposed to get "as much as it deserves."  But how much is that?  Specifically, should it be able to recover its costs plus profits, or should be be awarded its proposed contract rates, which may be higher or lower than that amount?

A British court recently had to wrestle with that problem in a case involving work authorized under a letter of intent for which a contract was not finalized.  Should the contractor who did the work get its costs plus profits, or should it be stuck with its lower tendered rates?  The court decided on the latter, noting that failure to conclude a contract shouldn't leave a party better off than if its tender had been accepted.  In Quantum Meruit -- Valuation of Works Under a Letter of Intent, solicitor Jeremy Glover of London's Fenwick Elliott comments on the court's conclusions.

[Frank Snyder]

May 9, 2006 in Commentary, Recent Cases | Permalink | TrackBack (0)

Pickfords: The Careful Movers

Aab_31 For those of you who like visual aids for famous cases, we're pleased to bring you this ad for Pickford & Co., Carriers & Railway Agents, from the 1850-51 Post Office Glasgow Directory.  Pickfords, as all thinking people know, was the carrier who in 1853 lost the mill shaft in Hadley v. Baxendale.  Remember you can click on the ad to get a larger version.

This reproduction is by courtesy of the Mitchell Library, Cultural and Leisure Services, Glasgow City Council.  Permission is granted for classroom use.

[Frank Snyder -- hat tip to Ben Templin]

May 9, 2006 in Famous Cases | Permalink | TrackBack (0)

Restrictive Covenants for Physicians

Aaa_44 Restrictive employee covenants are a troublesome issue in contract law.  The problems only get worse when the employees being restricted are physicians.  In Physician Restrictive Covenants: The Neglect of the Incompetent Patients’ Interests, forthcoming in the Wake Forest Law Review, Betsy Malloy (Cincinnati) argues that courts are giving short shrift to patients when they assess such deals.  Here's the abstract:

The article examines how courts in different jurisdictions have addressed restrictive employment covenants for physicians and proposes a new approach drawn from the third-party beneficiary analysis in contract law.  Physicians hired into existing practices often must sign substantial non-compete agreements.  In evaluating the enforceability of any restrictive covenant, courts consider, among other factors, the agreement’s effect on the public.  Surprisingly, the vast majority of jurisdictions treat the “public interest” analysis vis-a-vis physician restrictive covenants no differently than any other commercial restrictive covenant; this approach neglects the impact that such agreements can have on a physician’s existing patients.  Although at first glance physician restrictive covenants may seem like a somewhat insular area of the law, it is an area that is reflective of some of the primary forces acting on the perceived health care “crisis” in this country -- the often contradictory pressures of serving patients and running a profitable business.  This article suggests courts should consider a physician’s incumbent patients as quasi third-party beneficiaries to the physician’s employment agreement when deciding whether to enforce the physician restrictive covenant.  This more nuanced approach will allow courts a finer balance of the business interests of physicians against the often weighty public interest in protecting physicians’ relationships with their patients.

[Frank Snyder]

May 9, 2006 in Recent Scholarship | Permalink | TrackBack (0)

Monday, May 8, 2006

Requiescat in Pace: Bill Bailey

Aaa_43 Willamette University College of Law has announced that emeritus professor and longtime commercial scholar Henry J. "Bill" Bailey III died April 26 at age 90.  Bailey's specialty was banking law and secured transactions (his Secured Transactions in a Nutshell is a classic), but he was probably best known to contract scholars and professionals as author of the UCC Desk Book and the three-volume Oregon Uniform Commercial Code.

Bailey taught at the Oregon school from 1965 until his retirement in 1981, but continued to keep up his scholarly activities.  He also served as a visiting professor at Akron, Florida State, and Rutgers.  A funeral mass was held May 3 in Salem.

[Frank Snyder]

May 8, 2006 in Contract Profs | Permalink | TrackBack (0)

Advertiser Lawsuits Against Search Engines

In the past year, advertisers have brought at least four high-stakes class action lawsuits against search engines.  These lawsuits pose some interesting but basic questions about contract interpretation.

Two of the lawsuits involve "click fraud."  Click fraud is a term with multiple meanings, but let's assume it refers to an illegitimate click on an online advertisement.  Many (most?) search engine advertising contracts say that advertisers will pay a certain amount for each click delivered by the search engines.  Thus, advertisers are concerned that they are paying for illegitimate clicks.

Ultimately, this could be a straightforward contract interpretation issue.  Google's contract says that advertisers owe money for "actual clicks."  So what's an "actual click"?  Is it every click, regardless of legitimacy, or a click motivated only by proper intent?

We may not find out the answer to this question any time soon.  Google has entered into a preliminary settlement with one of the plaintiffs, and if approved, that settlement likely will have preclusive effect on the other lawsuit.  Some have complained that Google has settled the case too cheaply, so it's possible that the judge will scuttle the settlement or that enough advertisers will opt-out of it.  Otherwise, the settlement may calm the waters for the time being.

A third lawsuit has been filed against Google for failing to honor advertisers' instructions about advertising limits.  Google allows advertisers to establish daily limits on the quantity of advertising they want, and allegedly Google failed to honor these limits.  This lawsuit is ongoing.

A fourth lawsuit was filed last week against Yahoo.  This lawsuit alleges that Yahoo engaged in "syndication fraud" by placing the advertisements in inappropriate places (specifically, on pop-up and pop-under windows served by adware and on "typosquatted" pages).  This lawsuit raises some basic questions about the interplay of marketing material (where Yahoo made various statements that the advertisers want to treat as promises) and a fully integrated online contract, as well as how words like "highly targeted," "popular"/"high-quality" and "and more" will be interpreted.  I've deconstructed this complaint at my other blog (warning: I have strong views about the validity of this complaint).

These lawsuits reflect the huge growth in online advertising issues--as more gets directed to online advertising, disputes inevitably will follow.  But they also are a good reminder of the critical importance of precise and thoughtful drafting of online advertising agreements.

[Eric Goldman]

May 8, 2006 in E-commerce, In the News, Recent Cases | Permalink | TrackBack (0)

Weekly Top 10

Ssrn_logo_57 It's exam time at America's law schools, and that means that most of us are too busy to post new papers or download the ones already up there.  So it's not surprising that there are few changes on this edition of our Weekly Top 10.  Following are the ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the sixty days ending May 7, 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-tie (7) Constructing a Bid Protest Process: Choices Every Procurement Challenge System Must Make, Daniel I. Gordon (GAO).

7-tie (8) Creative Commons: A Skeptical View of a Worthy Pursuit, Niva Elkin-Koren (Haifa).

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

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

[Frank Snyder]

May 8, 2006 in Recent Scholarship | Permalink | TrackBack (0)

Russell Tapped For Tulsa Job

Aaa_42 University of Memphis contracts prof Irma Russell has been tapped by the law school at the University of Tulsa to be the new Director of its National Energy-Environmental Law and Policy Institute.  NELPI, which is marking its 30th anniversary this year, sponsors a number of annual conferences and other events, and provides curriculum and certification programs for UT students.

Russell, who combines environmental law with contracts, earned her J.D. at Kansas.  She has taught at Memphis since 1992, and has been a visiting professor at Kansas, UMKC, and (this past year) at Pace.

[Frank Snyder]

May 8, 2006 in Contract Profs | Permalink | TrackBack (0)

Sunday, May 7, 2006

Modeling Contracts

As everybody knows, parties in contractual relationships rely not merely on legal enforcement mechanisms, but on a range of sanctions that can be brought to bear on parties who are not performing.  A new paper studying this is Networks of Relations and Social Capital by Steffen Lippert (Toulouse 1-GREMAQ) and Giancarlo Spagnolo (Stockholm-Economics).  Here's the abstract:

We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks.

The model provides formal definitions for individual and communities’ “social capital” in the spirit of Coleman and Putnam.

[Frank Snyder]

May 7, 2006 in Recent Scholarship | Permalink | TrackBack (0)

Podgor Named to Stetson Post

Aaa_38 Congratulations to our Law Prof Blogs colleague Ellen Podgor (White Collar Crime Prof Blog), who has just been named the inaugural "associate dean of faculty development and distance education" at Stetson University College of Law.  She joins the St. Petersburg school from Georgia State in Atlanta.  Among her tasks in her new job will be to build a distance learning consortium with other schools and a faculty exchange program.

As to the latter, it won't hurt that Stetson is the only U.S. law school housed in a former luxury resort hotel.

[Frank Snyder]

May 7, 2006 in In the News | Permalink | TrackBack (0)

Today in History: Sorry, No Harrier Jet

Aaa_41 Exactly ten years ago, on this date, May 7, 2006, the Pepsi Cola Company refused to deliver a Harrier jet aircraft to John D. R. Leonard, who had sent in a check for $700,000 for 7 million “Pepsi Points” and demanded the jet.  Leonard would subsequently sue, leading to one of the most famous contract law decisions of the last decade, Leonard v. Pepsico.

Pepsi had run a television commercial as part of its “Pepsi Stuff” marketing campaign, showing a schoolboy arriving at school in his own Harrier AV-8B VTOL (Vertical Take Off and Landing) fighter jet, with the tag line, “Harrier Fighter 7,000,000 Pepsi Points.”  The Harrier jet was presumably chosen because Arnold Schwarzenegger had flown one to destroy the bad guys in the 1994 hit True Lies.  The $700,000 would have been a bargain, since according to the Internet Movie Database, the producers of True Lies had paid the Marine Corps more than $100,000 -- $2,410 an hour -- just to rent Harriers for the film.

The Pepsi Stuff campaign, by the way, extremely effective, being named Promo Magazine in 2002 as one of the “Ageless Wonders” of advertising, right up there with the prizes in Cracker Jack boxes.  Leonard's suit probably didn't hurt.

[Frank Snyder]

May 7, 2006 in Famous Cases, Today in History | Permalink | TrackBack (0)