May 19, 2006
The Replacements' SNL Contract
"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 17, 2006
North Dakota Contractor Wins Appeal in Street Paving Case
Mariner Construction, Inc. agreed to undertake road work for
the city of
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
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 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.
Universities Afraid of Contract Claims
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.
Contract Doctrine and Incomplete Contracts
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.
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 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.
The court held that Sovereign could not allege a valid promissory estoppel claim against Fifth Third because Sovereign’s decision to provide BJ’s with cardholders’ information was not made in reliance on Fifth Third’s promise to insure that BJ’s would not store or retain that information. The court determined that Sovereign’s claim, in a much broader sense, was based on its decision to participate in the Visa network, and Sovereign could not reasonably argue that it joined the network in reliance on the promise of unknown acquiring banks to keep tabs on merchants’ handling of cardholder data. Further, the court held that, even if Sovereign had relied on Fifth Third’s promise to guard cardholders’ data, Sovereign’s reliance would not have been reasonable because Fifth Third did not make any promises directly to Sovereign.
Likewise, Sovereign’s promissory estoppel claim against BJ’s failed because BJ’s expressly excluded third parties from benefiting from its merchant agreements with Fifth Third. Given this express disclaimer of any intention to benefit third parties, the court held that BJ’s could not have reasonably expected that Sovereign – a third party to BJ’s agreements with Fifth Third – would rely on BJ’s promises in those agreements.
Sovereign’s breach of fiduciary duty claim against Fifth Third was also dismissed. The court held that no fiduciary duty was imposed on Fifth Third because Sovereign had not turned over substantial control of its affairs to Fifth Third – Sovereign’s surrender of cardholder information to complete a transaction was not the substantial surrender of control that imposed a fiduciary duty upon Fifth Third. Sovereign’s surrender of the cardholder’s information was simply part of the business transaction between the cardholder and BJ’s.
Thus, at least based upon these legal theories, Sovereign was stuck with its losses from the cardholders’ stolen account numbers.
Bank v. BJ’s Wholesale Club, Inc., ___ F. Supp.2d ___, 2006
WL 1000058 (M.D.
[Meredith R. Miller]
Weekly Top 10
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).
A Unified Theory of Contract Damages
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.
A Great New Way to Avoid Grading Papers
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.
Today in History: Sherwood Buys a Cow
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.
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.
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."
May 14, 2006
City, Developer to Go to Mat
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.
"Unfair Advantage" and "Transactional Neglect"
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.