Wednesday, May 31, 2006
"You have a debt to pay. You owe Davey Jones your soul. That was the agreement. Time's up! You're a marked man, Jack Sparrow."
If this "teaser" trailer for July's Pirates of the Caribbean: Dead Man's Chest is any indication, it looks as if Gore Verbinski and company are going to give pop culture-attuned Contracts professors more snippets with which to engage our students. (Film clips courtesy of Yahoo!Movies.)
Tuesday, May 30, 2006
A lot of us write about contract law but few of us really understand how contract rules function in the Real World. We spend a lot of time writing about which rules are more efficient, or more fair, or what parties really expect, with very little in the way of hard data about actual practice or the effects of our doctrine.
Improving empirical scholarship in contract law was the theme of the Section's Annual Meeting this past January. A symposium issue on the topic is coming out in the Tulane Law Review, but you don't have to wait for the hard copy to read Section Past President David V. Snyder's introduction, Go Out and Look: The Challenge and Promise of Empirical Scholarship in Contract Law. Here's the abstract:
This introduction to the symposium on Empirical Scholarship in Contract Law, sponsored in January 2006 by the Contracts Section of the Association of American Law Schools and published in the Tulane Law Review, pushes for an increased focus on the real world and argues that highly quantitative statistical analyses of published judicial opinions are no more empirical than simple case notes. While this short essay argues for increased rigor in empirical research, it also recognizes the limits of scientific methods for legal analysis and suggests that the seduction of scientific appearances, now as in the days of Langdell's legal science, should be viewed with a mixture of hope and caution. Although it points out the limits of scientific aspiration in the law, the piece also applauds the role of empiricism in the field of contracts, and especially in bringing a more rigorous form of experience to both scholarship and teaching. Finally, the essay introduces the symposium papers: Stephen Choi and Mitu Gulati's study of disclosures in sovereign debt contracts; George Geis's computerized experiment using marketing data to assess the optimal precision of contract default rules; Stewart Macaulay's article on the new legal realism; and Debora Threedy's analysis and exposition of legal archaeology.
It's been exactly 100 years since the last major codification of British insurance contract law, the Marine Insurance Act of 1906. The Law Commission has decided that it's time to reexamine things. It's starting with nondisclosure and breach of warranty, but it's inviting comments on 17 other topics that might warrant legislative action. Tim Hardy and Mark Aris of London's Barlow Lyde & Gilbert provide a rundown in Insurance Contract Law Reform And The Perils Of Inertia.
Monday, May 29, 2006
When sophisticated parties, represented by able counsel, agree to a contract term that explicitly releases either party from liability for misrepresentation and disclaims all reliance in a complex transaction, should courts nevertheless protect the party when it later claims foul?
In a recent decision, Abry Partners V, L.P. v. F&W Acquisition, LLC, the Delaware Court of Chancery said "no," although rather cautiously. The case involved a transaction selling a "portfolio company" from one "sophisticated private equity firm" to another. According to the court, the contract
carefully delineated the representations and warranties that were being made by the portfolio Company that was being sold and by the owner of that Company. By its plain and unambiguous terms, the Stock Purchase Agreement stated the Buyer’s promise that it was not relying upon representations and warranties not contained within the Agreement’s four corners and that no such extra-contractual representations had been made.
More critically for purposes of this case, the Stock Purchase Agreement went further. By its terms, it purports to limit the liability of the Seller for any misrepresentation of fact contained within the Agreement to exposure for a claim for damages in arbitration (an “Indemnity Claim”) not to exceed the amount of a contractually-established Indemnity Fund. That fund is set at $20 million, or 4% of the $500 million purchase price paid by the Buyer for the portfolio company. By its terms, the Stock Purchase Agreement makes an Indemnity Claim the exclusive remedy of the Buyer for misrepresentation and bars a rescission claim of the nature the Buyer has pled in this court.
The court nevertheless held, as a matter of public policy, that a claim for misrepresentation could go forward and that the indemnity agreement did not cap the damages.
In a new paper, Of Fine Lines, Blunt Instruments, and Predictability: The Right to Lie in Business Acquisition Agreements, Tulane's Jeffrey M. Lipshaw argues that the court's conclusion was correct, though its reasoning was wrong. Here's the abstract:
The Delaware Court of Chancery recently attempted to navigate the law of contract and fraud, where the buyer in a complex business acquisition alleged that the seller intentionally misrepresented the financial condition of the target company. This is a brief reaction to some immediate academic criticism of the opinion, which struggled over the extent to which the court should enforce the buyer's contractual disclaimer of reliance, and whether the limited exclusive contract remedy barred rescission based on fraud.
I think the case raises fundamental theoretical issues about a subtle truth-telling understanding among those who negotiate complex deals, and whether the power of language can be harnessed to reflect it. While the court permitted a fraud claim based on knowingly false contract representations to survive a motion to dismiss for failure to state a claim, both the court's opinion and the academic criticism reflect an excess of contract formalism and an over-concern for efficiency. The resulting law does not track the common understanding of participants in complex acquisitions, nor more generally how we ordinarily expect language to be used.
Courts should presume that the parties are aware of the law of fraud in all of its complexity (including omissions and half-truths) and permit only the narrowest interpretation of an attempt to avoid it. Hence, we would leave the cause of action in fraud, both for matters within and without the contract, intact, except insofar as the parties have explicitly disclaimed it. This is, in the end, I suspect a broader remedy than rational actor theorists or contract formalists might want, but one that I think more accurately maps on the fine line of the understanding among the lawyers and clients in the hothouse atmosphere of an intense merger or acquisition negotiation. I propose several theoretical reasons for the conclusion.
After several weeks on the charts, Brian Bix's contract theory piece reaches the number one slot on this week's Top Ten, while Steven Schwarcz's lawyering article continues to rise. Following are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending May 28, 2006. (Last week's rank in parentheses.)
1 (2) Contract Law Theory, Brian Bix (Minnesota).
2 (4) Corporation and Contract, Henry Hansmann (Yale).
3 (7) Explaining the Value of Transactional Lawyering, Steven L. Schwarcz (Duke).
4 (9) Formalism in American Contract Law: Classical and Contemporary, Mark L. Movsesian (Hofstra)
5 (6) Constructing a Bid Protest Process: Choices Every Procurement Challenge System Must Make, Daniel I. Gordon (GAO).
6 (5) Managing Risk on a $25 Million Bet: Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, Robert P. Bartlett (Georgia).
7 (10) Where do You Get Off? A Reply to Courting Failure's Critics, Lynn M. LoPucki (UCLA).
8 (8) The UNCITRAL Electronic Contracts Convention: Will it be Used or Avoided?, Charles H. Martin (UDC).
9 (9) Post-Katrina Reconstruction Liability: Exposing the Inferior Risk-Bearer, Steven L. Schooner & Erin Siuda (Geo. Washington).
10 (-) Private Order and Public Justice: Kant and Rawls, Arthur Ripstein (Toronto).
Turin's Juventus is Italy's most famous soccer franchise. This year it won its record 29th Italian championship, and it has extremely lucrative television and licensing deals. All that may be in jeopardy, however, as a result of a scandal that has rocked Italian soccer. The Bianconeri ("White-blacks") may have to forfeit their wins for 2005-06, which would mean the team would be demoted from the prestigious Serie A to the lower-level Serie B.
Why are we mentioning this? Well, the commercial implications of the demotion of Juventus -- equivalent to dropping the New York Yankees down to Triple-A where they would play Pawtucket and Scranton/Wilkes-Barre instead of Boston and Chicago -- are staggering. Francesco Portolano and Ernesto Apa of Rome's Portolano Colella Cavallo Studio Legale note that there are hundreds of contracts and large amounts of money riding on the Juventus image as a first-tier club, and lawyers will soon be taking notice.
Sunday, May 28, 2006
Over at Tax Prof Blog, our colleague Paul Caron is reporting on L.L. Bean's win in a class-action lawsuit claiming that the firm improperly collected Maine sales tax on the gross price of items, instead of the price after deducting coupons.
One interesting fact is that even though the state tax assessor had told Bean to collect the tax and the money had gone to the state, and the state assessor supported Bean's position in the litigation, the retailer lost in the lower Maine courts (exposing it to about $1 million in refund claims) before winning a reversal in the state supreme court. It's unlikely the state will pay Bean's legal fees for doing what it was told to do.
According to three business/finance scholars, Michigan's E. Han Kim and Adair Morse and Chicago/Harvard's Luigi Zingales (left), in Are Elite Universities Losing Their Competitive Edge?, the answer is "no." There was a strong positive effect, they find, back in the 1970s, but that edge vanished during the 1990s. Today, they find, there's no particular benefit to being at an elite institution. They do find that some attributes that some (but not all) elite institutions enjoy, like high salaries, pleasant working conditions, supportive colleagues, do positively affect research -- but note that many up-and-coming institutions can replicate those advantages, even if they can't replicate the reputation (yet). One odd finding is that being closely surrounded by extremely productive colleagues tends to make one less productive than if one is working at a distance.
This news is (if true) good for scholars and bad news for universities, which will find it harder to lure faculty based on reputation alone. Here's the abstract:
We study the location-specific component in research productivity of economics and finance faculty who have ever been affiliated with the top 25 universities in the last three decades. We find that there was a positive effect of being affiliated with an elite university in the 1970s; this effect weakened in the 1980s and disappeared in the 1990s. We decompose this university fixed effect and find that its decline is due to the reduced importance of physical access to productive research colleagues. We also find that salaries increased the most where the estimated externality dropped the most, consistent with the hypothesis that the de-localization of this externality makes it more difficult for universities to appropriate any rent. Our results shed some light on the potential effects of the Internet revolution on knowledge-based industries.