June 10, 2006
Post on Contracting in China
Deborah Post (Touro) sent this intriguing message to the AALS contracts listserve, describing some aspects of contracting in China:
Everybody expects to bargain in China. At the Great Wall, vendors yell at passing tourists, "tee shirts $1." But, of course, there are no tee shirts for one dollar. There are tablecloths, kimonos, place mats, chop sticks, fans, sculptures, bamboo hats, tea pots and all other manner of things tourist for sale. There are tourists willing to buy, thrilled with the prospect of a real bargain and girded for the contest of wills that bargaining represents.
Tourists buy souvenirs after they have climbed the Great Wall. Vendors outside the exit from the tram and the base of the steps leading up to the Wall have the advantage of location because the purchase of souvenirs is not an exercise in comparison shopping. The best price is obtained by those with the best skills and the greatest speed. How low can you go with an offer and get the item you want and still make it back to the bus within the allotted time.
Vendors with booths farther down the hill have a variety of competitive strategies. Pre- ascent they cultivate consumer loyalty: pressing cards into your hand and yelling after you " I remember you, you remember me..." Post-assent vendors may resort to physical aggression. A determined seller will
put his body in your way and block your descent. The better sales have been, the more likely it is that there will be a kind of feeding frenzy by unlicensed vendors. With postcards and plastic toys in hand, peasant participants in the market economy pursue tourists across parking lots and,
in the extreme case, right onto the buses.
Bargaining at the Great Wall probably isn't the best example of what a free market economy really means in China. Even when shopping at a four story mall in Chaoyang, the expat district in Beijing, bargaining is also the dominant form of commercial intercourse. There are prices posted in all the
stalls but the posted price bears no relationship at all to the actual price at which goods will be sold or even the starting point for negotiations. Calculators, the preferred communication devices for cross cultural cash transactions, are whipped out at the moment you pause to examine a silk scarf
or a leather purse. Come in, come in, said the spider to the fly. "Best price for you because you are my first customer."
The absence of a fixed price is disorienting. I don't like bargaining. I worry that I am an easy mark: an American just waiting to be parted from her disposable income. I stopped by the costume jewelry counter in to look at what was obviously fake jade. You don't get real jade earrings for 90 yuen (
approximately $11 U.S.) I know that, the sales clerk certainly knew that. Yet she insisted that you could see the "jade flowers" if you held the synthetic jade up to the light, which you could not, and that it would cut glass, which it obviously did not. What was the point of this patently absurd attempt at deception?
On the other hand, I worry about hard bargaining on my part. Selling below cost is not rational, but it might be necessary. You can't buy dumplings with clothes on a rack. So I want to know what a fair price would be. I want to know how much the seller has to charge in order to cover costs and make
a reasonable profit. My students react with derision. "You could have gotten those tee shirts for 30 yuen (about 4 dollars)." I paid 40 yuen (about 5 dollars). But 40 yuen was the point where I met what I perceived to be real resistance, a palpable reluctance to lower the price further. In bargaining I am risk averse. I do not wish to venture into the realm of human desperation.
It might all even out in the end. For every U.S. tourist who drives a hardbargain, there is a person like me, the reluctant participant in a global economy who worries about exploitation. I want to pay a fair price, but I can't tell what a fair price might be. I want a fair deal when everyone else is intent on getting the best deal --all of which makes me wonder about a market model for contract doctrine.
June 9, 2006
Goals at the World Cup: Contracts?
The soccer World Cup begins today and, unlike other tournaments denominated "world championships" (e.g., the "World Series" of American baseball), the World Cup really does have a global sampling of teams, and soccer may even explain the world.
For players on the U.S. team, the financial stakes of a stellar performance in Germany are "sky-high." Soccer still isn't as popular in the U.S., and players in America's fledgling Major League Soccer average $90,000 a year. Compare that to the average yearly salary in England's Premiership: $1.25 million — excluding "incentive-laden performance bonuses." Even in the English second division, the average salary is about $375,000 a year. With scouts watching in the stands at the World Cup, a good game in Germany can lead to a lucrative contract with a second-division English club or a club in Holland, France or Belgium which would "triple the player's base salary overnight."
The pay disparity seems simply explained by the dramatic difference in the popularity of professional soccer among the countries. Perhaps in that connection, it is also explained by "the economics underlying the U.S. and European leagues":
When it comes to soccer, Europe is the quintessence of free-wheeling capitalism, with billionaire owners like Chelsea's Roman Abramovich bidding up the salaries of top players. The U.S. league is anythi ng but extravagant. After many years of rocky financial results for U.S. soccer, the MLS was set up with tight controls over the teams.
It's the league — not the teams — that negotiate salaries with players, and a salary cap for each team is strictly enforced. The goal is to have a balance of talent so no one team can dominate. The result is that just 22 players out of the 336 active players make more than $200,000. On most teams, there are one or two stars who are highly paid and many who make modest, journeymen salaries. Each team has four or so development players who earn $11,000 a year.
So, if you turn on the tube (or your computer, thanks to the BBC) and take in some of the World Cup fever, don't forget that the players' goals may not simply be matter of wining the games, but lucrative contracts as well.
[Meredith R. Miller]
June 7, 2006
It's a Small, Small World
If you're a business negotiating a contract with someone in New York, keep in mind that if you use the telephone, e-mail, or instant messaging with them -- even in reply -- you're "projecting yourself" into New York and thus subjecting yourself to personal jurisdiction in the Empire State. The New York Law Journal summarizes a recent decision to that effect by the New York Court of Appeals. In the case, a Montana state agency that replied to an unsolicited e-mail by a New York bank offering to swap bonds found itself subject to jurisdiction in New York, despite a Montana statute providing for exclusive jurisdictions in Big Sky courts.
Weekly Top 10
Two new entries and a new number one this week. Following are the top ten most-downloaded new papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending June 4, 2006. (Last week's rank in parentheses.)
1 (2) Corporation and Contract, Henry Hansmann (Yale).
2 (3) Explaining the Value of Transactional Lawyering, Steven L. Schwarcz (Duke).
3 (10) Private Order and Public Justice: Kant and Rawls, Arthur Ripstein (Toronto).
4 (4) Formalism in American Contract Law: Classical and Contemporary, Mark L. Movsesian (Hofstra)
5 (6) Managing Risk on a $25 Million Bet: Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, Robert P. Bartlett (Georgia).
6 (7) Where do You Get Off? A Reply to Courting Failure's Critics, Lynn M. LoPucki (UCLA).
7 (8) The UNCITRAL Electronic Contracts Convention: Will it be Used or Avoided? , Charles H. Martin (UDC).
8 (9) Post-Katrina Reconstruction Liability: Exposing the Inferior Risk-Bearer, Steven L. Schooner & Erin Siuda (Geo. Washington).
9 (-) Bond Covenants and Creditor Protection: Economics and Law, Theory and Practice, Substance and Process, William W. Bratton (Georgetown).
10 (-) Emotional Paternalism, Jeremy A. Blumenthal (Syracuse).
June 6, 2006
Heartbreak Hotel for Geller on Ebay
Apparently, Uri Geller (of "spoon bending magic" fame) had the winning Ebay bid of roughly $905,100 on a house formerly belonging to Elvis (before he moved into Graceland). However, the seller sold the house to a foundation instead of Geller. The foundation plans to create a museum out of the house.
Geller's reaction: "We are absolutely, mind-blown angry. Of course we're going to sue."
However, news reports warn that "the rules of auction website eBay may make it hard for Uri Geller and his business partners, lawyer Pete Gleason and jewellery-maker Lisbeth Silvandersson, to pursue a breach of contract claim." An Ebay spokewoman stated that "[t]he platform we provide in real estate really serves to generate interest [and] [i]t isn't a legally binding contract."
[Meredith R. Miller]
Defensive Line for Ekuban: Statute of Frauds
The Fifth Circuit recently affirmed a bankruptcy court determination that a series of 36 identical loan guaranty agreements did not satisfy theTexas statute of frauds and, therefore, were not enforceable against the guarantor.
Ebenezer Ekuban is a professional football player (defensive end for Denver Broncos). In August 2000, he decided to purchase a block of thirty-six condominiums in Pasadena, Texas. Ekuban secured financing. The transaction was structured as thirty-six separate purchases. On August 14, 2000, in Ekuban’s capacity as president of EBCO (the holding company for his investments), he executed thirty-six sets of promissory notes and related closing documents. At a separate time, Ekuban received and executed thirty-six identical guaranty agreements, which stated:
FOR VALUE RECEIVED, I, EBENEZER EKUBAN, individually, do hereby guarantee payment of the hereinabove described note, according to the terms thereof, both as to interest and as to principal, and I do hereby waive demand, all notices including notice of intention to accelerate the maturity, notice of non-payment, presentment for payment, protest, notice of protest, suit, diligence and any notice of or defense on account of the extension of the time of payments or change in methods of payments and consent to any and all renewals and extensions in the time of payment hereof.
The guaranty agreements did not refer to a specific loan or account
number that would associate the guaranty with the
The condominiums turned out the be a bad investment, and EBCO defaulted on its loans in the spring of 2002. Ekuban did not honor the alleged guaranty, and both EBCO and he filed for Chapter 7 bankruptcy protection. The lender filed a timely Proof of Claim for the money loaned in the amount of $1,641,000. Ekuban moved for summary judgment, on the ground, among other things, that the guaranty documents were unenforceable pursuant to the Texas statute of frauds. The bankruptcy court granted Ekuban’s motion for summary judgment, which both the District Court and the Fifth Circuit affirmed. The Fifth Circuit held:
The guaranty agreements in the instant case cannot satisfy the statute of frauds because they lack the “essential elements” of a guaranty. The essential terms of a guaranty agreement are “(1) the parties involved, (2) a manifestation of intent to guaranty the obligation, and (3) a description of the obligation being guaranteed .” * * * While these guaranty agreements manifest Ekuban's intention to guarantee an obligation, they are in every other aspect deficient. Save Ekuban himself, the guaranties do not identify the parties involved in the transaction or their roles. Nor do the agreements provide a description of the note to be guaranteed or such basic information as dates and the amount of the loan.
The court rejected the lender’s argument that
the court should look beyond the text of guaranty agreements to determine
whether they satisfied the statute of frauds:
We decline to do so, noting that although the Texas Supreme Court has in the past looked to multiple documents to determine whether a contract comports with the statute of frauds, it has only done so where, “[a]ll of the instruments were a necessary part of the same transaction, without any one of which the transaction was not complete.” * * * [The lender] asserts that the guaranty was necessary to effectuate the transaction, but as a matter of contractual interpretation, the
Pasadena transaction was complete without a guaranty. Further, the guaranty agreements make no reference to the closing documents, and the closing documents do not contemplate the existence of a guaranty. To construe the guarantee agreements as part of the larger financial transaction would thus violate the principle that “where an oral contract is memorialized in more than one writing, one of the writings must refer to the others in order for the writings to be read together.”* * * The bank's contention that the guaranties were an indispensable part of the transaction finds no support within the language of the contracts themselves.
[Meredith R. Miller]
One of former California Justice Roger Traynor's best-known contract law opinions is Drennan v. Star Paving Co, in which the former tax professor held that a subcontractor's bid created an irrevocable offer to the prime contractor when the prime uses it in its own bid, even without the prime's payment of an option fee and without any promise that the sub will get the contract.
Drennan has had its critics and its champions. Two of the latter, Ofer Grosskopf (Tel Aviv) and Barak Medina (Hebrew-Jerusalem), take up the cudgels in Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range. Here's the abstract:
Courts may imply that an offer is irrevocable, based on the offeree's reliance. For instance, following the landmark case of Drennan v. Star Paving Co. (1958), a subcontractor’s price offer is irrevocable once it has been relied upon by the general contractor in computing his overall bid. However, a rule of implied irrevocability raises two main difficulties. First, it seems unfair to commit the offeror but not the offeree. Second, from an ex-ante perspective, the implied irrevocability rule seems to deter parties from submitting low-priced, unqualified offers. These concerns had led several scholars to argue for the application of either contractual or doctrinal provisions, such as implying an early conditional contract or establishing option fees or termination fees. This paper challenges the above concerns and vindicates both the fairness and the efficiency of the implied irrevocability rule.
It is shown that whereas some restrictions on the offeree’s freedom to conduct bid shopping ex-post (i.e. after the uncertainties are resolved) are essential in order to allow him to receive viable price offers ex ante, these restrictions need not be absolute nor legally-enforced. Partial restrictions, in the form of a self-enforced “Binding Range,” may well suffice. The plausible existence of self-enforced “Binding Range” entails that offerors have incentives to submit irrevocable offers, based on their expectation to extract a profit from submitting the best preliminary offer. The paper characterizes the optimal size of the “Binding Range,” and explores what legal provisions should be applied if the self-enforced “Binding Range” is sub-optimal.
Speaking of Faustian Bargains . . .
. . . how about the contract written in blood that's now before a court in Orange County, California? In the case, Jinsoo Kim says he invested $170,000 in a business owned by Stephen Son. While the two were at a bar, Son wrote out a promise to repay the money in his own blood. Son now says that the promise isn't enforceable because he wrote he would repay "to the best of my ability."
Fordham's Joe Perillo is quoted by the AP as saying it's the first contract written in human blood he's run across in forty years of reading contract cases. And he's read a lot of cases.
[Keith Rowley points out that he blogged on this case earlier, which is what comes from me being out of touch for a week.]
[Frank: Some of us have been -- or at least have been accused of being -- "out of touch" for much more than a week. <g> Anyway, your link was to a beefier version of the story than mine. Keith]
June 5, 2006
Win Your Own Golf Course
Our colleague Paul Caron over at TaxProf Blog has links to the story of an Indiana golf course that is selling itself in an unusual manner: by hosting a $1,000-a-shot golf contest where the ball closest to the hole wins the golf course. The contest rules are pretty interesting.
XML and Contract Drafting
"Markup language" is the stuff in your computer-generated documents that you don't usually see on the screen -- codes, attributes, comments, and so forth. Extensible (or "eXtensible") Markup Language (XML) is a popular kind of markup language that allows a great deal of flexibility in assigning those attributes. It's that flexibility that's led to a lot of spontaneous development. And it's that spontaneous development that might lead to problems for those of us in the contract world, says Lawrence Cunningham (Boston College) n a new paper, Language, Deals and Standards: The Future of XML Contracts, forthcoming in the Washington University Law Review. Here's the abstract:
eXtensible Markup Language (XML) structures information in documentary systems ranging from financial reports to medical records and business contracts. XML standards for specific
applications are developed spontaneously by self-appointed technologists or entrepreneurs. XML's social and economic stakes are considerable, especially when developed for the private law of contracts. XML can reduce transaction costs but also limit the range of contractual expression and redefine the nature of law practice. So reliance on spontaneous development may be sub-optimal and identification of a more formal public standard setting model necessary. To exploit XML's advantages while minimizing risks, this Article envisions creating a publicly oriented foundation to set XML-based standards for the private law of corporate contracts. The Article's specific inquiry
concerning corporate contracts illuminates XML's broader implications, making the standard-setting model it contributes adaptable to other contexts.
We've previously mentioned the issue of whether lawyers (or perhaps their clients) have intellectual property rights in the boilerplate they draft. Lawyer Ken Adams at his new blog AdamsDrafting has some interesting thoughts on the subject.