July 13, 2007
Hadley v. Baxendale Marked at Ceremony
One of contract law's enduring monuments, Hadley v. Baxendale, will soon have a monument of its own. Authorities in Gloucester, England, will memorialize the case next week with two plaques to be placed on the old City Flour Mills building (left), where a broken shaft in 1853 led to one of the most important contracts damages cases of all time. Here's the press release from the Central Gloucester Initiative:
Two plaques will be unveiled at a restored flour mill in Gloucester Docks next week (July 21, 2007, 6 p.m.) to celebrate an historic court ruling.
The ceremony will be performed by Franklin G, Snyder, Professor of Law at Texas Wesleyan University in Fort Worth, accompanied by the Mayor of Gloucester, Councillor Harjit Gill.
The unveiling is part of the fourth annual Gloucester International Legal Conference being held at the Oxstalls Campus of the University of Gloucestershire and attended by delegates from all over the world.
The theme of this year’s event is “Law and Justice in the Age of Globalisation,” and marks the 200th anniversary of the abolition of the transatlantic slave trade.
Richard Dennery, City Centre manager and director of the Central Gloucester Initiative which has organised the conference, said: “The plaques on the City Flour Mills -- now called Priday’s Mill -- record the landmark Appeal Court ruling of 1854, when the Court of Exchequer judge laid down the principles on which damages should be calculated. The case of Hadley v. Baxendale, is still used as a famous precedent in legal schools and courts throughout the world.”
Paul James, Leader of the Gloucester City Council, commented: “This is another example of the rich historic tapestry that makes Gloucester such a wonderful place. So many buildings around the city have a story to tell. These plaques help to do exactly that for our residents and many visitors.”
Gloucester Historic Buildings Ltd., a company formed by the Gloucester Civic Trust and Gloucester City Council to promote the city’s history, has provided the cast metal plaques with sponsorship from the Central Gloucester Initiative.
Civic Trust spokesman, Hugh Worsnip, said: “Soon after brothers Jonah and Joseph Hadley started their flour mill in 1850, the crankshaft of the steam engine broke and had to be taken to London to serve as a pattern for a new one. There were delays in transporting the shaft, so Hadleys sued Mr Baxendale, senior partner of carriers, Pickfords, for their loss of income.
“The jury at Gloucester Assizes awarded the Hadleys damages of £50 –- a lot of money in those days –- but Mr Baxendale appealed, and, in a ruling which has had enormous consequences throughout the world ever since, the appeal judge laid down the foreseeability rules. In other words, damages had to reflect what could reasonably have been foreseen by both parties at the time contracts are made.
“This ruling has provided employment for lawyers and arguments in law schools throughout the world ever since. It is mentioned in no fewer than 2,000 sites on the Internet. So the Gloucester Flour Mills truly made legal history.”
After the ceremony delegates to the conference will attend a civic reception, hosted by the Mayor, at the North Warehouse.
Contract Damages and the Economists
The life of the law, said Holmes, has not been logic, it has been experience. But that has never stopped anyone from trying to apply logic to it. No group of people on earth is more logical than the economists, and over the years they have striven mightily to try to explain various doctrines of contract law in logical terms.
Enter Nate Oman (Wm. & Mary), with a new paper, appropriately titled The Failure of Economic Interpretations of the Law of Contract Damages. Oman doesn't think that the various economic analyses offered to explain contract doctrines are convincing, but he still thinks economics has a lot to say about contract law. Here's the abstract:
The law of contracts is complex but remarkably stable. What we lack is a widely accepted interpretation of that law as embodying a coherent set of normative choices. Some scholars have suggested that either economic efficiency or personal autonomy provide unifying principles of contract law. These two approaches, however, seem incommensurable, which suggests that we must reject at least one of them in order to have a coherent theory. This article dissents from this view and has a simple thesis: Economic accounts of the current doctrine governing contract damages have failed, but efficiency arguments remain key to any adequate theory of contract law. Contractual liability -- like virtually all civil liability -- is structured around the concept of bilateralism, meaning that damages are always paid by defeated defendants to victorious plaintiffs. Ultimately, economic accounts of this basic feature are unpersuasive. This criticism, however, leaves untouched many of the key economic insights into the doctrine of contract damages. The limited failure of economic interpretations points toward a principled accommodation of both autonomy and efficiency in a single vision of contract law where notions of autonomy provide the basic structure and economics fills in most of the doctrinal detail.
The Decline of England
It's a sad day for those of us who have always loved the pomp and circumstance of English justice: The judicial wig, the wing collar, and the variegated robes used in different courts will be no more civil cases.
The British government -- which has been known to knock down 11th century Norman churches just to widen a roadway -- has decided to do away with four centuries of tradition to save a measly $600,000 a year.
That presumably means that the next Nichols v. Raynbred or Adams v. Lindsell will delivered by somebody dressed (like an American judge) in a black polyester gown and Hush Puppies. Sic transit gloria mundi, if that's the expression we want.
July 12, 2007
Can't Get No Satisfaction
But the defendants in a $65 million lawsuit over a misplaced pair of pants, who've spent two years and $100,000 in legal fees to battle their way through the D.C. legal system, don't seem to feel it's very funny. Jim Nan Chung and Ki Chung (left), Korean immigrants and the owners of a dry cleaning establishment, were sued by a customer, Judge Roy Pearson (right) whose pants were either (depending on whom you believe) lost or temporarily mislaid. It took two years to get the case dismissed -- and now Pearson is moving to set aside the dismissal. Various business groups, including the U.S. Chamber of Commerce, are pitching in with a fund-raiser.
Among Pearson's claimed damages are the costs to rent a car each weekend for ten years to drive to another dry cleaner, since he no longer has confidence in the Chungs. Foreseeable?
Contracts With Angels
No field of contract practice offers more opportunity for information asymmetry, differences in bargaining power, opportunism, and simple uncertainty than the world of the so-called "angel" investor. Angels are investors who provide money to would-be entrepreneurs at an early stage of the business. Darian Ibrahim (Arizona) has been studying these contracts, and has come up with some surprising conclusions in The (Not So) Puzzling Behavior of Angel Investors. Here's the abstract:
Angel investors fund start-ups in their earliest stages, which creates a contracting environment rife with uncertainty, information asymmetry, and agency costs in the form of potential opportunism by entrepreneurs. Venture capitalists also encounter these problems in slightly later-stage funding, and use a combination of staged financing, preferred stock, board seats, negative covenants, and specific exit rights to respond to them. Curiously, however, traditional angel investment contracts employ none of these measures, which is a marked departure from what financial contracting theory would predict. This article explains this (not so) puzzling behavior on the part of angel investors, and also explains why some angels are moving toward venture capital-like organization and adopting venture capital-like contracts in the process.
July 11, 2007
Weekly Top Ten
Hmm, you go away for four or five months and wow, what a lot of great new papers on contracts are out there. Practical, theoretical, doctrinal, economic, international -- you name it, there's something for everyone in this week's list of the top 10 most-downloaded new articles from the SSRN Journal of Contract and Commercial Law for the 60 days ending July 8, 2007.
1 The Failure of Economic Interpretations of the Law of Contract Damages, Nathan B. Oman (Wm. & Mary).
2 The Seller's Right to Avoid the Contract in International Sales, Jonathan Yovel (Haifa/Columbia).
3-tie The (Not So) Puzzling Behavior of Angel Investors, Darian M. Ibrahim (Arizona).
3-tie Contractualism About Contract Law, Robin Bradley Kar (Loyola-L.A.).
5 The ‘Natural Meaning’ of Contracts, John Carter & Elisabeth Peden (Sydney).
6-tie When Common Law Trumps Equity: The Rise of Good Faith and Reasonableness and the Demise of Unconscionability, Elisabeth Peden (Sydney).
6-tie Contract Rights and Remedies, and the Divergence between Law and Morality, Brian Bix (Minnesota).
8 E-Contract Doctrine 2.0: A Fresh Approach to Online Standard Form Contracts in the Age of Online User Participation, Shmuel I. Becher & Tal Zarsky (Haifa).
9 The Expressive Function of Directors' Duties to Creditors, Jonathan C. Lipson (Temple).
10 Transparency and Determinacy in Common Law Adjudication: A Philosophical Defense of Explanatory Economic Analysis, Jody S. Kraus (Virginia).
We're delighted to publish Joe Perillo's thoughtful review of Victor Goldberg's Framing Contract Law, below. We welcome reviews like this of books, films, and other materials of interest to those who study or teach contract law. Please send them to Frank Snyder.
Those of you who have written pieces for newspapers or other online sources and want to have us link to them, please send the link along. We'll be happy to publish it.
If you're submitting a review, it's helpful if you can include an unformatted text file or paste the text of the piece in the e-mail message. Hope your summers are going swimmingly!
Perillo on Goldberg
Victor Goldberg, Framing Contract Law: An Economic Perspective(Harvard Univ. Press 2006)
by Joseph M. Perillo (Fordham)
Economists and lawyers trained in economics invaded what had been the relatively autonomous discipline of law in the 1970's. They have taken over many classrooms, preaching that rules of law are, or ought to be, rooted in economics. Law review articles employing economic analysis make up a sizable chunk of legal literature. Yet, economic analysts of law lament that they have had little impact on court decisions. When such lamentations are addressed to me, I reply that there are two basic reasons why economic analysts are usually ignored outside the academy. For one thing, rather than employ language and jargon that lawyers comprehend, their articles are overrun with the jargon of economics. Second, economic analysts are typically wrong about, or have a superficial acquaintance with, the legal rules they analyze. Victor Goldberg’s book suffers from neither of these infirmities. His prose is clear, and despite his lack of a law degree, he has a good handle on contract law. While most economic analyses of contract law tend to agree that from an economic perspective the legal system has got contract law basically right, this book analyzes a number of contract cases and finds them either wrong or, if right, wrongly reasoned. The skewering of some of these cases is, in his opinion "like shooting fish in a barrel" (p. 123).
One of his strong beliefs is that a court should take into account the business background -- the context -- of any contract. His first chapter shows the economic justification of Hollywood accounting, a system of bookkeeping that almost always shows that a blockbuster film produced no profits. This often shocks talent who sometimes agree to a small fee plus a share of the profits. It shocked the conscience of one trial court. But Goldberg demonstrates that the accounting system is embedded in the rational method by which a producer step by step puts together the talent and financing for a film. His knowledge of the film business serves him in good stead when he analyzes Hollywood’s "pay-or-play" contracts in chapters 15 & 16. However, I wish he had taken the trouble to explain why a Hollywood pay-or-play contract is a valid option in law and economics while a take-or-pay clause outside of certain specialized fields is an invalid penalty in law.
The context of the business, he urges, is of prime importance. His chapter 7, however, excoriates the decision in Columbia Nitrogen v. Royster, where the court attempted to understand the business context of a contract between fertilizer companies. The court got the context and the decision wrong, Goldberg complains. But interestingly, he employs legal, rather than economic, arguments to show that the court had an insufficient record to understand the business context and that the negotiating history, involving 21 negotiators, showed that the parties had crafted a tailor-made contract that trumped the alleged trade usage. Goldberg argues that the document should have been enforced as written and evidence of trade usage should not have been allowed to undermine the written agreement. In Chapter 6 he explains why another casebook favorite, Bloor v. Falstaff Brewing Corp., was wrongly decided, but places the blame on the lawyers who failed to have their witnesses sufficiently explain why an express "best efforts" clause had been included.
There is much in this book to surprise the reader. Did you know that the contract case that all lawyers read in law school, Wood v. Lucy, Lady Duff Gordon, was wrongly decided? The author makes a persuasive legal case that it was. But the argument is based on evidence that was not in the record. If we limit our analysis to the facts in the record, was it wrongly decided? Goldberg thinks so. His main criticism is not the finding of consideration; he would have found consideration in an unorthodox way that has a basis in economics but not in law. His main objection is that an implied term of best or reasonable efforts is too amorphous when it is argued that the implied term was breached. Indeed, a major theme of the entire volume is that the implication of terms such as "best efforts" or "good faith" undercuts the parties’ agreement. Yet some will believe that human sloth and iniquity are so variegated as to justify such implications. While he faults the implication of those terms, he would readily imply option terms in many agreements sometimes without a sufficient explanation why this should be so. Go figure!
I think that Goldberg is unaware of how his analysis undercuts the parties' agreements as I, and many others, interpret them. Take one of the cases he cites as wrongly decided and its holding absurd; he calls the decision in 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp, "another tail-wags-dog opinion." The Savoy Hilton hotel had entered into a five-year contract with a parking garage, promising to use reasonable efforts to steer its guests to use the garage’s facilities for parking their vehicles. In exchange, the garage promised to pay to the hotel 10 percent of the fees it received from the hotel guests. The hotel decided to go out of business during the five-year term and to use its valuable real property for another commercial use. The garage sued for breach. The court held that the garage had a cause of action unless the hotel could prove, on remand, that a custom existed to allow a hotel to go out of business without making compensation for incidental service contracts.
Goldberg faults the decision, basically by discussing the garage’s and the hotel’s reliance. In doing this, his analysis is hindered by the lack any knowledge of the garage’s opportunity costs. Did it turn down a deal with the nearby Plaza because the Plaza offered somewhat less favorable terms? More importantly, he totally ignores one of the dominant vectors in contract law, the protection of the promisee’s expectations. This is at the core of my disagreement with much in this volume. In his analysis of another decision, authored by fellow economist Richard Posner, he states that "[t]he lost profits remedy provided a ludicrously high level of protection for [plaintiff’s] reliance" (p.128). Although some respectable theorists view expectation damages as a surrogate for lost opportunities -- a reliance interest -- most contract scholars view expectation damages as a free-standing core value that underlies much of contract law. This volume would have been improved by a segment explaining why the author throughout concentrates on the parties’ reliance interests and seemingly disdains the expectation interest of the parties. In the tail-wags-dog opinion that he faults, the promisee is the tail, but has expectations that banks will lend money on. It is a form of property that is protected by the Constitution against interference by the states and protected by tort law against interference by third parties; fortunately, the courts often protect the reasonable expectations of parties in the position of the garage against a breach by parties in the position of the hotel. The mitigation principle assures the hotel that it will not be punished for making a presumably rational business decision to shut down.
The parties had no term in the contract with respect to the hotel’s going out of business. It seems to me and to a unanimous court that the implication of a term that the hotel impliedly promised to stay in business is more rational and more in line with the reasonable expectations of a party in the garage’s position than is a term that would allow the hotel to cease operations the day after signing a contract that purports to have a five-year term.
The author does recognize the expectation interest in two excellent chapters dealing with contracts for the sale of goods. This is followed by a more doubtful chapter on the "lost volume" issue where he comes out against scholars and courts that would grant the seller its lost profits and against those who would limit the seller to the difference (usually none) between the market price and the contract price plus incidental damages. Instead, he would substitute an implied option price -- pure economics with no grounding in law. The argument would place the daunting task of determining the implied option price in the laps of the jury.
I have discussed a few of the themes in this volume. There are many others. Although I have highlighted a few points of disagreement, this is the most stimulating and interesting book on contract law that I have come across in many years. It is full of surprises. Everyone who works with contracts and every law professor who teaches contracts should take a look at it.
July 10, 2007
It's fairly common for a judge to find that a provision in a standard-form contract didn't give the other party adequate notice of something or other. Yet even the worst contract boilerplate is often more understandable to the lay person than some of the orders routinely issued by the judges themselves. There's therefore a certain irony -- if irony is the word we're looking for -- in this story about a New York bankruptcy judge whose boilerplate notice to debtors was held insufficient to alert a debtor to the fact that his Chapter 11 petition might be dismissed.
According to the story, the case has "'wide implications' for the administration of Chapter 11 proceedings," because "the initial case management order issued by [the judge] is similar to orders issued by most bankruptcy court judges." The decision, says one expert, "calls into question the current framework for the administration of Chapter 11 cases."
Maybe they should just rewrite the notice. We know some contract lawyers who could help.
Sorry to have been gone such a long time, but it's been a rugged year. Back in February I had an altercation with a big quarter horse named Moses -- I thought I'd ride him and he thought differently. He won the argument. I wound up with a broken humerus, a broken ulna, and an acromion bone (the one that sits at the top of the shoulder) that was busted into five equal pieces, the result of going shoulder first into a stout fence post.
Three surgeries, a bunch of metal plates and screws, and a ton of big blue pills later, I'm back at nearly full speed, though I was out of the office (and literally unable even to type) for several months.
For those readers who sent me interesting links and other stuff over that time and never heard from me, I'm sorry. Please send it again if it's still timely. For those who didn't send anything, please keep your eyes open. If you see something that you think will be interesting to other readers, send it along.
Hope all your summers are going swimmingly!