ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Saturday, August 2, 2008

Limerick of the Week: Lawlis

I didn't get to post a Limerick last week as we were driving cross country. visiting, inter alia, Devil's Tower. Img_0301_4

Cross-country trips, I have learned, leave little time for anything but sight-seeing, eating and recovering. So, I will post a Limerick today as we prepare to head back east.

Lawlis illustrates one of the limitations on Cardozo's punctilio, discussed in the previous Limerick. Lawlis was a partner in a law firm, but he hit the bottle. His partners kindly saw him through a full recovery, and then executed him via a "guillotine clause" in their partnership agreement, which permitted the termination of a partner. Under the Uniform Partnership Act, Lawlis should have been safe, but partners can trump at least parts of the punctilio through a partnership agreement. They did so in this case.

The case raises nice policy issues about what a partnership should do with a partner who becomes disabled for some reason. Students, it turns out, have very strong and divergent views about how best to treat an alcoholic partner.

Lawlis v. Knightlinger & Gray

"Where's Lawlis? I haven't seen him."
The UPA says, "Don't demean him."
"But that partners' agreement"
Is stronger than cement,
And the partners may guillotine him."

[Jeremy Telman]

August 2, 2008 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)

Friday, August 1, 2008

Now in Print

Papers_2Now available in print:

- George S. Geis, Automating Contract Law, 83 N.Y.U. L. Rev. 450 (2008).

- Mariana Pargendler, Modes of Gap Filling: Good Faith and Fiduciary Duties Reconsidered, 82 Tul. L. Rev. 1315 (2008).

- Lawrence Solan, Terri Rosenblatt and Daniel Osherson, False Consensus Bias in Contract Interpretation, 108 Colum. L. Rev. 1268 (2008).

- Bryce Yoder, Note, How Reasonable is "Reasonable"? The Search for a Satisfactory Approach to Employment Handbooks, 57 Duke L.J. 1517 (2008).

[Meredith R. Miller]

August 1, 2008 in Recent Scholarship | Permalink | TrackBack (0)

California Court First To Declare Cell Phone Early Termination Fee Illegal

Chp_cell_phoneThis just in from

Californians fed up with being charged for ending their cell phone service prematurely won a major victory in a Bay Area court decision that concluded such fees violate state law.

In a preliminary ruling Monday, Alameda County Superior Court Judge Bonnie Sabraw said Sprint Nextel must pay California mobile-phone consumers $18.2 million as part of a class-action lawsuit challenging early termination fees.

Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users.

The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee.

Whether Sabraw's ruling will stand isn't clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule - backed by the wireless industry - which might decree that only federal authorities can regulate early termination fees.

Sprint Nextel also argued in the lawsuit that such fees - which ranged from $150 to $200 - were outside the purview of California law. But Sabraw rejected that argument.

"This is a terrific ruling," said Chicago attorney Jay Edelson, who was not part of the case but has filed about 50 other suits nationwide against various cell phone charges. "The phone companies have a tremendous amount of power," he added. "They lock you into long-term contracts and then they allow all these charges to be put on your bill. We have to make sure that consumers are protected."

"We are disappointed," said Sprint Nextel spokesman Matthew Sullivan. But he added that Sabraw's ruling was tentative and that she has given Sprint Nextel's attorneys the opportunity to file a rebuttal before she considers making it permanent.

Sullivan noted that similar suits have been filed in other states, but that Sabraw's decision was the first he knows of declaring such fees illegal.

Several other industry experts agreed, including John Walls, a spokesman with the CTIA, a Washington-based organization that represents the wireless telecommunications industry.

"I don't know of any state that has gone to this extent," he said, adding that his group believes it makes more sense to have such fees solely policed by the federal government.

I haven't read the court's decision, but, from a contracts perspective, this is a thorny issue. On the one hand, consumers enter into these adhesion contracts with cell phone providers and the substantial early termination fees are arguably both procedurally and substantively unconscionable. Likewise, to the extent the fee constitutes liquidated damages for the consumer's breach, the consumer might have an argument that the fee amount is a penalty. On the other hand, cell phone companies keep the cost of the phones/devices down by building in this fee. Indeed, the reason the consumer gets the phone at below market cost is because they agree to be "locked in" to a service contract. If the consumer terminates early enough, the cell phone company might not recoup the cost of the phone. Though, this becomes less of a concern, for example, if the consumer cancels in month 22 of a two-year contract - presumably, by then, a $200 termination fee is mostly profit in the pocket of the company. Plus, all termination fees are the same under these contracts, but some phones are cheaper than others.

We've noted before that the FCC might begin to regulate these fees.

[Meredith R. Miller]

August 1, 2008 in In the News, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Wednesday, July 30, 2008

Estate Fails to Establish Mistake of Fact as Ground to Rescind Decedent’s Annuity

California_state_flagJean M. Simes (Simes) died of cancer less than four months after purchasing an annuity that provided for monthly benefit payments as long as she lived. The administrators of her estate (the Estate), sought to rescind the annuity based on a mistake of fact, namely, that Simes was unaware at the time of the contract that she was terminally ill. The trial court granted summary judgment in favor of the issuing company, defendant United of Omaha Life Insurance Company (United). A California appellate court affirm because the Estate failed to establish an essential element for rescission based on mistake of fact -- that is, the Estate failed to establish that Simes did not bear the risk of the mistake.

This strikes me as a great teaching case for mistake of fact, especially because it extensively cites Donovan v. RRL Corp., 26 Cal.4th 261, 278 (2001), which I use to discuss unilateral mistake of fact.

It was undisputed that Simes submitted a signed annuity application to United’s agent on October 2, 2001, and paid a single premium of $321,131. United then issued a policy for a single premium immediate annuity, effective the date of Simes’s application. On January 25, 2002, after receiving three benefit payments, Simes was diagnosed with ovarian cancer. She died less than a week later on January 30, 2002.

The Estate filed suit against United to, among other things, rescind the annuity based on mistake of fact. The trial court granted summary judgment in favor of United, concluding that Simes’s undetected cancer did not constitute a mistake of fact rendering enforcement unconscionable. The trial court noted that purchasers of annuities assume the risk of dying before recouping their investments and concluded it was reasonably foreseeable that Simes would die before the benefit payments matched her premium. Under these circumstances, the trial court held that it was reasonable to allocate to Simes the risk of a mistake regarding her health and life expectancy.

The Estate appealed. The appellate court reviewed the grant of summary judgment de novo, and affirmed the trial court. The appellate court reasoned:

The facts on which the Estate relied below purport to show the following: (1) Simes did not know at the time of her application and during the statutory rescission period that she had terminal ovarian cancer that would result in her death four months later; (2) Simes’s illness affected her ability to make decisions; and (3) Simes did not receive a copy of the annuity policy until mid-November 2001. The sole issue argued by the Estate on appeal is whether these facts provide a legal basis for rescission of the life annuity contract based on a mistake of fact. We hold, as a matter of law, that they do not, for the following reasons.

California law permits rescission of a contract when a party’s consent is given by mistake. (Civ. Code, § 1689, subd. (b)(1); Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 278 (Donovan).) On this basis, the Estate asserts a right to rescind the annuity policy, alleging that Simes would not have entered the contract but for a mistake of fact, specifically, the terminal illness she did not know she had. A mistake of fact may consist of a “[b]elief in the present existence of a thing material to the contract, which does not exist.” (Civ. Code, § 1577.) The alleged mistake therefore may be characterized as Simes’s erroneous belief at the time of the contract that she was in good health and had a reasonable life expectancy.

A mistake of this nature does not support a claim for rescission. The Estate asserts a unilateral mistake and offers no evidence that United had reason to know of or caused the mistake. Accordingly, to prevail at trial, the Estate would have been required to prove the following: (1) Simes was mistaken regarding a basic assumption upon which she made the contract; (2) the mistake materially affected the agreed exchange of performances in a way that was adverse to Simes; (3) Simes did not bear the risk of the mistake; and (4) the effect of the mistake was such that enforcement of the contract would be unconscionable. (See Donovan, supra, 26 Cal.4th at p. 278.) The facts on which the Estate relies demonstrate that it cannot establish the third of these elements.

We conclude, based on the nature of the contract and the alleged mistake, that Simes bore the risk of the mistake, as a matter of law. A contracting party bears the risk of a mistake when the agreement so provides or when the party is aware of having only limited knowledge of the facts relating to the mistake but treats this limited knowledge as sufficient. (Donovan, supra, 26 Cal.4th at p. 283, citing Rest.2d Contracts, § 154.) Additionally, the court may allocate the risk to a party because it is reasonable under the circumstances to do so. (Donovan, at p. 283.) The contract in this case does not expressly assign the risk of the alleged mistake. Nonetheless, parties who contract for “life contingent” benefits necessarily do so based on limited knowledge of the very facts about which Simes was mistaken. We cannot fix the length of our lives or even the state of our health with certainty, and the parties knew that their expectations in this regard were at best an educated guess. Indeed, life annuity contracts are read “in the light of the knowledge of all mankind, that death may come tomorrow.” (Rishel v. Pacific Mut. Life Ins. Co. of California (10th Cir. 1935) 78 F.2d 881, 883 (Rishel).)

The allocation of this risk to Simes is reasonable because such risks are an inherent part of life annuity contracts, which reflect, at their essence, a longevity wager measured by average life expectancy. (See Rest.2d Contracts, § 154, illus. 3 [reasonable allocation of risk that annuitant has incurable disease and will live no more than a year]; see also Stockett v. Penn Mut. Life Ins. Co. (1954) 82 R.I. 172 [106 A.2d 741, 744] [contract not based on life expectancy of particular annuitant, but on “the average life expectancy of a specified group within which the individual may reasonably be included”].) Annuitants who survive the average life expectancy receive benefits beyond the premium; those who die earlier do not recoup their investments. Both risks are contemplated by the parties and, indeed, are an integral part of their bargain. (See Guthrie v. Times-Mirror Co. (1975) 51 Cal.App.3d 879, 885 [“Where parties are aware at the time the contract is entered into that a doubt exists in regard to a certain matter and contract on that assumption, the risk of the existence of the doubtful matter is assumed as an element of the bargain”].)

While there was no California case squarely on point, the court noted that the decision was consistent with the bulk of persuasive authority from other jurisdictions.

Grenall v. United of Omaha Life Insurance Company, 08 S.O.S. 4461, (California Court of Appeal, 1st Appellate Dept., July 25, 2008).

[Meredith R. Miller]

July 30, 2008 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 29, 2008

The Boss on the Hold Up Game (and Gas Prices)

Back in June, after Adam Liptak's NYT article about the use of Dylan's lyrics in judicial opnions, Prof. Katrina Kuh lamented that:

Bruce Springsteen ranks as the third most-cited rocker in judicial opinions. However, I can’t help but think that, even coming in at number three, the Boss is being underutilized in the judicial lexicon.

"To help matters along," she offered some suggestions "for incorporating Springsteen lyrics into decisions."

Well, I figure it is a worthwhile effort, and I am writing here to endorse it. You see, I actually did some research last night at Giants Stadium. I had the opportunity to see Bruuuuuuce; it was a great show.

Bruce took sign requests from the crowd and, about midway through the set, he played a fan's request for "Held Up Without a Gun." This is a somewhat obscure song off a 2003 release called "The Essential Bruce Springsteen," which has a third disc of live recordings. "Held Up Without a Gun" was recorded back in 1980, but, to the extent it is about high gas prices, it could have been written today. The Boss remarked that the band had played the song maybe twice before, and dedicated the song "to what it cost you guys to drive here."

But, I couldn't help thinking that the song was, additionally, about economic duress:

I was out driving just a taking it slow Looked at my tank it was reading low Pulled in a Exxon station out on Highway One Held up without a gun, held up without a gun

Some damn fool
with a guitar
walkin' down
the street
ain't got
nowhere to go
Ain't got
nothing to eat
Man with a cigar says,
"Sign here son"
Held up without
a gun, held up
without a gun

Now it's a sin
and it oughta
be a crime
You know it
happens buddy
all the time
Try to make a
living, try to
have a little
Held up without
a gun, held up
without a gun

[Meredith R. Miller]

July 29, 2008 in Quotes | Permalink | Comments (0) | TrackBack (0)

Monday, July 28, 2008

We Plead the Fifth

It is undeniable that, here at ContractsProf Blog, we love all things Rose the 2d of Aberlone.

And, we took great interest in this story, via Jeffrey Lipshaw at Legal Profession Blog:

As I'm still a member in good standing of the State Bar of Michigan, I get the Michigan Bar Journal (the repository of an article I wrote twenty-five years ago which was of no value whatsoever academically speaking, but that's another story). Well, it turns out that pretty little Kellogg Park, the Midwest equivalent of the town green, turns out to have all sorts of historic legal implications to it. The June, 2008 issue of the MBJ highlights the rededication of the Rose of Aberlone plaque in the park. As we all recall, Rose was the the breeder cow whose fertility or lack thereof was the subject of Sherwood v. Walker (Hiram of whiskey fame), the 1887 contract law chestnut.

Why a rededication of the Rose of Aberlone plaque? Apparently, vandals pilfered the original one. Prof Lipshaw would have done well to stop his reporting there. But, oh no, he goes on to point the finger at us and, it seems, in particular, one Professor Franklin Snyder:

Far be it from me to cast aspersions, but I think you will agree that the left side of this page [i.e, ContractProf Blog] contains a nice list of the usual suspects, particularly toward the top. So the criminal law clearly, it seems to me, has a place in the history of Kellogg Park.

We admit nothing beyond admiration for Rose and, in the spirit of a grand tradition, we feel compelled to otherwise exercise our Fifth Amendment right:

[Meredith R. Miller]

July 28, 2008 in Miscellaneous | Permalink | Comments (0) | TrackBack (0)