March 7, 2009
Breaking: NYT Declares Death of Contract
In What Contract? in the NYT Real Estate section, reporter Michael M. Grynbaum begins:
COULD the days of the iron-clad contract be numbered?
It used to be that once a buyer went to contract on an apartment, the terms of the deal were all but set in stone. Sales prices never budged, and if the buyer balked, the down payment went bye-bye.
But double-digit price declines and the lending drought have started to threaten this once near-inviolable pillar of New York real estate. Buyers are demanding concessions from developers on apartments that they say have lost up to 30 percent in value. Others are hoping to back out of their contracts entirely, while keeping their down payments in the process.
The sudden demand has sent lawyers scurrying to uncover avant-garde legal tactics for ducking out of a deal. Downtown conversions like 75 Wall Street and new developments like One Hunters Point in Long Island City are facing suits from buyers seeking to break contracts on the basis of a once-obscure consumer protection law.
Read more here. The article is adorned with an illustration of a burning contract. Perhaps I should ask my dean if I can teach torts next year.
[Meredith R. Miller]
March 5, 2009
Ambiguity and Trade Usage in Texas: XTO Energy v. Smith Production
Smith Production, Inc was the operator under two joint operating agreements (JOAs) governing exploration and production on and oil and gas lease. Chevron was one of the four non-operating owners. As required under the JOAs, Smith gave Chevron notice of its intent to drill four wells on the lease. The JOAs gave non-operating owners 30 days after receipt of notice to tell Smith whether or not they wanted to participate in the cost of proposed operations. If they chose not to participate, a "non-consent provision" in the JOAs, sometimes called a non-consent penalty, provided that non-consenting non-operating owners cede their rights to the proceeds from an operation up to certain caps provided for in the JOAs.
Chevron first told Smith that it did not wish to participate in the costs of the proposed wells. The other three non-operating owners informed Smith that they did. Then, a week after telling Smith it did not want to participate, Chevron stated that its earlier non-consent had been sent in error, but Smith would not change Chevron's status from non-consenting to consenting. XTO Energy succeeded to Chevron's interest in the lease and sued, arguing that the language in the JOAs was ambiguous with respect to a party's ability to change its election within the 30-day window parties have to respond to notice of new operations. The trial court ruled for Smith, finding the JOAs unambiguous. It also excluded XTO's expert testimony relating to trade custom and usage. In XTO Energy, Inc. v. Smith Production, Inc., 2009 WL 442003, No. 14-07-00069-CV (Tex. App. Hous., Feb. 24, 2009), Texas's Court of Appeals for the 14th District affirmed. The first footnote in the opinion indicates that the court here construes a standard form contract, so its holding may have significance for future litigants.
On ambiguity, the Court noted:
There is no language in the JOAs expressly allowing an electing party to change its election once it has notified the proposing party of the election. Nor is there language expressly disallowing such a change in election.
However, the Court found that permitting a change in election was inconsistent with other portions of the JOAs. The Court found reasonable Smith's proffered interpretation, according to which the JOAs provide that each party's Notice Period expires when it makes its election. The Court rejected as unreasonable XTO's reading of the JOAs, according to which a party is entitled to change its election so long as the other parties have not materially changed their positions in reliance on the original election.
The Court did not reach the issue of whether exclusion of expert testimony as to custom was erroneous, as it concluded that any error would have been harmless. The Court noted that the excluded testimony would not have satisfied the relevant standard in any case:
XTO's expert did not show that the alleged custom and usage to which he testified is so general and universal that the parties to the JOAs are charged with knowledge of its existence to such an extent to raise a presumption that they dealt with reference to it.
Justice Eva Guzman filed a dissenting opinon on the ambiguity issue. Among other things, Justice Guzman noted that the JOAs referred to the 30-day notice period as "fixed," suggesting at least a triable ambiguity regarding the ability of non-operating owners to change their election throughout the 30-day period.
March 4, 2009
Would You Attempt to Hurdle Contract, Propery and Health Law to Become a Grandparent?
I have heard that the parental yearning for grandchildren is a strong one. Based on the recent case of Speranza v. Repro Lab, it is evidently stronger than I initially realized.
In 1997, Mark Speranza deposited a number of semen specimens with Repro Lab. Repro Lab is a tissue bank licensed by the State of New York. The sperm was frozen and stored in Repro's nitrogen vaults.
As part of his agreement with Repro Lab, on July 30, 1997, Mark filled in and signed a form document entitled, "Ultimate Disposition of Specimens," which contained several options for the disposition of the specimens by the tissue bank in the event of Mark's death. Mark checked off the provision stating that in the event of his death: "I authorize and instruct Repro Lab to destroy all semen vials in its possession." The document concludes: "[t]his agreement shall be binding on the parties and their respective assigns, heirs, executors and administrators."
Just six months later, Mark died from cancer. Thereafter, Mark's parents, in the administration of his estate, discovered that he had deposited sperm at Repro. The parents sought a declaration that they were the legal owners of the sperm. They sought to have a surrogate inseminated, with the hope of producing a grandchild for them.
The lab continued to store the sperm for a yearly fee, but refused to turn them over to the parents based upon the document Mark had signed.
A New York trial court dismissed the action. The Appellate Division (Saxe, J.) affirmed on different grounds. The court first reasoned that the parents faced regulatory impediments, namely because Mark fit the definition of a sperm "depositor" rather than a "donor." Based upon this distinction, Repro had not examined and screened Mark's blood and semen and, therefore, could not release the sperm specimens for insemination of a surrogate.
Then, the court held that, even setting aside these regulatory hurdles, the parents' argument for reformation of the contract between the Mark and Repro law was without merit. It reasoned:
Plaintiffs assert that Mark's purpose in storing the sperm was to assure his ability to have a child. The contract, however, is not that vague. It represents a determined choice that the sperm should be available to him so he could protect his ability to procreate if he survived. It does not protect any possibility that his genetic or biological issue could be created after his death; indeed, the directive that his semen be destroyed in the event of his death precludes such a possibility. Since the document conveys a clear intent that the specimens be destroyed upon Mark's death, which intent is not contrary to the asserted intent to assure his ability to have a child while he was alive, it cannot be said that the instrument contains an erroneous expression of the intention of the parties. Accordingly, nothing in plaintiffs' submissions would justify reforming the contract so as to permit them to fulfill their wish after his death, contrary to his express wishes.
Nor does defendant's alleged conduct, in accepting yearly storage fees without revealing the existence of the contract directing the destruction of the specimens in the event of Mark's death, and without initially informing plaintiffs that the specimens could not, under applicable law, be turned over to them, provide plaintiffs with a legal right to claim ownership of the specimens. Whatever remedies Mark's estate might be entitled to seek for the asserted contract breach created by defendant's failure to destroy the specimens, the breach would not engender in Mark's estate a right to an ownership interest. Simply put, under applicable regulations as well as the terms of the contract between Mark and defendant, the specimens are not assets of the estate over which the administrators have possessory rights.
Rather, the legal obligations with regard to the possession and handling of the semen specimens are dictated solely and completely by the applicable Department of Health regulations. At this point, the proposed use of Mark's semen would fundamentally violate 10 NYCRR 52-8.6(g), which requires that a semen donor be "fully evaluated and tested" prior to the use of his semen "by a specific recipient, other than his current or active regular sexual partner." Since the purpose of this statute is to protect the surrogate mother, and thereby the general public, from disease, we cannot countenance avoidance of the regulations' dictates, even though we recognize the joy that ignoring those regulations could bring to plaintiffs.
Speranza v. Repro Lab Inc., 2009 NY Slip Op 01543 (App. Div. 1st Dep't Mar. 3, 2009).
[Meredith R. Miller]
Arbitration Agreements Must Specify Kentucky to Be Enforceable in Kentucky Courts
Ally Cat, LLC v. Chauvin, 2009 WL 160581, No. 2008-SC-00377-MR (Kentucky, Jan 22, 2009) involves a Home Owners Limited Warranty (HOLW) that provided for arbitration of disputes relating to a condominium unit. Dr. Stephanie Russell, the sole member of Ally Cat, LLC purchased a condo unit for use as a medical clinic, and she signed the HOLW. Her unit leaked, so she sued for fraud, concealment, tortious misconduct, negligence, breach of contract and professional negligence against various entities identified in the opinion as the Real Parties in Interest. The latter moved to compel arbitration, and that motion was granted at the trial level and affirmed on appeal. Ally Cat appealed to the Supreme Court of Kentucky, contending among other things that the trial court had no subject-matter jurisdiction to order the parties to arbitrate because the HOLW did not specify that arbitration must occur in Kentucky.
Kentucky courts had previously held that a provision of the Kentucky Arbitration Act, KRS 417.200, requires that arbitration clauses include language stating that the arbitration is to be held in Kentucky before a Kentucky court can enforce an arbitral award. They had done so only when asked to enforce such awards that had already been granted after out-of-state arbitrations. In this case, the arbitration had not yet taken place. Nonetheless, the Supreme Court of Kentucky held that "[s]ubject matter jurisdiction to enforce an agreement to arbitrate is conferred upon a Kentucky court only if the agreement provides for arbitration in this state." This ruling was based on the language of 417.200 which specifically relates to agreements "providing for arbitration in this state." The Court found that the phrase would be rendered meaningless if limited to cases, like those decided earlier, in which parties sought to enforce out-of-state arbitral awards. The Court declined to address what it would have done if the parties, despite the faulty HOLW, had actually arbitrated in Kentucky.
The Court also found that the HOLW was faulty in other, less interesting ways. For example, it was not signed by any of the Real Parties in Interest, and Dr. Russell signed only in her individual capacity and not on behalf of Ally Cat, LLC. In addition, the HOLW is phrased merely as an acknowledgment of receipt of certain policies, not as an assent to their terms. In short, faulty drafting prevented the HOLW from qualifying as "the making of an agreement" under KRS 417.050.
March 3, 2009
Take Notice, Elmer Fudd: Chinese Rabbit Still Available
We reported recently about an environmentalist who sought to prevent the sale of public lands for oil and gas exploration by bidding on the land himself. That tactic, which Nate Oman dubbed "environmentalism by breach of contract," now has its imitators. Today's Wall Street Journal reports that Mr. Cai Mingchao, a Chinese collector who bid $40.4 million for two bronze sculptures (including a rabbit) now says that the sculptures were looted from Beijing's Imperial Summer Palace during a French and British attack in the 19th century and should be returned there. Mr. Cai told the Journal that he never intended to pay for the sculptures on which he bid.
The sculptures were auctioned off along with the rest of the collection of Yves Saint Laurent and his partner Pierre Berge. The Journal reports that winning bids are binding contracts but reports that Christie's will not reveal its intentions. The Journal offers the options of (a) a suit against Mr. Cai to enforce the contract; (b) resale to the next highest bidder (which is not, of course inconsistent with (a)); or (c) return of the sculptures to Mr. Berge. The option of returning the sculptures to China does not appear to be on the table.
Business Associations Limerick of the Week: Galler v. Galler
Like the case memorialized in last week's Limerick, this is a case about the enforceability of a shareholders' agreement. Like Owen v. Cohen, this case offers the opportunity to develop the Catskills shtick theme in the Limericks for Lawyers.
The Galler brothers, Benjamin and Isadore (Izzy to me) each owned 47.3% shares in a wholesale drug business. They entered into a shareholders' agreement in 1955 that would guarantee each family two seats on the corporation's four-member board, even if one of the brothers died. It also provided for dividends and a death benefit to the widow of either brother. Ben had a heart attack while the agreement was being negotiated. When he died two years later, Isadore and his son Aaron refused to honor the agreement. In a close corporation in which minority shareholders excluded from the agreement do not object, the test for the enforceability of such agreements is simple reasonableness.
The court found the agreement in question here reasonable in terms of the amount to be paid, the terms for payment (contingent upon a specified earned surplus), and duration. The last of these factors is interesting in this case. The agreement provided that it was to last for the lifetimes of the Galler brothers and their wives. The court's rendition of the facts of the case suggests that Ben's widow, Emma, was a generation younger than he was. Perhaps the in-laws weren't crazy about Ben's taste in women. Perhaps Emma was a second wife, viewed as an interloper or a gold-digger.
It is interesting to explore with students why the business's minority shareholder (a long-time employee of the firm) raised no objections to the agreement.
The following Limerick issues from beyond the grave, from Izzy and Ben's yiddische mama.
Galler v. Galler
Is Emma an utter schllemiel?
Izzy, hear this appeal!
She who life to you gave,
Oy! She'll turn in her grave!
Abide by the '55 deal!
March 2, 2009
Is the Substantial Performance Doctrine Rendered Quaint by Statute?
I can't imagine not teaching Jacob & Youngs v. Kent, a Limerickworthy case if ever there was one. Still, I'm happy that the Supreme Court of Connecticut has rejected a lower court ruling that threatened to eliminate the doctrine of substantial performance in the context of a home renovation contract that was not completed to the homeowner's complete satisfaction -- at least in Connecticut. The case, Hees v. Burke Construction, 290 Conn. 1, 961 A.2d 373 (Conn. 2009), addresses the question of whether Connecticut's Home Improvement Act precludes a home improvement contractor from reducing breach of contract damages by the unpaid balance due under the contract. That Act provides in relevant part as follows:
No home improvement contract shall be valid or enforceable against an owner unless it: (1) Is in writing, (2) is signed by the owner and the contractor, (3) contains the entire agreement between the owner and the contractor, (4) contains the date of the transaction, (5) contains the name and address of the contractor and the contractor’s registration number, (6) contains a notice of the owner’s cancellation rights in accordance with the provisions of chapter 740, (7) contains a starting date and completion date, and (8) is entered into by a registered salesman or registered contractor. . . .
The Supreme Court of Connecticut held that the Act does not preclude recovery by the contractor, reversing the lower court's judgment for plaintiffs.
Plaintiffs engaged Burke Construction to undertake about $350,000 in home improvements. After about 30 change orders, the contract price rose closer to $400,000. Plaintiffs paid $330,531, but then refused to make a tenth payment. At that point, there was an unpaid balance of $16,472, and after giving plaintiffs notice that it considered them in breach, Burke terminated the contract. Plaintiffs sued alleging that Burke had breached by not completing all of the work. Burke counterclaimed alleging breach of contract, quantum meruit and foreclosure of its mechanic's lien. The case was referred to a referee, who found for plaintiffs and awarded them damages for costs incurred in completing work that defendant had left undone. The referee denied Burke's counterclaims because the contract included no right of rescission and was thus unenforceable against the plaintiffs under the Act. The trial court adopted the referee's report.
On appeal, Burke contended that it was entitled to offset plaintiffs' damages by the amount due under the contract and that the Act did nothing to change that standard rule of contracts damages. The Supreme Court agreed.
The Court determined that the statutory language was ambiguous on the subject of its intended scope. The Act prevents contractors from relying on a contract that is inconsistent with the statute in an action brought by the contractor, but it is not clear that contractors could not rely on such a contract in a case in which they are alleged to have breached the agreement. However, after a review of the legislative history behind the act and case law decided under it, the Court concluded that the referee's interpretation of the Act was untenable.
The Court observed that homeowners would be awarded "an unwarranted windfall" if it were to permit plaintiffs to recover damages for a breach of contract but then were not to permit defendants to recover amounts due under that same contract.
Justice Schaller provided a niftier solution in a concurring opinion. Preferring to avoid a distinction between "affirmative" and defensive uses of the Act, Justice Schaller argued that plaintiff conceded the validity of the contract by suing for its breach. There was thus no need to consider the Act at all.