ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

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Friday, September 4, 2009

Contract Law, Party Sophistication and the New Formalism [File this under: Self-Promotion]

While I took a little break from blogging about the contract foibles of faded celebrities, I managed to get out a draft of "Contract Law, Party Sophistication and the New Formalism."  Coming to a theater near you, courtesy of the Missouri Law Review.  For now, I welcome your thoughts and feedback.  Here's the abstract:

With increasing frequency, courts are mentioning party sophistication as relevant to whether a contract has been formed, whether a contract is enforceable, how the contract should be interpreted, and even, in some instances, the determination of an appropriate remedy.  Sophisticated parties are held to a different set of rules, grounded in freedom of contract.  It is presumed that a sophisticated party was aware of what to bargain for and read (or should have read) and understood (or should have understood) the terms of a written agreement. 

But, just what do courts mean when they call a contracting party “sophisticated”?

"Sophistication” is a slippery word.  Courts and scholars have not established instructive criteria, and often presume that parties to a commercial transaction are sophisticated.  Widely cited and highly regarded works in the area of contract law have stated that their theories only apply to sophisticated parties, without a serious attempt to explain who falls into that category.  Likewise, all too often, courts label parties “sophisticated” without any analysis.

 

Part I of this Article positions the discussion in theoretical context, and describes the significance of party sophistication as a compromise between formalist and realist concerns.  Part II collects examples of contexts in which courts have used party sophistication as a tool to organize the world of contracting parties and, with that, the applicable legal principles.  For sophisticated parties, in answering a wide array of contracts questions, courts employ a formalist approach.  Part III begins descriptively and addresses the general lack of meaningful assessment of party sophistication.  Drawing upon review of hundreds of cases, Part III details the attributes common among parties that courts have deemed sophisticated, and begins to draw the contours of a standard for sophistication.

Finally, Part IV presents the central normative claim of this Article: courts should take a more deliberate and thoughtful approach in addressing party sophistication.  Drawing upon the extensive review of case law, Part IV provides a definition of sophistication that asks whether the contracting parties are repeat players in the relevant market for the transaction.  The proposed standard would require courts to do a contextual, factual assessment of the comparative knowledge and experience of the parties as it relates to the nature of the transaction.  As it stands now, however, in the absence of a meaningful definition of sophistication, courts are not actually addressing the context of the deal.  Rather, they are simply reciting well-worn clichés about “sophisticated parties dealing at arms’ length.”

You can download the paper here.

[Meredith R. Miller]

September 4, 2009 in Recent Scholarship | Permalink | TrackBack (0)

Thursday, September 3, 2009

More Bad News For Seasons Ticket Holders

Patriots One issue in the dispute, discussed below, between Washington Redskins fans and the team is the team’s duty to mitigate damages when it resells tickets reclaimed from defaulting seasons ticket holders.  Some of the Redskins fanned interviewed for the Washington Post story decried as “double dipping” the Redskins’ practice of collecting full damages for unused tickets and then reselling the tickets and collecting again. 

Alas, as reported in Connecticut Sports Law, in NPS, LLC v. Minihane, 451 Mass. 417 (2008), the Massachusetts Supreme Judicial Court enforced a liquidated damages clause in a ten-year agreement for club-level seats at New England Patriots games.  The defendant in that case was ordered to pay damages for the full value of the ten-year contract, although he had only used the seats for one year.  The trial court had struck down the liquidated damages clause as “grossly disproportionate to a reasonable estimate of actual damages made at the time of contract formation.”

The Massachusetts Supreme Judicial Court reversed, based on a finding that the damages would have been difficult to ascertain at the time the parties entered into the contract and that the liquidated damages clause represented a “reasonable forecast of the damages expected to occur in the event of a breach.”  The court reasoned that the team could not predict in advance how long it would take them to resell the seats.  In light of the benefit defendant would have enjoyed of having guaranteed seats for ten years without the threat of a price increase, the court found that the damages clause was not “unconscionably excessive.”  Once the liquidated damages clause was found to be enforceable, mitigation evidence was deemed irrelevant. 

[Jeremy Telman – HT again! Zachary Calo]

September 3, 2009 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

And Now. . . A Feel Bad Story: Washington Redskins v. Their Fans

Redskins Although I am a fan of the Chicago Bears (Walter Payton edition), I’ve always had a bit of a soft spot for the Washington Redskins and especially for their Hogettes.  Well, I’ll always love those beefy cross-dressing pig-snouted guys, but my sympathy for the team has just fizzled.  As reported in the Washington Post, the team has gone to court to enforce the terms of long-term contracts with seasons-ticket holders, even if the ticket holders are unable to pay because of unforeseen changes in circumstances, such as the loss of their livelihoods.  The Post tells the story of Pat Hill, a seasons-ticket holder since the early 1960s.   Now 72 and still working in real estate, Hill has had some down years recently and can no longer afford $5300 a year for her two loge seats behind the end zone.

Unfortunately for Hill, she had entered into a 10-year agreement with the Redskins, which the team is demanding she honor.  The team sued and won a $66,364 default judgment.  Redskins General Counsel, David Donovan, claims the team has done its best to work with its fans and has compromised with those open to negotiation.   He was not familiar with Ms. Hill’s case.  While Mr. Donovan was under the impression that all teams sue their fans, the Post reports that many do not. The Bears, alas, do so on occasion, but I’m sure it’s only if the fans are downright evil. 

[Jeremy Telman -- HT Zachary Calo]

September 3, 2009 in In the News | Permalink | Comments (1) | TrackBack (0)

UPDATE: Roxanne's Revenge: Not A True Story [File This Under Debunked Feel Good Stories]

We previously mentioned a story reported in the Daily News about Roxanne's Revenge - the heartening story about a young rapper who got a PhD on Warner Music because of a clause promising to pay for her education "for life."  According to Slate, the story appears to be false. Perhaps it is a better lesson for the journalism students than the law students.

It sure was a good story while it lasted.

[Meredith R. Miller] 

September 3, 2009 in In the News | Permalink | TrackBack (0)

Tuesday, September 1, 2009

Behavioral Economics and Peevyhouse

Peevyhouse ChannelThe Second in a Series of Posts by:

Guest Blogger, Alan White 

The Peevyhouse case offers all sorts of possibilities for law and economics discussions of the traditional and behavioral varieties, a few of which we were able to touch on in class last week.  The issue, after all, is how (and whether) to place an objective value on a subjective injury.  According to the Oklahoma Supreme Court, Garland Coal breached its promise by spoiling roughly 10% of the Peevyhouses’ 60-acre farm and failing to repair the damage.  Land in the area sold for $50 an acre, so presumably Mr. Peevyhouse could simply have taken his $300 damage award and purchased another 6 acres nearby.  But of course the spoiled land was his family farm, and he was not indifferent as between his 6 acres and a substitute parcel.  This is the well-known endowment effect.  The value one places on an item depends on whether one is buying it or selling it.  We value more highly what we own than what we want.  The market price in this context thus serves to advance values of efficiency and consistency, but not competing values of autonomy and equity.

Equally interesting is the fact that the amount of money that would have satisfied Mr. Peevyhouse, we learn from Professor Maute’s excellent article, fluctuated dramatically as the dispute progressed.  Prior to the breach, Mr. Peevyhouse rejected a $3,000 advance cash payment in lieu of the promise to restore the land.  When first confronted with the contract breach, he asked for only $500 in lieu of specific performance, on the theory that he could rent a bulldozer and repair the damage himself.  When Garland Coal refused that demand, Mr. Peevyhouse retorted that he would demand an additional $500 for each time he was required to visit Garland’s office, a demand that quickly reached $3,000, the amount he had earlier rejected.  In litigation, he demanded $25,000, the highest available estimate of the cost of repair if performed by a contractor.  While rational choice theory could explain the escalating demands as reflecting Mr. Peevyhouse’s own estimate of transaction costs, a behaviorist might say that preferences are shaped, not fixed, and that Mr. Peevyhouse’s indifference curve jumped around partly as an emotional response to his separate preferences for fair treatment.

The common law, in its special treatment of specific performance for land sale contracts, seems to recognize the endowment effect and the inadequacy of market pricing mechanisms as compensation for land, reflecting in part feudal traditions that tied social status to land ownership.  That recognition, however, does not always extend to contract breaches that result in damage to land. 

[submitted, on Alan's behalf, by Jeremy Telman]

September 1, 2009 in Teaching | Permalink | Comments (0) | TrackBack (0)

Hoddeson v. Koos Bros. Revisited

Is Koos Bros. estopped from denying liability for a contract entered into by a "silver-haired mountebank" on its sales floor?  See Prof. Telman's Limerick for more details about this Business Associations staple on agency and estoppel.

After discussing the case, one of my awesome students alerted me to this Improv Everywhere mission at Best Buy:

Imposters Everywhere!

[Meredith R. Miller]

September 1, 2009 in Miscellaneous | Permalink | Comments (0) | TrackBack (0)

Monday, August 31, 2009

Is Breach of Contract a Good Use of Taxpayer Dollars?

Bookmobile LexCH.com, your source for Dawson and Gosper County News, brings this report from Hall County (which actually seems a bit out of their jurisdiction): the County Board of Supervisors has decided to cut funding to their local bookmobile, abruptly electing not to pay $70,000 of the service fee outstanding on the county's agreement with the library board for the 2009-2010 fiscal year.  According to the report, the cut constitutes a breach of contract, and if challenged in court, the county could not win.  Still, all six of the supervisors present at a special budget meeting were reportedly willing to take the risk of litigation because they believed "that spending money on the bookmobile is no longer the best use of taxpayer funds."  

Perhaps I overestimate the litigiousness of library boards, but it seems to me if you have a public admission of a breach of contract and an acknowledgment that the breach could not be justified in a court of law, you sue and you get the full $70,000 that's owed to you.  That means that the taxpayers will pay the full contract price, plus the litigations costs.  How efficient is that?

Of course, it's also possible that the library board will take the hit, in the hopes of preserving good relationships with the county and thus living to fight another day.  If so, I'm afraid I have to agree with Jerry Seinfeld.  Libraries are like some pathetic kid who has all the best sports equipment and lets you play with his ball if you agree to be his friend.

[Jeremy Telman]

August 31, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Contracts Limerick of the Week: Lefkowitz

Lefkowitz Coat I am teaching Lefkowitz v. Great Minneapolis Surplus Store for the first time this year.  I don't know why this case has fallen out of the casebooks; I really like it.  I also teach Izadi v. Machado Ford, Inc. (about which more in next week's Limerick), and I like that case too, but I think they will teach well together because I think Lefkowitz is pretty clearly rightly decided, while I have my doubts about Izadi.

The reason I like Lefkowitz is that it provides lots of opportunities to talk about what constitutes an offer, as well as the sub-topic of when an ad can qualify as an offer.  It also provides an opportunity to talk about the need for damages to be calculable with reasonable certainty.  As I mentioned in an earlier post, I do not start with damages, but I try to bring them into the conversation wherever possible, since as my colleague Alan White stresses, ultimately, contracts cases are about getting some recovery for your clients.  The casebook that we both use, Law in Action, appropriately stresses that the storybook contract with an easily identifiable offer followed by a clear acceptance does not capture the much more tohu vavohu world of actual commercial interactions.  I do not quarrel with that principle, but I still think you've got to be able to swim before you can synchronized swim.  So I start with the basics, even if they may be Platonic forms.

In any case, to celebrate the return of Lefkowitz to my syllabus, I have composed a new Limerick, which I acknowledge does not do the case justice.  By the way, after I introduced my new students to the Limerick approach to contracts pedagogy, one of them asked how much time I spend composing them -- as if he could think of better uses for my time!  Well, in this case, the answer is about 20 minutes.  Next week's Limerick was more of an epiphany; it only took me ten minutes.

Lefkowitz v. Great Minneapolis Surplus Store

Mo Lefkowitz made his career
Finding ads explicit and clear.
He's the first to the store;
Now he's got furs galore,
And the price that he pays isn't dear.

[Jeremy Telman]

August 31, 2009 in Famous Cases, Limericks, Teaching | Permalink | TrackBack (0)