ContractsProf Blog

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

A Member of the Law Professor Blogs Network

Wednesday, September 9, 2009

Alan White on Drafting Exercises

The Third in a Series of Posts by:

Guest Blogger, Alan White 

Paris_Hilton Thanks to Professor Miller’s post on this blog, I became aware of the Goldberg v. (Paris) Hilton case, which fit nicely into this week’s discussions of uncertain expectation damages, reliance and restitution.  In addition to discussing the case, I decided to use it as the basis for my first drafting exercise.  Last year I asked students to draft a liquidated damage clause based on the Lake River v. Carborundum case from the casebook, in which Judge Posner invalidates a contractual remedy as a penalty.  Because Judge Posner’s opinion steps through the math to show why the contractual remedy resulted in a windfall, the exercise did not allow for a great variety of solutions.  The Hilton case was a considerable improvement in giving free reign to students’ creativity, while still inviting the predictable errors.  The liquidated damages exercise requires not only an understanding of when such clauses are deemed unenforceable penalties, but also a grasp of the expectation, reliance or restitution damages of which the clause is supposed to be a reasonable estimate.

While students are quick to grasp the idea behind the liquidated damages clause, their substantive errors fall into three general categories:

1) writing a clause that does not actually liquidate damages.  If the proposed clause simply describes the producers’ damages in a qualitative way, such as “all promotional expenses incurred at the time of the breach”, it does not provide the certainty of a fixed sum or a sum calculated according to an easy formula, which is the purpose of liquidated damages clauses. 

2) choosing a very conservative amount to avoid unenforceability as a penalty – certainly one can make sure the LD clause is enforceable by using a fixed sum that will always be less than actual damages, but that isn’t very good advocacy for the client seeking the LD clause.

3)  unhelpful recitals – it can be helpful to recite facts that support the fixed sum of damages in the LD clause, but only if those facts support the enforceability of the clause, by establishing the uncertainty of potential damages and the reasonableness of the estimate.

How, fellow teachers, might ask, does one grade 50 to 100 drafting exercises without consuming unreasonable amounts of time that could otherwise be spent on blogging and other key professorial duties?  I have adopted several strategies to get students writing while preserving my own sanity.  First, I have the writing exercises done in groups, not only to economize grading time, but because real-life lawyers typically collaborate on much of their writing, and it is never too early to learn to work with others.  Second, I try to keep writing exercises extremely short, such as drafting a one- or two-paragraph contract clause rather than an entire agreement.  Third, I provide limited written feedback in lieu of a grade, or in some cases assign a grade on a very simplified scale intended only to differentiate those who took the exercise seriously from those who did not.  Reading and writing feedback for the 15 liquidated damage clauses in this instance took me about 3 hours total.  Time well worth investing in the worthy goal of writing across the curriculum, while also reinforcing much of the material in remedies.

Professor Telman and I are on different topics at the moment, but will shortly be back in synch, at which point perhaps we can liven up the dialogue a bit. 

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

September 9, 2009 in Celebrity Contracts, Recent Cases, Teaching | Permalink | TrackBack (0)

A Simple Contract Issue or a Moral Issue? Ask a 5th grader.

Chalk-boardThis week, it is back to school for 5th graders across the U.S.  Maybe we should ask them who should win a legal battle that is heating up in Georgia. 

Kathy Cox, the superintendent of Georgia's schools, won $1 million on the Fox TV game show Are You Smarter Than A Fifth Grader?  On the show, Cox pledged to give the winnings to three public schools for the deaf and blind.  However, after Cox won, her husband filed for bankruptcy.  Now the creditors say that the game show earnings belong to them, not the Georgia schools.  The creditors point to Cox's contract with Fox; the Georgia schools present a powerful moral appeal. Here's the story from yesterday's NPR Morning Edition (you can listen if you follow the link): 

The Atlanta Area School for the Deaf is one of the schools to which Cox promised the money. The school had planned to use part of its share of the money to buy uniforms for its basketball team. The school's athletic director, Reginald Bess, says the team's uniforms are secondhand.

"Most of the uniforms that we have — sort of hand-me-downs — don't fit the kids. They're kind of squeezed into some of the uniforms, and it's a little bit embarrassing for them if they go play other teams," Bess says.

However, the school is now competing for the money with dozens of creditors of Cox's husband, John.

A homebuilder, John Cox filed for bankruptcy after his wife's TV appearance. Atlanta's slow housing market left him and his wife $3.5 million in debt — she had co-signed many of his loans.

Alex Teel, a lawyer for the bankruptcy trustee, says regardless of what Kathy Cox said on the show, the contract she signed with Fox TV says the money is hers.

"The terms of the agreements are that prize money won is income to the recipient subject to taxation," Teel says.

A Legal — And Moral — Issue

Teel says the question of who gets the money is a simple issue of contract law, and that the $1 million would be the Coxes' only asset. But for some in the deaf community, it's a moral issue.

About two-dozen hearing-impaired people marched recently in a quiet circle outside the bankruptcy trustee's office. They hoisted signs reading, "One Million Belongs To The Deaf Children" and "Robbing From The Blind, Shame On You."

Georgia state officials have vowed to fight for the $1 million.

"The state of Georgia's position is that Superintendent Cox was invited to appear on this game show solely in her official capacity as school superindendent, and accordingly, the winnings belong to the Department of Education for the benefit for those three schools," says Russ Willard of the state attorney general's office.

For her part, Cox says she never considered the winnings to be her money. But she does remember signing documents before the show.

"I'm not an attorney," she says. "And so I basically was just cooperating and thinking I was signing, you know, what everybody signs."

Fox TV plans to pay the $1 million winnings to the bankruptcy court, where a judge will decide whether Georgia or creditors will get the money.

[Meredith R. Miller] 

September 9, 2009 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 8, 2009

Save the Dates: February 26-27, 2010

Having skipped 2009 because of scheduling conflicts at the intended host school, UNLV's William S. Boyd School of Law is planning to host the Fifth International Contracts Conference (or its likeness) on February 26 and 27, 2010.  More details and a call for proposals to follow.

UPDATE: Please note that my initial post indicated February 27 & 28.  We'll stick with the Friday-Saturday schedule that has worked well at the prior conferences.

[Keith A. Rowley]

September 8, 2009 in Conferences | Permalink | TrackBack (0)

Teaching Filanto, S.p.A. v. Chilewich Int'l Corp.

Boots I like to give my students a little taste of the U.N. Convention on the International Sale of Goods (CISG), just so they know that it is out there and so they know that the outcome can be different if their clients' contracts are governed by the CISG rather than the UCC.  Filanto, a case I learned about by reading William S. Dodge's scholarship, is one of the cases I always teach because the Battle of the Forms can come out differently under the CISG's Article 19 than it does under the UCC's Section 2-207.  The case also illustrates what I see as the dilemma of the Contracts: Law in Action approach. 

The authors of the casebook that I use are clearly right that the rules of offer and acceptance do not operate in the manner one might imagine if one only read the Restatement.  The UCC is supposed to be responsive to the more helter-skelter or haphazard way in which offer and acceptance really occur, as is the CISG. Filanto nicely illustrates the way real transactions occur:  Chilewich wants to purchase boots from Filanto and sell them in Russia.  It sends orders to Filanto and it attaches a form contract with a clause calling for arbitration of disputes in Russia.  Filanto responds in correspondence from time to time and always indicates -- without clearly stating -- that it does not want to be bound to arbitration in Russia.  The parties never resolve their differences, but a contract is formed because there is a flow of boots from Italy to New York.  Eventually Chilewich becomes frustrated with Filanto's performance and tries to enforce its understanding of the deal through arbitration in Russia.  Filanto resists and files suit in the Southern District of New York.  The issue before the court is whether the arbitration clause was part of the parties' agreement.

The court resolves the dispute by reviewing the confusion of correspondence, which constitutes an incomplete record of the parties' communications and which indicates that the parties themselves might have been confused about which terms attached to which transactions.  Out of the mass of documents, the court plucks out what it takes to be an offer, which it deems accepted through performance.  This requires some real detective work, because the parties are performing other contracts while the offer was outstanding, and it's pretty hard to identify which conduct could be construed as a response to a particular offer.  What the court describes as Filanto's written "acceptance" of the offer comes five months after what the court regarded as the offer.  The outcome of the case might well have been different if the roulette wheel had stopped on a different document as the "offer" or on a different mode of acceptance.  As delivery of the boots did not begin until after Filanto's writing, a court could have construed that writing as an offer, which was accepted through Chilewich's delivery of the boots.

Law in Action tells us that real-world transactions are like this.  The parties exchange contradictory forms which neither party ever reads, and then they both proceed based on their separate understandings of the agreement.  Neither party anticipates breach, and if breach occurs, both parties assume that they will work out a new deal rather than litigate, and so the terms of the agreement never really matter much.  The problem is that, every once in a while, the parties do litigate, and when they do, courts resolve the dispute by trying to pluck out of their very messy interactions a precise moment of offer and acceptance.  Lawyers come in handy, if at all, only in drafting form purchase orders and form acknowledgments that are designed to lead courts to determine that their clients' forms contain the terms that should govern the deal.  

[Jeremy Telman}

September 8, 2009 in Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, September 7, 2009

Contracts Limerick of the Week: Izadi v. Machado (Gus) Ford, Inc.

Pinto As I mentioned in introducing last week’s Limerick, although Lefkowitz and Izadi cover much the same ground, I think they go well together.  In fact, I also have the students read Leonard v. Pepsico., Inc., which is always good for a laugh.

My students raised some interesting issues with respect to Lefkowitz.  As you may or may not recall, Lefkowitz is about a guy who responds to an ad advertising various fur coats and stoles for sale on a first-come-first-served basis for $1.  When Lefkowitz shows up and tries to buy a fur, the store owners say that they have a policy against selling to men.  Lefkowitz tries the trick again two weeks later and gets the same response.  He sues, claiming breach of a contract for sale. The court sides with Lefkowitz, construing the ad as an unambiguous offer.

We had a really interesting discussion of damages this time around.  The court gave Lefkowitz his expectation damages for the second failed attempt at purchase, which was for a stole valued at $139.  The court refused to grant him damages for his first failed attempt because the ad was ambiguous as to the value of the coats: “worth to $100.”   We explored whether Lefkowitz’s attorneys could not have elicited deposition testimony or gotten some appraisal of the coats.  Perhaps if they failed to do so, that’s their fault and Lefkowitz was properly precluded.

But some of my students wondered whether Lefkowitz should be entitled to collect for his second attempt at purchase.  After all, it seems likely that he was unaware of the store policy against selling women’s coats to men when he first showed up in the Great Minneapolis Surplus Store.  But the second time he came, he knew that the ad in question was not an offer directed at him.  Why grant him recovery?   It seems like the court split the baby, but they gave Lefkowitz the wrong half.  Eww; that’s a hideous metaphor, but you get the point.

Pacer I am somewhat sympathetic to Lefkowitz.  I don’t know about Izadi.  Izadi claims to have construed Machado Ford’s ad as meaning that he could get $3000 off a new Ford car or truck if he traded in “any vehicle.”  He showed up with a vehicle which the court acknowledged was likely worth far less than $3000.  Was it a tricycle?   That’s a vehicle.  I feel for Machado Ford, because they were arguing before a highly unsympathetic Judge Alan R. Schwartz.  I’ve had that experience and it was not pleasant.

Judge Schwartz got himself in a lather about what he took to be an intentionally misleading advertisement.   In order to establish that the advertisement was misleading, one might try to learn how many people were actually mislead.  As far as I can tell, only Izadi claimed to have been taken in by the ad -- after all, the case is not a class action -- and I suspect that Izadi was not mislead at all but in fact was opportunistic in his reading of the ad.  

But here’s the rub: Judge Schwartz offers two justifications for ruling against Machado Ford.  First, he reads the ad as an unambiguous offer.  That’s a bit hard to swallow.  The ad is confusing, but that argues for rather than against ambiguity.  The second justification is that people ought not to be allowed to take advantage of consumers with intentionally misleading ads.  I certainly agree with that, but Judge Schwartz is able to find no Florida authority establishing that rule as a matter of contract law.  

I thus use this case to introduce my students to the problems of institutional competence and judge-made law.  In order to do so, I edit out the case which indicates that defendant could also be liable under relevant Florida consumer protection statutes. 

As Judge Schwartz notes, other states have adopted the rule of contracts law that “a binding offer may be implied from the very fact that deliberately misleading advertising intentionally leads the reader to the conclusion that one exists,” but Florida courts had not recognized that rule.  Why not leave it to the legislature to do so, I ask my students.  This can lead to an interesting discussion of why judges often feel that they have to make or adopt legal rules on the fly rather than wait for the slugs in the legislature to act.

Well, this post is already too long.  I’ll have to compose a Limerick for Leonard so that I can explain where that case fits in next week.

Izadi v. Machado (Gus) Ford, Inc.. 

Want to make a used-car dealer weep?
Try to trade in your rusting junk-heap,
Then pretend that your mad
On account of his ad
And seek justice not blind but asleep.

[Jeremy Telman]

September 7, 2009 in Famous Cases, Limericks, Teaching | Permalink | Comments (0) | TrackBack (0)