Thursday, February 28, 2013
I recently reviewed a new decision out of West Virginia involving the implied warranty of merchantability ("IWM"), Teamsters v. Bristol Myers Squibb. Many Contracts Profs teach IWM as part of their UCC coverage but some do not. For those unfamiliar...any sale of good by a merchant comes with the IWM assuming that the state has adopted its own version of UCC 2-314. Under West Virginia law (and under the UCC), goods are "merchantable" if they "are fit for the ordinary purposes for which such goods are used." Although IWM cases are common, this case is particularly interesting (at least to me) because it involved the following issue: What is the "ordinary" purpose of a supposedly "extraordinary" product?
In Teamsters, the product was Plavix, a prescription anti-coagulant. According to the FDA, Plavix's blood-thinning properties could help treat "patients who experienced a recent heart attack [or] stroke." The drug reportedly was marketed as a superior alternative to Aspirin, a much cheaper, over-the-counter anti-coagulant taken by similar patient groups. Plaintiffs alleged that Plavix's "ordinary and intended pharmacological purpose" was "being a superior alternative to asprin for certain indicated usages." Because Plavix allegedly worked no better than Aspirin, Plaintiffs alleged breach of IWM. Defendants countered that the "ordinary purpose" of Plavix was "to act as an anticoagulant" and nothing more.
The West Virginia court agreed with Defendants. The court gave the following fact-based reasons:
"The FDA approved Plavix for its blood-thinning properties in treating patients who experienced a recent heart attack, stroke, PAD, or ACS. There is no indication that the FDA approval was related to Plavix's efficacy compared to aspirin and other alternatives. Also, this Court has reviewed the Plavix labeling information, and has found nothing on that label suggesting that Plavix's ordinary purpose was to act as a superior alternative to aspirin or Aggrenox."
These reasons were supported by citations to Williston on Contracts and other sources indicating that IWM "requires only that the goods be fit for their ordinary purpose, not that they be...outstanding or superior....or function as well as the buyer would like." Thus, because "Plaintiffs [did] not allege that Plavix was not fit for its ordinary purpose of being an anticoagulant," the IWM was not breached.
When I read the case, I wasn't entirely convinced by the cited sources because they dealt with claims involving products marketed as ordinary (as far as I could tell). I also couldn't help but think back to the (in)famous claim of Papa John's regarding its pizza--"Better Ingredients, Better Pizza--Papa John's." I recalled that being an express warranty case but it turns out that it was a Lanham Act case brought by Pizza Hut. I suppose that if a product is marketed as extraordinary, the warranty claims will be based on those assertions (whether under express warranty, false advertising, etc.) and not on IWM. So, the "ordinary" purpose of an "extraordinary" product becomes irrelevant. Regardless, I'm still a bit puzzled by the question.
[Heidi R. Anderson, h/t to student, Shawn Matter]
SCOTUSblog has linked to the transcript from yesterday's oral arguments in American Express Co. v. Italian Colors Restaurants. SCOTUSblog, as always, has full materials on the case here. The issue in the case is:
Whether the Federal Arbitration Act permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.
The plaintiffs in the case are merchants who claim that American Express violates antitrust laws by requring it to accept American Express credit cards if they also accept American Express charge cards. The plaintiffs claim that, since the expense associated with individual arbitrations outweighs the individual recovery that any one merchant can expect, their claims are effectively denied if they cannot bring them as part of a class action lawsuit.
According to the New York Times' coverage, there are at least six votes on the Court for enforcing the arbitration agreements. Justice Scalia set the tone for the presumptive majority, stating on page 24 of the transcript, "I dont' see how a Federal statute is frustrated or is unable to be vindicated if it's too expensive to bring a Federal suit. That happened for years before there was such a thing as class action[s] in Federal courts. Nobody thought the Sherman Act was a dead letter, that it couldn't be vindicated." On the Times reading of the tea leaves, that position will be attractive to the five Justices who formed the majority in Concepcion, but this time Justice Breyer (pictured) also seemed inclined to reject the argument that there was no cost-effective way for plaintiffs to bring their claims through arbitration.
On last night's Colbert Report, Stephen announced that he, a company man, was contractually obligated to provide a sponsor integration for Halls Mentho-Lyptus cough drops. He does so by changing the name of his intern Jay to "Halls Mentho-Lyptus with Triple-Soothing Action Presents Jay the Intern."
Ahh, the power of contracts.
Tuesday, February 26, 2013
Sunday, February 24, 2013
The 8th Annual International Conference on Contracts was a success! Thanks to Frank Snyder and Texas Wesleyan for organizing and hosting. All of the panels were videotaped, so we will provide a link once it is made available to us.
The blog was privileged to present a replica of the 5-foot contract from the Hobbit movie to the conference honoree, Chancellor John E. Murray. (Here's an "amazingly detailed" legal analysis of that contract, which includes a non-disclosure provision and a mandatory arbitration clause).
Next year we will trade the Lonestar State for the Sunshine State... so mark your calendars for February 22-23, 2014 at St. Thomas University School of Law in Miami... where we contracts profs will "party in the city where the heat is on, all night on the beach till the break of dawn."
[Meredith R. Miller]
Thursday, February 21, 2013
There's a theory among some of my foodie friends that, when it comes to food, bacon makes everything better. I'm considering a similar theory for teaching Contracts via hypos: when it comes to Contracts hypos, celebrities make everything better. Hypos work. Sure, they "taste" just fine using names like "Buyer," "Client," and "Sub-Contractor," and I use those names most of the time. But using names like "Jason Patric, you know, the guy from Lost Boys and Narc" often makes the hypo better, at least for the few people over 25 who remember those movies. So, in the interest of making hypos better via celebrity a.k.a. bacon, I bring you this story from TMZ (see, you don't actually have to go to sites of ill repute; you can count on me to go to them for you and only bring you the somewhat good, quasi-clean stuff).
As TMZ reports, actor Jason Patric is in a custody dispute with his ex-girlfriend, Danielle Schreiber. Upon their break-up in 2009, Patric allegedly agreed to compensate Schreiber for her troubles via donating his sperm instead of by paying her. Presumably, in exchange for Patric's promised sperm, Schreiber would not sue Patric for support payments. Simple enough (sort of). But wait, there's more! Patric allegedly would donate his sperm to Schreiber only if she also promised not to seek support from him for the child; Schreiber agreed. If this agreement actually was reached, Schreiber must have believed that Patric's sperm was so valuable that she was willing to forgo support payments for herself and for the child that would result. [Insert skepticism here.]
How does this relate to Contracts hypos? It works as a hypo for R.R. v. M.H., which many of us use to teach how a contract can be deemed unenforceable if it violates public policy. In R.R. v. M.H., the court must decide whether to enforce the surrogacy agreement between a fertile father, married to an infertile wife, and the surrogate mother, who also happens to be married, and who was inseminated with the fertile father's donor sperm. I won't go into the case in more detail here; instead, I would like to focus one part of the case has a direct parallel to the Jason Patric dispute.
In R.R. v. M.H., a state statute provided that the husband of a married woman inseminated with donor sperm was treated as the legal father of the child, with all of the associated benefits and obligations that fatherhood carried along with it. The statute was supposed to facilitate the common practice of women being inseminated by a (usually anonymous) sperm donor. Strictly applying the statute to the facts in R.R. v. M.H. would have led to an absurd result. Specifically, it would have meant that the legal father of the child born to the surrogate would have been the surrogate's husband, who had no real interest in the child. The court wisely argued its way around that literal application and ruled differently.
The Patric dispute also involves a law of unintended consequence much like that involved in R.R. v. M.H. A California law states as follows:
"(b) The donor of semen provided to a licensed physician and surgeon or to a licensed sperm bank for use in artificial insemination or in vitro fertilization of a woman other than the donor's wife is treated in law as if he were not the natural father of a child thereby conceived, unless otherwise agreed to in a writing signed by the donor and the woman prior to the conception of the child."
Applying this law to the Patric situation could, like the law in R.R. v. M.H., produce an absurd result. Let's paraphrase the statute with applicable facts in parentheses:
"The donor of semen (Patric) for use in artificial insemenation of a woman (Schreiber) other than the donor's (Patric's) wife (they weren't married) is treated in law as if he (Patric) were not the natural father unless otherwise agreed in a signed writing."
So, even though Patric and Schreiber had been romantically involved, the formalized donation and the couple's unmarried status could negate Patric's claims to custody. It is not clear whether the statute applies and, not being admitted in California, I'd rather not analyze it further. But it always surprises me how what seems like a one-in-a-million kind of case does, in fact, repeat itself. Eventually.
[Heidi R. Anderson]
I have been meaning to blog about IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., a New York Court of Appeals case holding that a conflict of laws analysis was obviated by the parties’ choice of law clause.
IIC (a Brazilian company) owns a 60% stake in Inepar (a Uruguayan company). Inepar issued $30 million in notes to raise capital and refinance previous debt incurred by both companies. IIC agreed to guarantee the notes. The guarantee contained a clause choosing New York law to govern the agreement. New York was also designated as the venue.
Another Brazilian company (IRB/Plaintiff) purchased $14 million of the notes. When Inepar defaulted, IRB sued Inepar and IIC in New York. IIC argued that New York’s choice of law principles should apply, resulting in the application of Brazilian law. Under Brazilian law the guarantee was void because it was never authorized by IIC’s board.
Invoking New York General Obligations Law § 5-1401, the New York Court of Appeals held that New York law applied and no choice of law analysis was necessary. Section 5-1401(1) provides in part:
The parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars . . . may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.
The Court explained:
The Legislature passed the statute in 1984 in order to allow parties without New York contacts to choose New York law to govern their contracts. Prior to the enactment of § 5-1401, the Legislature feared that New York courts would not recognize "a choice of New York law [in certain contracts] on the ground that the particular contract had insufficient 'contact' or 'relationship' with New York" (Sponsor's Mem, Bill Jacket, L 1984, ch 421). Instead of applying New York law, the courts would conduct a conflicts analysis and apply the law of the jurisdiction with "'the most significant relationship to the transaction and the parties'" (Zurich Ins. Co. v Shearson Lehman Hutton, 84 NY2d 309, 317  [quoting Restatement (Second) of Conflict of Laws § 188 (1)]). As a result, parties would be deterred from choosing the law of New York in their contracts, and the Legislature was concerned about how that would affect the standing of New York as a commercial and financial center (see Sponsor's Mem, Bill Jacket, L 1984, ch 421). The Sponsor's Memorandum states, "In order to encourage the parties of significant commercial, mercantile or financial contracts to choose New York law, it is important . . . that the parties be certain that their choice of law will not be rejected by a New York Court . . ." (id.). The Legislature desired for parties with multi-jurisdictional contacts to avail themselves of New York law if they so designate in their choice-of-law provisions, in order to eliminate uncertainty and to permit the parties to choose New York's "well-developed system of commercial jurisprudence" (id.).
General Obligations Law § 5-1402 (1) further provides:
any person may maintain an action or proceeding against a foreign corporation, non-resident, or foreign state where the action or proceeding arises out of or relates to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.
The Court wrote that:
Section 5-1402 (1) opened New York courts up to parties who lacked New York contacts but who had (1) engaged in a transaction involving $1 million or more, (2) agreed in their contract to submit to the jurisdiction of New York courts, and (3) chosen to apply New York law pursuant to General Obligations Law § 5-1401. The statutes read together permit parties to select New York law to govern their contractual relationship and to avail themselves of New York courts despite lacking New York contacts.
Applying General Obligations Law §§ 5-1401 and 5-1402 to the facts of the present case, we conclude that New York substantive law must govern, since the parties designated New York in their choice-of-law provision in the Guarantee and the transaction exceeded $250,000. IIC argues that the "whole" of New York law should apply, including New York's common law conflict-of-laws principles. IIC maintains that the Guarantee's choice-of-law provision would have had to expressly exclude New York's conflict-of-laws principles in order for New York substantive law to apply; otherwise, IIC claims that the court must engage in a conflicts analysis that results in the application of Brazilian substantive law. IIC's argument is unpersuasive. Express contract language excluding New York's conflict-of-laws principles is not necessary. The plain language of General Obligations Law § 5-1401 dictates that New York substantive law applies when parties include an ordinary New York choice-of-law provision, such as appears in the Guarantee, in their contracts. The goal of General Obligations Law § 5-1401 was to promote and preserve New York's status as a commercial center and to maintain predictability for the parties. To find here that courts must engage in a conflict-of-law analysis despite the parties' plainly expressed desire to apply New York law would frustrate the Legislature's purpose of encouraging a predictable contractual choice of New York commercial law and, crucially, of eliminating uncertainty regarding the governing law.
IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., (NY Ct of Appeals Dec. 12, 2012).
[Meredith R. Miller]
Tuesday, February 19, 2013
Monday, February 18, 2013
"Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law.
Notwithstanding the clearly expansive nature of the doctrine, my students would not accept that, for example, a mechanic with whom you had left your car for repairs could sell same car and your only remedy against the mechanic (under the UCC) would be a suit for damages. When I informed them of the true state of the law, their outrage was unquenchable.
"You could still have the authorities pursue criminal charges for theft," I offered.
Not good enough.
Backing away from the lectern and eyeing the emergency exit, I pleaded, "There are likely state statutory protections that would enable you to recover the car. After all, the buyer is going to have a problem when he tries to register title to the car."
Still not satisfied.
Finally, left with no other choice, I threw Karl Llewellyn under the bus. "Look, I just teach this stuff," I said. "I didn't draft the UCC. Blame Karl! Blame Karl!! Blame Karl!!!!
I put up a white flag from the teaching station that I was hiding behind to avoid the projectiles headed my way, and then it came to me. "Wait," I said. "Let's talk about Kahr v. Markland." In that case, a man gave Goodwill a bag of clothes. Unbeknowst to him, the bag also included valuable sterling silver. The court held there had been no entrustment because Kahr intended to donate the clothes but not the silver. It's reasoning is as follows:
An entrustment requires four essential elements: (1) an actual entrustment of the goods by the delivery of possession of those goods to a merchant; (2) the party receiving the goods must be a merchant who deals in goods of that kind; (3) the merchant must sell the entrusted goods; and (4) the sale must be to a buyer in the ordinary course of business. ( Dan Pilson Auto Center, Inc. v. DeMarco (1987), 156 Ill. App. 3d 617, 621, 509 N.E.2d 159, 162.) The record establishes there was no delivery or voluntary transfer of the sterling silver because plaintiffs were unaware of its place in the bags of clothes.
But wait! Whence the court's notion that "there was no delivery or voluntary transfer"? Saying that there was no delivery in this case is more than a stretch. It's simply factually untrue. And saying that the transfer was not voluntary turns on what the term "voluntary," means. Nobody put a gun to Kahr's head. He just made a mistake. In any case, voluntariness is not an element of the test for entrustment as laid out by the Kahr court.
Of course, I merely thought all these things. I didn't say them for fear of my students' wrath.
But how about this hypothetical based on personal experience: I donate a bunch of books to Goodwill, including an old copy of Atlas Shrugged with a hideous paper cover on it. One week later, my wife asks me where her copy of Atlas Shrugged is. Since she is always after me to clear away old books that we are not going to read or re-read, I proudly announce that I delivered it to Goodwill.
Her jaw drops. "But that was a first edition bearing the inscription, "I know who John Galt is, It's you. Yours, with a passion hot enough to forge Rearden steel, Ayn." We rush to Goodwill, but we are too late. The book was snapped up faster than a locomotive powered by an engine that transforms atmospheric static electricity into kinetic electricity. Did I entrust it to Goodwill?
There is a bit of a discussion of the Kahr case on The Faculty Lounge blog.
Friday, February 15, 2013
CNN's Erin Burnett did some intrepid reporting and "went to book a cruise . . . on Carnival so we could look at the contract..." The contract apparently says that, even after 5 days of being stuck on a disabled ship with no electricity or plumbing, "you're out of luck":
Shute v. Carnival Cruise Lines reprise?
[Meredith R. Miller]
Thursday, February 14, 2013
The brochure for the wildlife sanctuary cried out to us: "Be Stalked By a Mountain Lion!" So we went, foregoing opportunities to be served by a sommelier, pounded by a masseuse, guided by a docent or entertained by a performer.
When we arrived at the sanctuary, and I announced to the ticket taker that we would like to be stalked by a mountain lion, he looked confused. Craning his neck to shout a question to someone who made something above minimum wage, he said, "Do we have a mountain lion?"
"That's the cougar," came the disinterested response.
"Oh," said the ticket taker. "He hides a lot."
My heart sank, but we trudged on. We weren't stalked, and while I contemplated a breach of warranty claim, my wife wrote a poem. Indiana Poet Laureate, Karen Kovacik is featuring that poem today on her blog, No more corn, as a Valentine's Day poem. We reproduce it here:
On Not Being Stalked by a Mountain Lion BE STALKED BY A MOUNTAIN LION! said the brochure. But we weren’t stalked, Although for a lazy hour along the path We strolled and talked-- Totally helpless, as you pointed out, Pitifully clueless, meant for lion-prey (Apart from the fence and the ditch too broad to leap Even for mountain lions). You scanned the sway And shadow play of branches for a glimpse Of that quicksilver shape-- O the rising unease, the chills, the chase, the last- Minute, hairsbreadth escape! “He’s probably sleeping,” the gate attendant shrugged When you complained No icy green-gold gaze had pricked our necks. Later it rained, And we drove back and chased each other into bed And slept an hour or two. There was nothing boring about not being stalked By a mountain lion with you. This poem originally appeared in Able Muse Review.
Tuesday, February 12, 2013
I recently covered the implied duty of good faith and fair dealing in part through the fun case of Locke v. Warner Bros. In Locke, the LA County Superior Court found that Warner Brothers' alleged failure to even consider Ms. Locke's movie proposals could violate the implied duty of good faith and fair dealing in their contract. Although Warner Brothers was not obligated to produce Ms. Locke's projects, it was obligated to exercise its discretionary power regarding her proposals in good faith. If Warner Brothers had, as Ms. Locke alleged, never actually considered her proposals, it would have violated their contract.
After Ms. Locke survived summary judgment, the case later settled. Prior to that time, Ms. Locke also had suggested that Warner Brothers never seriously considered her proposals as a favor to her ex, Clint Eastwood. Locke and Eastwood had worked together on the movie, The Outlaw Josey Wales (poster pictured to the right), and cohabitated for several years therafter. When the two actors split, Eastwood allegedly convinced Warner Brothers to give Locke the "first look" deal as part of his settlement with her and perhaps had even reimbursed Warner Brothers for the money it paid to Locke under its deal with her.
Inspired by this tale of love and faith lost, student Catherine Witting crafted the following limerick and authorized me to share it with the world.
Locke sued the Dubya B,
Saying "Don't you patronize me!
Clint may pay the bill,
But discretion is still
Subject to good faith guarantee!"
For a more recent case that tracks the facts of Locke, see this post regarding director John Singleton from 2011.
Yesterday, I bellyached about a Ninth Circuit opinion with which I disagree. Today, I would like to complain about a Second Circuit decision with which I disagree, although not quite so passionately. The case is Bayway Refining Co. v. Oxygenated Marketing and Trading. The relevant facts are pretty simple. Oxygenated Marketing and Trading (OMT) send an order to Bayway Refining Co. (Bayway) for 60,000 barrels of a gasoline blendstock. Bayway sent a conflirmation that specified all of the relevant terms of the agreement and also included the following language:
Notwithstanding any other provision of this agreement, where not in conflict with the foregoing, the terms and conditions as set forth in Bayway Refining Company's General Terms and Conditions dated March 01, 1994 along with Bayway's Marine Provisions are hereby incorporated in full by reference in this contract.
Bayway's General Terms included a "Tax Clause" that required the purchaser to pay all taxes associated with the transaction. OMT never asked for and Bayway never sent a copy of its General Terms. Bayway then sent the blendstock and OMT accepted delivery. The taxes associated with the transaction came to nearly $500,000. Bayway paid the tax and then sued OMT to recover.
The Second Circuit correctly saw the outcome of the case as turning on the battle of the forms. Under UCC § 2- 207(1), Bayway's confirmation constitutes an acceptance of OMT's offer even though it contained additional terms. Under 2-207(2), because both parties are merchants, the additional terms become part of the contract unless one of three exceptions apply. The relevant exception in this case is materiality. The Second Circuit correctly noted that the Tax Clause was not per se material, in that there was no clear legal rule that had already determined such clauses to be material. So the Court proceeded to determine materiality based on a common law test, under which a clause is material if it causes surprise or (perhaps) hardship.
The court defined "surprise" as meaning that "under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term." The court found that no surprise occurred in this case because provisions like the Tax Clause were common (although not universal) in the industry. New York law is not clear on whether hardship is an element of its materiality analysis for the purposes of the battle of the forms. The Second Circuit did not reach the issue because it found that OMT could not show hardship in this case. OMT claimed hardship because "it is a small business dependent on precarious profit margins, and it would suffer a loss it cannot afford." The Second Circuit was unmoved because "any loss that the Tax Clause imposed on OMT is limited, routine and self-inflicted."
I have two problems with the Second Circuit's analysis. First, its discussion of surprise did not address the fact that clause at issue was part of an agreement incorporated by reference and never shared with OMT. While that fact might not change the outcome in the case, since the court found the evidence of industry practice convincing enough to put OMT on constructive notice, it strikes me as at least worthy of mention in the context of a discussion of surprise.
Second, I think the court could have treated the Tax Clause as relating to price. Industry practice suggested that sometimes contracts like the one at issue in the case included language like the Tax Clause, but in other cases the tax was just added to the price of the product. If OMT's original order included a price term, then Bayway's confirmation containing a price term plus the Tax Clause introduces not an additional term but a different term. I think the best reading of UCC § 2-207(2) suggests that different terms knock each other out. We then proceed to § 2-207(3) to enforce a contract consisting of the agreed-upon terms plus any additional terms the UCC can provide. The court should have been able to then determine the fair market price for the 60,000 barrels of a gasoline blendstock. Such an approach might have resulted in a Solomonic ruling or it might have made clear that one party or the other was trying to pull a fast one.
We had previously blogged about the demand letter that Donald Trump sent to Bill Maher. Maher dedicated a segment on his show to the dispute, taking aim at Trump's lawyer. Maher begins: “Donald Trump must learn two things: what a joke is and what a contract is.”
The segment is reminiscent of the Leonard v. Pepsico decision when Judge Wood takes on the task of explaining why the harrier jet commercial was "evidently done in jest." Here, Maher continues the humor in explaining why it was parody when challenged Trump to prove that he (Trump) was not born of an orangutan.
Here's the clip:
[Meredith R. Miller]
Monday, February 11, 2013
Last week, I taught an infuriating case called Diamond Fruit Growers v. Krack Corp. The case infuriates me not only because I think the Ninth Circuit bungled the battle of the forms so as to eliminate the UCC's § 2-207's important innovations and replaced them with with a rule unknown in either the code or the common law, but because James White, co-author with Robert Summers of the standard treatise on the Uniform Commercial Code, endorses the opinion. I can't understand why. Summers disagrees with his co-author but without the passion or incredulity that I think the context demands.
The parties to the contract at issue had been doing business together for ten years. Metal-Matic provided metal tubing for Krack's air conditioning business. The parties' practice was that Krack would send Metal-Matic an annual estimate of its needs, and Metal-Matic would send back its own acknowledgment form disclaiming warranties and consequential damages. Moreover, capitalizing on the langauge of § 2-207(1), Metal Matic's form included the following: "Metal-Matic, Inc.'s acceptance of purchaser's offer or its offer to purchaser is hereby expressly made conditional to purchaser's acceptance of the terms and provisions of the acknowledgment form."
The effect of that language under the UCC should be to make Metal-Matic's response into a counter-offer which would govern the parties' transactions once Krack, having notice of the terms, had accepted delivery. In this case, we know that Krack had notice of the terms, because it tried to get Metal-Matic to remove the disclaimer of warranties and limitations of damages, and Metal-Matic refused to do so. Having continued to accept delivery on that basis, Krack should be bound by Metal-Matic's terms.
Krack delivered some air conditioning units to Diamond Fruit Growers, but some of the Metal-Matic tubing failed, causing harm to Diamond Fruit Growers products. Diamond sued Krack and Krack turned around and filed a third-party complaint againts Metal-Matic. Metal-Matic's disclaimers and limitations on damages were now in play.
The court noted the important principle of neutrality underlying § 2-207. In contrast to the common law mirror image rule and last shot rule, the UCC is designed to avoid privileging either the offer or the counter-offer. Determining that it therefore could not give effect to Metal-Matic's unilaterally imposed terms, it looked to the UCC, as is proper under § 2-207(3), to supply the missing terms of the contract that had been formed by the parties' conduct. Since the UCC does not provide for limitations of damages and disfavors disclaimers of warranties, the court found that Metal-Matic's terms were out.
The court was focused on avoiding a return to the common law's last shot rule:
That result is avoided by requiring a specific and unequivocal expression of assent on the part of the offeror when the offeree conditions its acceptance on assent to additional or different terms. If the offeror does not give specific and unequivocal assent but the parties act as if they have a contract, the provisions of section 2-207(3) apply to fill in the terms of the contract.
The are numerous problems with this approach. Most obvsiouly, the UCC does not require a specific and unequivocal expression of assent by the offerer to additional terms. It certainly could have done so if the framers of the UCC so intended. More fundamentally, the result at which the court arrives is inconsistent with the principle of neutrality at the heart of the UCC"s approach to the battle of the forms. Indeed, the court's solution to the problem presented advantages the offeror far more than did the common law. Under the court's approach, the offeror is not only master of the offer; she is master of the transaction, and the offeree can do nothing through its writings to add terms to the contract.
The court suggests that allowing Metal-Matic to prevail in this situation would be arbitrary because it would turn only on which party sent the form last. But that is not so. Metal-Matic conditioned its acceptance on Krack's assent to its terms. Krack did not do likewise. Sticking to the language of the forms at issue in this transaction, Metal-Matic's terms would govern regardless of the order in which the parties exchanged forms. Here we have two sophisticated parties who knew what they were about. Metal-Matic insisted on its terms and Krack acquiesced because it needed the tubing.
The outcome of the case thus seems extremely unfair. Although I don't think it changes the UCC analysis, one might feel differently about the equities in the case if Krack were unaware of the terms and accepted the goods thinking that they were warranted, etc., but that was not the case here. Krack took the goods knowing the terms on which it accepted them. The court should not bail out commercial parties in these circustances, and courts do not bail out consumers who are bound by shrink-wrap terms to which they never expressly and unequivocally assent.
But James White, in § 2-13 of the White and Summers Treatise suggests otherwise, apparently on the ground that the UCC does not recognize acceptance by performance in this context. That's very odd, because the UCC is all about the liberalization of rules, including rules of offer and acceptance. As Summers points out, even the common law recognizes acceptance by performance and Summers sees no injustice given the parties' conversation about the disputed terms. White thinks the proper remedy for seller is to refuse to ship until buyer assents to its terms, but since a straight reading of the UCC would give a seller no reason to think such express assent necessary, I do not think Metal-Matic was on notice of that requirement.
The LA Times reports that the state of California has terminated its contract with SAP Public Services, a contractor that was supposed to fix the state's outdated computer network system that handles paychecks and medical benefits for 240,000 state employees.
While both SAP and California are unhappy about the state of events, I have just covered breach, substantial performance, conditions and damages in my Contracts course and was delighted to find a real life scenario to illustrate the relevance of the material we just covered.
So what triggered CA's termination? SAP was hired three years ago but when its program was tested, it made errors at "more than 100 times" the rate of the old system.
Was failing this test a breach? If so, was it a minor or material breach? It seems it would depend on what was in the contract. As contracts profs know, the first place to look in a contract dispute is the contract itself. The are terms in the contract that will be relevant in evaluating whether there was a breach or the applicable measure of damages. For example, there may be performance targets (i.e. conditions) that SAP had to meet which weren't met. Those conditions would be relevant in determining each party's obligations (would the contract terminate upon failure to meet the condition, for example?) There's also likely to be a provision dealing with whether SAP gets paid per deliverable or target met or per person/hour or time spent on a project. If this was a scheduled deliverable, then the facts tend toward finding a breach (or, if the contract language indicates, it could be a condition that was just never met). If it was a test done in the course of moving the project toward completion, CA may have jumped the gun. A material breach would allow CA to then terminate its obligation. If not a material breach, CA should have sought adequate assurance of performance and could itself be in breach by terminating the contract.
Facts matter, as I repeat like a broken record to my students (I guess I should update my reference for the iPod generation) - so it matters what it means to say that SAP failed the test. The LA Times reports that:
"During a trial run involving 1,300 employees....some paychecks went to the wrong person for the wrong amoung. The system canceled some medical coverage and sent child-support payments to the wrong beneficiaries."
Furthermore, because the system sent money to retirement accounts "incorrectly,"' the state had to pay $50,000 in penalties.
Given the late stage of the project, if not a material breach itself, the failed trial seems to at least give rise to a reasonable belief that SAP would breach. What did CA do then? Did it immediately terminate or seek explanations/reassurance?
Another issue is what damages measure is applicable? CA paid SAP $50million dollars but it had incurred much more trying to get the system up and running. It wasn't clear to me whether the $50million dollar amount was the amount paid up to that point, or the total due to SAP. In class, the cases we study regarding breach of contract to provide services typically involve some type of construction contract. The standard measure then would be the difference between the cost of completion and the contract price. But in a situation like this, the cost of completion is a bit funny given the various factors involved - and the period of time it would take to implement a new project (SAP took the project over from a prior contractor). Furthermore, the purpose of the new system wasn't so CA could make money (no loss profit measure applicable here). Given that, the standard expectation measure likely would not be appropriate and a reliance (or restitution) measure makes more sense. Not surprisingly, CA is seeking recovery of the $50million dollars paid.
What about SAP? Will it claim that it substantially performed? I don't think it can with a straight face, but again, I am only basing my conclusion upon the facts contained in the newspaper article. Will SAP seek restitution for the reasonable value of its services to CA? It very well may, (and any students reading this, should raise it on an exam...) since it has spent three years on this project. Based upon the information in the article, it doesn't sound as though CA received any benefit from the services rendered. If SAP is determined to be the breaching party, it may not get awarded anything. The real world problem for SAP is that trying to hang on to money for delivering a system that doesn't work might hurt its reputation even more. And it doesn't help that the other party is a state entity - meaning lots of future potential business at stake. (The LA times noted that SAP projects with other CA entities are not going so well, either).
As is true for other contracts profs, I spend a lot time trying to situate doctrine into a problem solving (or minimizing) scenario since this is how most lawyers deal with contract law. For example, prior to cancelling the contract, the attorneys for the state of CA most likely sat down and discussed its available options under both the contract and contract law. SAP, too, likely reviewed (or is reviewing) its options under the contract and contract law. My guess is that the contract terms probably permit CA to cancel under these circumstances, although a spokesperson for SAP stated that it believed it had "satisfied all contractual obligations in this project."
I'm sure I missed a few things in my quick analysis of ths situation, so feel free to note any other issues in the comments.
Friday, February 8, 2013
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Thursday, February 7, 2013
Plaintiff Fabian Zanzi alleged that John Travolta sexually assualted and battered him while Zanzi was attending to him aboard a Royal Carribean Cruise ship. In the District Court for the Central District of California, Travolta moved to compel arbitration based on his cruise ticket and Zanzi's employment agreement. On February 1, 2013, as posted on The Hollywood Reporter, the District Court denied Travolta's motion to compel arbitration.
The District Court rejected Travolta's arguments that Zanzi was bound by the arbitration clause in Travolta's ticket because Zanzi, as a non-signatory to the agreement contained in that ticket could not be bound to arbitrate under it. While the court recognized certain exceptions to the rule against binding non-signatories, it found none of them applicable on these facts.
The court similarly rejected Travolta's argument that Zanzi could be bound by the arbitration clause in Travolta's ticket because Zanzi was an agent of Royal Carribean, a signatory. The court noted that "a non-signatory employee is bound to arbitrate under 'agency principles' only to the extent that its principal signed an arbitration agreement with the authority to bind the employee in his individual capacity." Zanzi never authorized his employer to divest him of his right to bring personal claims.
Travolta next argued that Zanzi should be bound by Travolta's ticket's arbitration clause because Zanzi was a third-party beneficiary to the agreement contained in the ticket. The court rejected Travolta's third-party beneficiary theory, finding that the agreement benefits Royal Caribbean and shields it from liability. Any benefits flowing to Zanzi from the ticket are indirect and incidental.
In the alternative, Travolta argued that Zanzi should be estopped from litigating his claims against Travolta in court while also litigating related claims against Royal Caribbean through arbitration as required under Zanzi's employment agreement. Here, Zanzi is a signatory to the agreement; Travolta is not. Travolta contended that estoppel applied because Zanzi had "alleged substantially interdependent and concerted misconduct by the nonsignatory Defendant and signatory Royal Caribbean." The court found that characterization inaccurate. Zanzi alleged sexual assault and battery against Travolta; his allegations against Royal Caribbean relate to how his employers treated him after he reported Travolta's alleged misconduct. Zanzi claimed that he had been confined for five days until Travolta disembarked. In his dispute with Royal Caribbean, Zanzi is claiming false imprisonment and intentional and negligent infliction of emotional distress. The two sets of claims relate to separate acts that occurred at different times and there are no allegations that the parties acted in concert.
Days after this decision was issued, as reported in the Daily Mail online, Zanzi announced that he was dropping his suit, citing litigation costs. Travolta's lawyers dismsses Zanzi's allegations as an attempt to gain fame and money by selling the story to the media.