Monday, February 11, 2013
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of California has terminated its contract with SAP Public Services, a contractor that was supposed to fix the state's outdated computer network system that handles paychecks and medical benefits for 240,000 state employees.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.
Shades of Hamer v. Sidway! A man offered his daughter $200 if she quits Facebook for five months. It seems that the daughter was well aware of the irresistible time-wasting hazards of the popular social networking site, but needed an incentive to quit. The father even had her sign a contract. But, as contractsprofs know, it's not the written form that makes the contract but the bargain. Even though quitting Facebook may be better for productivity (as I keep telling my students....), it is still a legal "detriment" so if she's successful, dad should pay up.
Wednesday, February 6, 2013
Owners of the model year 2010 Prius and Lexus HS 250h brought suit against Toyota alleging that defects in the cars' anti-lock brake systems (ABS) caused increased stopping distances. They also allege that Toyota knew of the problem but failed to disclose that knowledge.
Members of the class entered into purchase agreements with Toyota dealerships that included arbitration provisions and also provided that owners of the cars would give up any right to participate in class action lawsuits if their disputes went to arbitration. Toyota sought to compel arbitration, but the District Court denied the motion on multiple grounds. First, becasue Toyota had vigorously litigated the case in federal court for two years, the District Court found that it had waived its right to move for arbitration. Second, the District Court found that, since Toyota was not a signatory to purchase agreements that contained the arbitration clauses, it could not move to compel arbitration. Nor would the District Court hold that plaintiffs are equitably estopped from avoiding arbitration
On appeal in Kramer v. Toyota Motor Corp., Toyota argued that, since arbitrators may decide issues of interpretation, scope, and applicability of arbitration agreements, it was for the arbitrator to decide whether a non-signatory to the arbitration agreement could invoke it. The Ninth Circuit distinguished cases that had permitted the arbiter to decide such issues on the ground that in those cases, the parties had agreed to have the arbiter decide them. Here, plaintiffs had never agreed to submit any of their disputes with Toyota to arbitration.
The Ninth Circuit was equally unmoved by Toyota's argument that plaintiffs should be equitably estopped from resisting arbitration. This doctrine applies where: 1) a signatory relies on the terms of a written agreement in asserting claims against the non-signatory or the claims are intertwined with the agreement and 2) a signatory alleges concerted action bewteen the non-signatory and a signatory and that action is intimately connected to the agreement.
The Ninth Circuit found that none of plaintiffs claims inimately relied on the purchase ageements; they merely referenced the purchase agreements. With respect to the second prong of the test, the Ninth Circuit noted that "California state contract law does not allow a nonsignatory to enforce an arbitration agreement based upon a mere allegation of collusion or interdependent misconduct bewteen a signatory and nonsignatory." The Ninth Circuit found that the complaint did not allege systematic collusion between the dealerships and Toyota and that any collusion that was alleged was not inextricably related to the purchase agreement.
Since the Ninth Circuit found that Toyota had no right to compel arbitration, it did not address the District Court's finding that it had waived that right.
Tuesday, February 5, 2013
In a previous post, I shared a way to illustrate the differences between certain types of chicken for the frequently-used ambiguity case, Frigaliment. For today's random teaching tip, I am leaving chicken behind and moving on to fish. Because I have the luxury of a six-credit Contracts course, I have time to cover warranties, both express and implied, for sales of goods. The case I use to teach the implied warranty of merchantability, Webster v. Blue Ship Tea Room, involves fish chowder. The primary issue is whether a fish bone in a cup of New England fish chowder sold to Ms. Webster at the Blue Ship Tea Room resulted in a breach of the implied warranty of merchantability. The court answered, "no," but not before going into the details of the way chowder is made in New England. After I call on a student to share the facts of the case, I say that I've unearthed this clip showing exactly how the fish chowder was made (start at 0:17):
I also encourage students to craft their own limericks for cases--just as our own Prof. Telman has done. The latest student limerick submitted was for Webster. Kudos to student Sareena Beasley for this one:
And to those who say that Contracts is the driest 1L class, I say,"puh-shaw!"
[Heidi R. Anderson]
Buyer and seller enter into a contract of sale for property in Manhattan for a purchase price of over $56 million. The contract sets a closing date and contains a no oral modification clause. The parties had extended the closing date numerous times by written agreement. The buyer, however, did not appear at the scheduled closing. Later that day, the parties began negotiating an amendment to the contract of sale. While the parties communicated by email, their negotiations did not result in a written modification agreement. The seller declared the buyer in breach of contract for failure to close and notified the buyer that the seller would retain the down payment (upwards of $9 million). The buyer sued for its return.
A standard provision included in many commercial contracts is one requiring any modification of the agreement to be in writing. Nevertheless, courts are presented over and over again with litigation arising out of circumstances where one party to a contract wrongly presumes, based on past practice, that an oral modification will be sufficient. This appeal illustrates the problem.
The question then becomes whether [the buyer’s] evidence suffices to create an issue of fact as to whether the parties’ written agreement was modified by an agreement extending the closing date. Since the contract of sale provided that any amendments or modifications must be in a signed writing, under General Obligations Law §15-301, the contract cannot be changed by an executory agreement that is not in a signed writing.
The court rejected the buyer’s argument that the existence of a modification was proved by the parties' full (or at least partial) performance of the alleged oral modification:
We reject [the buyer’s] contention that the parties fully performed the oral modification of the contract providing for the adjournment of the closing, since they met at 3:00 p.m. on [the date of the scheduled closing]. At best, that 3:00 p.m. meeting could qualify as partial performance of the alleged oral modification. But, while partial performance of an alleged oral modification may permit avoidance of the requirement of a writing, any such partial performance must be unequivocally referable to the modification (see Rose v. Spa Realty Assoc., 42 NY2d 338, 341 ). The "unequivocally referable" standard requires that the conduct must be "explainable only with reference to the oral agreement." Where the conduct is "reasonably explained" by other possible reasons, it does not satisfy this standard (Anostario v. Vicinanzo, 59 NY2d 662, 664 ). If "the performance undertaken by plaintiff is also explainable as preparatory steps taken with a view toward consummation of an agreement in the future," then that performance is not "unequivocally referable" to the new contract (id.).
* * *
[The buyer’s] submissions fail to satisfy this standard. None of the documents and events that [the buyer] relies on are unequivocally referable to the alleged oral extension. The unexecuted proposed fifth amendment to the contract, the emails exchanged between the parties after noon on [the scheduled closing date], and the 3:00 p.m. meeting attended by the parties that day are insufficient. Not only do the emails fail to even indicate that the closing was adjourned by agreement, but all these items were clearly explainable as preparatory steps taken with a view of attempting to arrive at a possible agreement in the future (see Sutphin Mgt. Corp. v. REP 755 Real Estate, LLC, 73 AD3d 738 [2d Dept 2010]; RAJ Acquisition Corp. v. Atamanuk, 272 AD2d 164 [1st Dept 2000]). In the absence of a resulting written modification, the mere fact that the parties met at 3:00 p.m. does not negate [the buyer’s] default at the 12:00 p.m. closing, or reflect an adjournment of that scheduled closing; it may be understood to merely reflect that [the seller] was willing to attempt to negotiate a new modification, as the parties had done once before, and which, if accomplished, would have nullified the default. Since [the buyer] had already invested $9 million into the project, it had many reasons to continue meeting and negotiating in order to attempt to salvage the deal despite the expiration of the closing deadline, so meetings held after the time set for the closing do not establish that an extension was orally agreed to.
The court also held that estoppel was inapplicable.
Get those modifications in writing! As Beyonce says, "if you liked it then you should've put a pen to it."
Nassau Beekman, LLC v. Ann/Nassau Realty, LLC, 116402/08 (NY App. Div. 1st Dep’t Jan. 31, 2013).
[Meredith R. Miller]
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Monday, February 4, 2013
File this under "objective theory" example that even a law professor could not invent.
On national tv Bill Maher challenged Donald Trump to come forward with Trump's birth certificate to prove that Trump was in fact born from a human father (not an orangutan). Apparently Trump provided his birth certificate and then requested that Maher remit the $5 million. The discussion on Fox News: what did Donald Trump reasonably believe? Was this an offer to enter into a unilateral contract? Watch it here:
Who wins: Trump or Maher?
[Meredith R. Miller h/t Steven Crosley]