Tuesday, April 30, 2013
We are grateful to the website Lexology.com and to Ellen D. Marcus of Zuckerman Spaeder LLP for this informative and interesting post about this complaint filed in the Northern District of Illinois by Merry Gentlemen, LLC against actor and director, Michael Keaton. According to the complaint, Keaton breached his contract to act in and direct a film called Merry Gentlemen by failing to deliver it on time and by marketing his own version of the film to the Sundance Film Festival. The film cratered, grossing only $350,000 at the box office. Moreover, the producers allege that Keaton's various breaches caused "substantial delays and increased expenses in the completion and release of the movie," thus causing the producers to suffer "substantial financial loss."
Ms. Marcus's post picks it up there, citing Restatement 2d's Section 347 on the elements of expectation damages and illustrating what sort of sums the producers might be looking to recover. Ms. Marcus has to speculate, as the producers cite no figures beyond those required to meet the amount-in-controversy requirement to get their diversity claim into a federal court.
Whether or not the allegations of the complaint are true, they paint a nice picture of the behind-the-scenes machinanations invovled in getting a film out to the viewing public. According to the complaint, Keaton produced a "first cut" that all agreed was unsatisfactory. There then followed both a "Chicago cut," edited by the producers and by Ron Lazzeretti, the screenwriter and the producers' original choice for director, as well as Keaton's second director's cut.
The producers then shopped the Chicago cut to the Sundance Film Festival, where they were awarded a prime venue. Keaton then allegedly threatened not to appear at Sundance unless his cut was screened. That was a dealbreaker for Sundance, so despite already having sunk $4 million in to the film, the producers claim they had no choice but to agree to screen Keaton's second cut at the festival. They did so through a Settlement and Release (attached to the complaint, but not to the online version) entered into with Keaton, which they now claim was without consideration, despite the recital of consideration in the agreement, and entered into under duress.
Despite all of this, the complaint alleges that the Sundance screening was a success, since the USA Today identified "Merry Gentlemen" as one of ten stand-out films screened that year. But the producers were unable to capitalize on this success, since Keaton's alleged continuing dereliction of his directorial duties resulted in dealys of the release of the film from October of November 2008 to May 2009. The producers allege that the film was a Christmas movie (or at least was set around Christmas time), so Keaton's delays caused the movie to premiere during the wrong season.
The producers allege that Keaton continued to refuse to cooperate with them after Sundance. Somehow, the movie nonetheless was released to some positive reviews:
The movie, as released (based upon Keaton’s second cut and numerous changes made by plaintiff), received substantial critical praise. Roger Ebert called the film “original, absorbing and curiously moving in ways that are far from expected.” The New York Times’ Manohla Dargis called it “[a]n austere, nearly perfect character study of two mismatched yet ideally matched souls.” David Letterman said on his Late Night talk show, “What a tremendous film . . . . I loved it.”
Note to the producers' attorneys: if you've got Roger Ebert and Manohla Dargis in your corner, you don't need Letterman (or The USA Today for that matter).
Nonetheless, the film did not succeed, grossing only $350,000, allegedly because of Keaton's failure to promote it. Indeed, some of the complaints allegations relating to Keaton's promotion efforts suggest some real issues. Upon being asked by an interviewer if she had accurately summarized the film's plot, Keaton allegedly responded that he had not seen it for a while.
We note also that Ms. Marcus's post is cross-posted on Suits by Suits, a legal blog about disputes between companies and their executives, a site to which we may occasionally return for more blog fodder.
Monday, April 29, 2013
A little over a year ago, we reported on a Ninth Circuit case, Kilgore v. Key Bank. Here is a summary of the panel's opinion:
The issue in Kilgore was whether California’s public policy favoring the litigation (rather than arbitration) of claims seeking public injunctions could trump the [Federal Arbitration Act (FAA)] post-Concepcion as it did pre-Concepcion in two California Supreme Court cases, Broughton and Cruz. The Ninth Circuit reluctantly concluded that the Broughton-Cruz line of cases is no longer viable post-Concepcion. As the Supreme Court made clear in Marmet, about which we blogged last month, Concepcion’s reach is broad enough to preempt state public policies other than the specific one addressed in Concepcion. The fact that a state legislature specifically intended to avoid federal preemption under the FAA is irrelevant.
The Court then addressed the unconscionability of the arbitration clause. The Court noted that the arbitration clause at issue here was not buried in the contract and specified the rights that plaintiffs waived under arbitration. In addition, the contract contained clear instructions on how to opt-out. Finding no procedural unconscionability, the Court saw no need to address potential substantive unconscionability in the arbitration clause. The case was remanded to the District Court with instructions to compel arbitration.
On rehearing en banc, the Ninth Circuit held that the case does not fall within the "public injunction" exception to the FAA, recognized in Broughton, Cruz, and Davis v. O'Melveny & Myers, and thus the Ninth Circuit vacated the District Court's denial of the defendant's motion to compel arbitration and remanded with instructions to compel aribration. That exception only applies where the "benefits of granting injunctive relief by and large do not accrue to that party, but to the general public in danger of being victimized by the same deceptive practices as the plaintiff suffered.” The Ninth Circuit found that not to be the case in Kilgore and thus it was able to compel arbitration while leaving the Broughton-Cruz exception to the FAA intact for now.
Judge Pregerson dissented, finding the challenged arbitration clause unconscionable.
Thursday, April 25, 2013
It's the end of the semester which means that I'm finally covering third parties. One of my favorite (and pretty simple) cases in this unit is Rumbin v. Utical Mutual Insurance, Co. Mr. Rumbin, who had settled a personal injury case, was due regular payments under an annuity purchased by Utica and issued by Safeco. When he faced foreclosure and other financial hardships, Rumbin sought a declaratory judgment approving his assignment of rights to J.G. Wentworth. After a student recites the facts, I often pause the class to ask, "How many of you have heard of Mr. Wentworth before?" Usually, about half of my class has heard of him while the other half is thinking, "J.G. who?" For those who haven't heard of him, I offer this clip, which sums up Mr. Rumbin's situation rather nicely and features Mr. Wentworth himself at the end as the conductor:
If you watch and later find a way to get the "877-CASH-NOW" earworm out of your head, please let me know. I've been stuck with it for nearly 24 hours now.
[Heidi R. Anderson]
Wednesday, April 24, 2013
The Sacramento Bee reports that a California legislative committee (if you really want to know, it’s called the Assembly Arts, Entertainment, Sports, Tourism and Internet Media committee) “gutted” a bill that would have illegalized “paperless” tickets. Paperless tickets are more (or is it less?) than what they sound like – they are a way for companies like Ticketmaster to sell seats without permitting purchasers to resell those seats. Purchasers must show their ID and a credit card to attend the show. The bill pitted two companies, Live Nation (owner of Ticketmaster) and StubHub, against each other.
This bill and the related issues should be of interest to contracts profs because it highlights the same license v. sale issues that have cropped up in other market sectors where digital technologies have transformed the business landscape. Like software vendors and book publishers, Ticketmaster is concerned about the effect of technology and the secondary marketplace on its business. Vendors, using automated software (“bots”), can quickly purchase large numbers of tickets and then turn around and sell these tickets in the secondary marketplace (i.e. at StubHub) at much higher prices. Both companies argue that the other is hurting consumers. Ticketmaster argues that scalpers hurt fans, who are unable to buy tickets at the original price and must buy them at inflated prices. Stub Hub, on the other hand, argues that paperless tickets hurt consumers because they are unable to resell or transfer their tickets.
The underlying question seems to be whether a ticket is a license to enter a venue or is it more akin to a property right that can be transferred. Or rather, should a ticket be permitted to be only a license or only a property right that can be transferred? The proposed pre-gutted legislation would have taken that decision out of the hands of the parties (the seller and the purchaser) and mandated that it be a property right that could be transferred. In other words, it would have made a ticket something that could not be a contract. Of course, given the adhesive nature of these types of sales, a ticket as contract would end up being like any other mass consumer contract – meaning the terms would be unilaterally imposed by the seller. In this case, that would mean the ticket would be a license and not a sale of a property right.
It’s not just the media giants who are feeling the disruptive effect of technology - we contracts profs feel it, too.
[NB: My original post confused StubHub with the vendors who use the site. StubHub is the secondary marketplace where tickets can be resold. Thanks to Eric Goldman for pointing that out].
Tuesday, April 23, 2013
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Monday, April 22, 2013
A lot of very smart contracts scholars, including to name just a few, Omri Ben-Shahar and Lisa Bernstein (here), Victor Goldberg (here), and Peter Siegelman and Steve Thel (e.g., here), have thought long and hard about the seeming conflict between UCC § 2-713 and the general principles of damages set out in UCC § 1-305 (formerly § 1-106). Most of them support the ruling in Tongish v. Thomas, to which I have just been introduced in teaching Sales for the first time this semester. I am uncomfortable with the decision for two reasons, which I will set out below.
But first, a brief summary of the case: Tongish agreed to sell his sunflower seeds to the Decatur Coop Association (the Coop) for a fixed price. The Coop had a deal with Bambino Bean & Seed, Inc. (Bambino) to sell the seeds to them for whatever price the Coop paid plus $0.55 per 100 pounds. The price of seeds went up and Tongish breached. The trial court awarded the Coop its lost profits, which came out to $455.51. The Court of Appeals vacted that award and remanded the case for a calculation of damages based on UCC § 2-713 (and the Kansas Supreme Court upheld that ruling). UCC § 2-713 allows a buyer to recover the difference between makret price at the time buyer learned of the breach and the contract price. Under this section, the Coop would recieve not $455 but something like over $5500, despite the fact that it would not have been able to charge Bambino anything more than what it paid Tongish for his seeds. In short, under the damages awarded by the appellate courts, the Coop gets about $5000 more than expectation damages.
I do not like the result, at least not based on the court's reasoning. Subsequent law review articles (cited above) provide more sophisticated defenses of § 2-713 based on economic theory. I cannot address those arguments here. Instead, I focus on two issues: fault and contract and the court's characterization of UCC § 2-713 as a "statutory liquidated damages provision."
First, the case is grist for the mill of Friend of the Blog, Steve Feldman, who has been trying unsuccessfully for years to persuade me that courts not only do consider moral fault in assessing damages but should do so. In Tongish, the Kansas Court of Appeals distinguished the case from a California case, Allied Canners Packers, Inc. v. Victor Packing Co. In Allied, the California court limited the buyer's remedy to actual loss. That case was different, says the Kansas court, because in Allied, the seller's crop had been destroyed and so it had no goods that it could deliver to buyer. Here, Tonigish breached simply becasue the price went up, and so "the nature of Tongish's breach was much different" from that in Allied, because the Kansas court found, "there was no valid reason" for Tongish's breach. Whether or not the court is right that there was no valid reason for the breach depends on one's views on the doctrine of efficient breach. More to the point, I find no language in the UCC that indicates that the measure of damages turns on the state of mind of the breaching party. That is, where in the UCC does it say that whether or not one can recover damages in excess of actual loss depends on whether the breach was innocent or willful?
The Kansas court then proceeds to an actual statutory analysis and notes the principle that a specific clause (in this case § 2-713, which the court reads to provide damages in excess of actual loss) trumps a general clause (§ 1-305, which limits damages to expectations). Allowing the specific clause to trump the general clause generally makes sense, but I would invoke another canon of contruction and read § 1-305 as articulating the general remedial scheme in light of which the remainder of the Code is to be read. Section 1-305 puts parties on notice that, unless they set out their own remedial schemes, though allocation of risk, liquidated damages and the like, they should expect that traditional expectation damages will be the most they can hope for in case of breach.
Read in that light, § 2-713 does nothing more than describe the usual mechanism for calculating expectation damages. It does not contemplate a contract such as the one at issue in Tongish in which the Coop, very far from demanding liquidated damages in the case of breach, has protected itself against loss by linking its purchase price from Tongish to its sale price to Bambino. In so doing, it invited the very sort of efficient breach in which Tongish engaged, and it is absurd for it to now to claim entitlement to (effectively) a disgorgement remedy when it failed to negotiate such a remedy at the time of contracting.
The Kansas court cites to Robert Scott's argument that limiting recovery to lost profits in such cases creates market instability by encouraging breach if the market fluctuates to the seller's advantage. Applying § 2-713 to permit recovery of damages in excess of actual loss, on the other hand, "encourages a more efficient market and discourages the breach of contracts," says the court. Once again, that determination turns on one's understanding of efficiency. In any case, to the extent that the circumstances in Tongish encouraged breach, they were entirely a product of the way the parties drew up their contracts. They in effect, allocated the risk of breach to the Coop, which had protected itself by finding a buyer who would accept any price so long as it was the same price as what the Coop had paid, plus a $0.55/100 lb. handling fee. To allow the Coop to recover cover costs on top of lost profits actually creates an incentive for sellers with contractual protections such as the Coop had, to encourage breaches, since the court allowed them recovery ten times in excess of their actual harm.
The FTC recently charged a company, Wise Media, with unfair and deceptive business practices. The FTC complaint alleges that Wise Media charged unwitting mobile phone users for “premium" text services, or junk text messages (horoscopes, love tips, other “useful” information…) that consumers never authorized. The practice is referred to as “bill cramming,” and consumers often failed to notice the indefinitely recurring charges of, in this case, $9.99/month. Even when they did and sent a text to “stop” the messages, the company often failed to comply with the request.
Consumers often miss these charges because they aren’t aware that their mobile phone bills contain charges by third parties and because the charges are not clearly indicated. The result? Wise Media has made millions of dollars by surreptitiously charging consumers.
What I find particularly interesting and troubling is the potential interaction of contract law in the area of electronic contracts and consumer protection. What distinguishes a deceptive business practice (although not necessarily an unfair one) from a “hard bargain” is consent. The FTC complaint, for example, was filed because the charges were “unauthorized” by consumers - they were signed up "seemingly at random" without consumer "knowledge or permission." The FTC has, in my view, done a pretty terrific job of protecting consumers given the lack of resources and the wide range of consumer-harming activities out there. Courts have not done so well. What happens where contractual “consent” (such as in the form of a clickwrap”) is obtained for an unfair practice, such as bill cramming? What if the consumer had clicked "I agree" on a clickwrap to the premium service? Would the contract law notion of “consent” mean that the consumer had authorized the “premium text” service, even when we all know that nobody reads clickwraps and browsewraps? Or would the commonsense version of consent championed by the FTC prevail?
I talk about this disjunction between, what I refer to as “wrap contract doctrine” (since, let's face it, the digital contract cases are not consistent with traditional contract doctrine despite what Easterbrook and others claim) and the FTC’s more commonsense approach to consumer perception and business practices in my forthcoming book on wrap contracts. (Did you know a plug was coming? I actually didn’t but there it is.) The conclusion I reached was that there appears to be a disconnect between contract law notions of “reasonable notice” and the FTC’s notion of “reasonable notice” (which I find more reasonable….) The takeaway for businesses – just because you obtain consent for a particular business practice via an online contract which may meet the surreal standards of contractual consent set forth by courts doesn’t mean that the practice in question won’t be viewed as an “unfair and deceptive” one by the FTC.
Friday, April 19, 2013
The end of the semester is near (cue Alice Cooper). Thus, my class has just completed damages and is moving on to third parties. One of the last damages cases we discussed was Hollywood Fantasy Corp. v. Gabor. In that case, Zsa Zsa Gabor breached a contract with a company started by Leonard Saffir. Saffir organized and promoted celebrity fantasy camps in which regular people could pay a large fee to spend time with and act with celebrities like Gabor. When Gabor breached, Saffir had to cancel the camp and his company went bankrupt.
The Gabor case often is used to illustrate the damage concepts of certainty and reliance. Saffir could not show that his expected lost profits were certain enough but he was able to prove reliance damages. When we discuss the case in class, many students scoff at Saffir's business idea as if it was borderline crazy. However, one student recently drew a parallel between Saffir's plan and the common plan of party promoters who secure celebrity appearances in order to increase attendance at nightclubs and other locales. In one recent version, Philadelphia promoter Bobby Capone (the modern day Saffir?) contracted with X-Factor host and former Saved by the Bell star, Mario "You'll Always Be Slater to Me" Lopez, to appear at a party Capone was planning months later. When Lopez canceled without an excuse, Capone, like Saffir, sued for breach, seeking lost profits and reliance damages (though the complaint does not use those exact words). The comparison's not perfect but it is helpful when trying to understand Mr. Saffir's plans.
And there ends my attempt to compare Mario Lopez to Zsa Zsa Gabor.
[Heidi R. Anderson, h/t to student Rylee Genseal]
Tuesday, April 16, 2013
Under the headline "Contract Law Can Be Interesting!" Nota Bene, a blog by the librarians at the University of Houston O'Quinn Law Library, features a post praising some recent contracts law books. Other interesting posts on the Nota Bene blog include "Objects Fall to Earth," "Smoking May Be Harmful to Your Health," and "Cubs Unlikely to Win World Series this Year."
After proclaiming contracts to be right up there with civil procedure on the list of most boring law courses, he author \recommends two books that can make this daunting subject palatable: Contracts Stories, edited by Douglas Baird, and Larry Cunningham's Contracts in the Real World, about which we posted an online symposium a few months ago.
I also recommend these books, but I'm not sure the blog post's author's marketing strategy is going to work. He says, in effect, "I recommend to you these two books (only one of which I've read) about a subject that doesn't interest you. If you did not enjoy studying contracts, here are two books about contracts that will cause you to upgrade your attitutude towards the subject from 'feh' to 'meh.'"
Whatever. I always thought that the point of books like Contracts Stories is to enable students to learn more about the fascinating cases that they studied in their law courses. They also provide insights into litigation strategies, legal history, business strategies underlying contractual disputes, and lots of other useful supplements to the raw case law. Contracts in the Real World is an excellent representation of the sorts of issues that come up in the world of contracts law all the time. If there were some huge gap bewteen what Larry Cunningham talks about in his book and what we talk about in contracts courses, the book would not be as useful as it is.
Ultimately both books are born of a love of contracts law. And a book is a mirror. . . .
Monday, April 15, 2013
Next month, we will host an online symposium on Margaret Radin's recent book, Boilerplate.
For those who can't wait to get a sesne of the book, you can listen to a Canadian Broadcasting interview with Professor Radin here.
Irony of ironies: in order to listen to this, I had to download an upgrade of Adobe Flash Player, and of course that required my agreement to boilerplate terms and conditions.
There is no escape from boilerplate.
Samuel Muriithi was a driver for Shuttle Express, a shuttle service that transported passengers to and from the Baltimore-Washington International Thurgood Marshall Airport (BWI). Muriithi signed a Unit Franchise Agreement with Shuttle Express in 2007 (the Agreement). He claims that he was misled when he signed the agreement and objects to Shuttle Express having classified him as an independent contractor and franchisee rather than as an employee. He claims entitlement to payment of at least federal minimum wage plus overtime pay.
Based on this claims, Mr. Muriithi brought a Fair Labor Standards Act (FLSA) claim, as well as state law claims, on his own behalf and behalf of a purported class of other similarly situated drivers. in reliance on the Agreement's arbitration provision, which included a fee-splitting provision, a one-year statute of limitation and a class action waiver, Shuttle Express moved to compel arbitration.
The District Court found the arbitration provision unenforceable based on all three features mentioned above. The District Court found that the fee-splitting provision made arbitration so expensive as to deter an arbitration that Mr. Muriithi might consider. In addition, hat provision coupled with the class action waiver would prevent Mr. Muriithi from vindicating his statutory rights. Finally, the District Court found that the one year statute of limitations was unenforceable because inconsistent with the FLSA's two year statute of limitations. Concluding that the arbitration provision was "permeated by substantively unconscionable parts," the District Court found no way to severe the objectionable elements and denied Shuttle Express's motion to compel arbitration. Shuttle Express appealed.
In Muriithi v. Shuttle Expres Inc., decided April 1st, the Fourth Circuit vacated and remanded. The Fourth Circuit quickly established that Mr. Muriithi's dispute with Shuttle Express was subject to the arbitration provision, so the only questions was whether that provision was for some reason unenfroceable. In appealing the District Court's ruling that the class action waiver rendered the provision unconscionable, Shuttle Express contended that AT&T Mobility v. Concepcion foreclosed any such finding. Whilte Muriithi and the District Court attempted to limit Concepcion to cases involving federal pre-emption of state law claims and thus render it inapplicable to Muriithi's FLSA claim, the Fourth Circuit read Concepcion more broadly. It read Concepcion as foreclosing any unconscionability defenses to an otherwise valid arbitration agreement based on a class action waiver.
As to the fee-splitting provision, such a provision can render an arbitration agreement unenforceable, if plaintiff can establish that the "arbitral costs are so high that they effectively preclude a litigant from vindicating his federal statutory rights in an arbitral forum." The Fourth Circuit concluded that Mr. Muriithi failed to make such a showing. Finally, since the statute of limitations was not part of the arbitration clause, the Fourth Circuit found that the District Court had erred in addressing it on a motion to compel arbitration.
The case was remanded to the District Court for an order compelling arbitration, with Suttle Express paying the costs of such arbitration, pursuant to its in-court agreement to do so.
Thursday, April 11, 2013
According to Judge Wood, Johnson Conrols, Inc. v. Edman Controls, Inc., was a simple case of a party agreeing to arbitration and then seeking to avoid arbitration once the decision went against it. The parties had an agreement according to which Edman Controls (Edman) was supposed to have the exclusive right to distribute the products of Johnson Controls (Johnson) in Panama. The agreement provided for arbitration of all disputes under Wisconsin law and for the losing party to pay the prevailing party's attorneys' fees. At the time of the agreement, both parties were aware that Edman would rely on its Panamanian subsidiaries (Pinnacle) to carry out the distribution agreement.
In 2009, Johnson breached the agreement by seeking to sell its products directly in Panama. The Seventh Circuit noted that there was nothing subtle about the breach. Johnson approached Edman's clients directly and refused to communicate with Edman about attempts to market its products in Panama, In 2010, Edman brought its claims, sounding in tortious interference, unjust enrichment and breach of the duties of good faith and fair dealing to an arbitrator.
The arbitrator ruled in Edman's favor and awarded about $750,000 in damages. However, the arbitrator dismissed Edman's claims relating to tortious interference with Pinnacle, finding that he had no authority over the relations between Johnson and Pinnacle. "Aha!" said Johnson (we paraphrase). Challenging the arbitral award, Johnson argued that all of Edman's harm actually derived from Pinnacle's harm, and the arbitrator had no jurisdiction over Pinnacle's harms.
The District Court was unimpressed. The parties knew that Edman would be operating through Pinnacle, and given the narrow scope of the court's review on a challenge to an arbitral award, Johnson's claim that the arbitrator had been mistaken in his understanding of Wisconsin law was unavailing. But thanks for playing, Johnson. For your troubles, the District Court awarded Edman attorneys' fees of about $250,000, bringing the total in damages to a tidy $1 million.
On appeal, the Seventh Circuit noted that although both parties relied on Chapter 1 of the Federal Arbitration Act (FAA), the case was actually governed by either the FAA's Chapter 2, which incorporates the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the FAA's Chapter 3, which incorporates the (Panama) Inter-American Convention on International Commercial Arbitration. The Seventh Circuit noted that it was not clear whether a court could rely on FAA Chapter 1 to vacate a decision taken by a U.S. arbitrator relating to an agreement that is governed by either the New York or the Panama Convention.
In a close case, the Seventh Circuit opined, a court would have to address that issue, as the grounds for vacatur in FAA Chapters 2 and 3 are different from those in Chapter 1. But this was not a close case. Arbitral decisions are not overturned lightly and will be upheld so long as “an arbitrator is even arguably construing or applying the contract and acting within the scope of this authority.” Johnson claimed that the arbitrator exceeded its power by letting Edman bring claims on behalf of its subsidiary. But that would only be a mistaken application of Wisconsin law if Johnson were correct. Such a mistake would not be enough to overturn the award, and Johnson is not correct as to Wisconsin law. And in any case, it seems, not of that matters anyway, because Edman was directly harmed by Johnson's breach and the arbitrator allowed recovery only for Edman's direct losses.
The Seventh Circuit also affirmed the award of attorneys' fees, finding that the District Court had not abused its discretion in finding that Johnson had to pay a 33% contingency fee to Edman's attorneys. The Court denied Edman's request that the Court impose Rule 38 sanctions on Johnson for a frivolous appeal largely, it said, because the attorneys' fee award was already sanction enough.
Tuesday, April 9, 2013
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Monday, April 8, 2013
In Part VI, Chapter 4 of Fyodor Dosteovsky's Crime & Punishment (beginning on page 834 in this version), Svidrigailov, the unrepentant libertine whose attentions nearly ruined the life of Raskolnikov's sister, Avdotya (Dunya) Romanovna, describes to Raskolnikov the nature of what Svidrigailov characterizes as his "contract" with his (now decesased) wife, Marfa Petrovna.
According to Svidrigailov (and he is by no means a reliable narrator), the agreement, which he specifies was unwritten, had the following terms:
1. Svidrigailov would never leave Marfa Petrovna and would always be her husband;
2. He would never absent himself from her without her permission;
3. That he would never take on a "permanent mistress";
4. In return, Marfa Petrovna would give Svidrigailov "a free hand with the maidservants, but only with her secret knowledge";
5. Svidrigailov was expressly forbidden to faill in love with a woman of his own station;
6. But should 5 occur, Svidrigailov must reveal that fact to Marfa Petrovna.
So this sounds like a prenuptial agreement that would not be enforceable because not reduced to writing. Anybody out there know the 19th-century Russian rule on such matters? Moreoever, without a remedial provision, it is not clear what this contract accomplishes.
Friday, April 5, 2013
Remarkably, until just last month, the New York Court of Appeals was not presented with the occasion to decide the measure of a seller’s damages for a buyer’s breach of contract to purchase real property. Should the damages be based on the difference between the contract price and the market value of the property at the time of breach? Or, should the damages be based upon the difference between the contract price and the lower price obtained by the seller in a later resale of the property?
Relying heavily on Williston, the Court held that the measure of damages is “the difference, if any, between the contract price and the fair market value of the property at the time of the breach.” The Court stated that the resale price is not irrelevant to the determination of damages because,
in a particular case, it may be very strong evidence of fair market value at the time of breach. This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable.
The non-breaching sellers are entitled to the benefit of their bargain, and that benefit should not be denied by the application of a rule that fails to take that basic tenet into account. The cases cited by the majority in support of the "time-of-the-breach" rule appear to apply the rule by rote. . ., detached from the reality of realty by failing to consider the legal consequence of an axiom that is harmful to the non-breaching party.
The majority ultimately supports its adoption of the "time-of-the-breach" rule – which is common in contract law and in the Uniform Commercial Code where the parties are dealing in common activities or fungible goods – by relying primarily on a case involving a school district's cause of action seeking the cost of replacing or repairing defective window panels that had been installed in its building (see Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256 ). There, the Court, applying general, black letter law, stated that "damages for breach of contract are ordinarily ascertained as of the date of the breach" (id. at 261 [citations omitted]).
But real property, unlike window panels, is not fungible. While there are usually extensive and active markets for fungible goods, thereby making it relatively less difficult for the seller to mitigate or cover in the event of a breach, the sale of real estate is clearly different because each parcel is unique. . . As a result, the pool of buyers is plainly smaller for real estate than goods, and when a buyer breaches a real estate purchase agreement, the seller must then commence the sale process anew, which may require a reassessment of the list price and more showings of the property to new buyers, who may or may not find the property's location, amenities or architectural style desirable. This may take a substantial amount of time and effort on the seller's part, and the seller's efforts may not readily succeed, because once the house has been on the market for a significant period of time, the market may have declined or prospective purchasers may be wary of the amount of time the house has been on the market, leading them to conclude that the property is tainted in some fashion. Meanwhile, under our holding today, the breaching buyer will walk away indifferent to the hardship caused to the seller by his conduct.
* * *
There is no dispute that the general rule is that damages are measured by the fair market value at the time of the breach; the issue here is whether that measure, in cases where the property is later sold with reasonable diligence and in good faith, is adequate or even realistic. In such a circumstance, why should the non-breaching seller suffer the consequences of the buyer's breach? If market conditions decline, shouldn't the loss be laid squarely at the feet of the breaching buyer, particularly where the seller is able to make a colorable claim at trial in that regard?
The majority also holds that the trial court in this case will need to consider, among other things, whether the sellers "made sufficient efforts to mitigate" . . ., but mitigation is irrelevant under the majority's rule since the only calculation that matters is the difference between the fair market value at the time of the breach and the contract price.
Here's a link to a webcast of the oral argument.
White v. Farrell, No. 43 (N.Y. Ct. of Appeals Mar. 21, 2013).
[Meredith R. Miller]
Thursday, April 4, 2013
I thought I might jump on the “classroom posts” bandwagon and blog a little about something I have been trying to do more of in my Contracts class – incorporate contract clauses in class discussions. What I typically do is introduce a contract provision when I’m wrapping up a particular topic. For example, when we finished up the section on substantial performance (and breach and conditions- it’s hard to talk about one without the other, IMHO), I asked my students about the meaning and effect of this provision:
“ TIME SHALL BE OF THE ESSENCE IN THE PERFORMANCE OF THE OBLIGATIONS UNDER THIS AGREEMENT. “
The phrasing sometimes throws off students – what’s this “of the essence” business? But they realize that the provision indicates that the timeliness of performance is important to the parties. In other words, if the services are to be performed according to a schedule, they intend to stick to the schedule. More to the point, without such a clause, a court will probably not find a small delay to be a material breach. With the clause, even a short delay may constitute a material breach - which brings me to substantial performance. A material breach has legal effects, one of which is that a party who has materially breached has not substantially performed -- and so can’t recover expectations damages under the doctrine of substantial performance. A material breach also excuses the other party’s performance.
The clause illustrates how the different doctrines work together, and given the emphasis on “skills” teaching, underscores that doctrine and skills are really intertwined. (I’m not sure how anyone can effectively teach skills without a good grasp of the underlying doctrine). Another reason to introduce contract clauses is to help my students overcome the automatic response that most normal people get when they see boilerplate – glazed eyes, numbing sensation, urge to do something more exciting. My hope is that once they learn the legal meaning behind the legalese, reading a contract will be a more engaging and rewarding experience.
Wednesday, April 3, 2013
The entertainment mogul Shawn “Jay-Z” Carter has added another hat, er, baseball cap, to his rather extensive collection. The NYT reports that his company, Roc Nation Sports, just signed up to represent Robinson Cano, the New York Yankees second baseman. I’ve long been interested in Jay-Z’s business acumen and his ability to gauge where unpredictable markets are headed (and made a brief mention of it in this short essay). More than that, he seems to be making the most of these changes rather than resisting them. When he signed with LiveNation in 2008, Jay-Z was one of the first musicians to work with, rather than fight or deny, the changes in the music business (Madonna, another savvy business person, did too). He took that money and started Roc Nation (of which Roc Nation Sports is a part). Now he’s realizing the potential to be found in the blurring of sports and entertainment (and the public's perception of athletes and entertainers) . An athlete typically has a relatively short shelf life in the field, so why not make that short shelf life as lucrative as possible? Furthermore, an athlete may have a longer shelf life as a brand. Gven the coalescence of sports and entertainment, and the way social media makes celebrities so accessible, there's a lot of revenue generating opportunities there. So why should this be interesting to readers of this blog, many of whom may have no interest in baseball? Sure, Jay-Z is probably a great negotiator and the contract – if we ever get to see it – will be interesting. But more than that, we should be like Jay-Z and recognize how quickly the landscape and technology changes – and consider what impact those changes might have on our contracts. For example, there are outstanding recording/distribution contracts which predate digital distribution formats. Are digital recordings included under such contracts? ( The Eminem case touches upon a related issue having to do with a failure to anticipate digital tunes). The book publishing industry is another sector that is undergoing much disruption. While no lawyer is expected to be an oracle, it may help your client – or help your students to help their future clients) to think about future marketplace and technological changes during contract negotiations, especially where the contract is a long term one.
Tuesday, April 2, 2013
A student recently sent me this story as an example of a liquidated damages clause gone awry, at least for the contractor. The contractor, Crystal Corp., was supposed to remodel a building to be the new location for a restaurant, Kuroshio, by September 30th. The work was not completed until late December. The contractor does not appear to be contesting whether there was a breach. However, he is contesting the damages.
The contract apparently contained a liquidated damages clause that specified a per-day penalty for any delays. It also required Crystal to notify Kuroshio, in writing, of any delays, and the reason(s) for those delays. Crystal did not supply the required notice. And, because of the length of the delay, the contractor now reportedly owes more money to Kuroshio than he is owed for completing the work. Further, because the contractor has not been paid by the restaurant, he reportedly has not paid his own employees. Thus, the contractor and/or his employees have taken to the street in front of the restaurant. According to AnnArbor.com, they protested in front of the restaurant every evening for over a week (there's no obvious update since late March). A protester's photo is available here.
I thought this case was a good one to mention in class because it's not every day that a contract dispute leads to public protest. More specifically, I hope to use this dispute to illustrate how liquidated damages clauses may not be enforceable (the cases in the text I use, Kvassay and O'Brian, are great but a present day example always seems to work better for cementing the material into students' minds).
I also hope to use this dispute as an example of another theme I stress in class. I tell my studentes that, as a deal lawyer, they'll often have to be the most negative person in the room. They have to ask many "what if" questions of their clients before suggesting they sign contracts. For example, "What if...you get inside and find out that the HVAC system is in terrible disrepair? Are you going to want to pay the per-day penalty in that situation? If not, then we need to revise the contract because, as written, you're going to be on the hook for the daily penalty no matter what." I'm not sure how much of this they'll remember but I'm hopeful that at least some of it will stick with them.
[Heidi R. Anderson, h/t to student Michael DeRosa]