Friday, January 4, 2013
But tomorrow morning is Saturday, and that means . . .
It's time for the AALS Section on Contracts Session:
8:30-10:15 AM: Oak Alley, Third Floor, Hilton new Orleans Riverside
"Good Faith Notice and the Bilateral Employment Contract," Rachel Arnow-Richman, University of Denver Sturm College of Law
"Instructing Juries on Noneconomic Contract Damages," David A. Hoffman, Temple University, James F. Beasley School of Law
"The Dog that Didn’t Bark: Private Investment Funds and Relational Contracts in the Wake of the Great Recession,” Robert C.Illig, University of Oregon School of Law
"Formality in Patent Licensing," Karen E. Sandrik, Willamette University College of Law
To be followed by the ever-exciting business meeting.
We hope to see you there.
Monday, December 31, 2012
The other night, I finally got to see The Hobbit: An Unexpected Journey. Having recently spent several months in New Zealand (the home of Peter Jackson’s Weta studio), I had been surrounded by Hobbit-mania and was interested to see whether the movie proved worthy of the hype. I wasn’t disappointed. Although some critics were, well, critical, I thought it was an extremely entertaining movie that made time fly. Making a highly entertaining movie even better, a lengthy contract played a pivotal role. When Gandalf the Wizard, and Thorin and his company of dwarves seek Bilbo Baggins’ (i.e. the aforesaid hobbit’s) assistance to accompany them as burglar on an unexpected journey, they first ask him to sign a contract. The contract, several pages long, outlines in detail his compensation (i.e. consideration) and contains warnings and numerous disclaimers of liability in favor of Thorin & Co. Being a wise hobbit, Bilbo actually reads the contract, faints, and then refuses to sign it. The next morning, he awakens to a quiet house (dwarves know how to party, but apparently do so responsibly). Bilbo has a change of heart, decides he does want excitement and adventure, signs the contract, picks it up, and runs out of his house to join the departing dwarves. This is where --for a contracts prof -- the tension is most high. Having rejected the terms of the contract the night before, we know that the hobbit no longer has the power of acceptance. Therefore, when Bilbo thrusts his signed contract into the hands of one of the dwarves, he is only making an offer. It is the dwarf (who apparently has authority to accept on behalf of the other dwarves) who has the power of acceptance. I don’t think I need a spoiler alert before revealing that they do accept (there wouldn’t be much of a movie if they didn’t).
There were so many things to like about the movie, not the least of which was the way it illustrated how relational contracts set expectations, shape relationships and establish trust. At one point, Bilbo seeks to desert the dwarves. Although one could argue changed circumstances, I think a better explanation would be that given Thorin’s disparaging comments about Bilbo’s suitability for the journey, Bilbo decides to adjust his performance obligations accordingly. But events (and the always fascinating Gollum) intervene. In the end, Bilbo carries out his contractual obligations, proving that - even in Middle Earth - contracts are alive and well.
At issue in Adams v. Raintree Vacation Exchange, LLC was "the enforceability of a forum selection clause by entities not named as parties to the contract in which the clause appears."
Plaintiffs bought timeshare interests in villas at a resort called Club Regina in Baja California, in Mexico (pictured). Apparently, the villas in question were never built, and plaintiffs filed suit in Illinois against Raintree Vacation Exchange (Raintree) and its business partner in the venture, Starwood Vacation Ownership (Starwood). Plaintiffs alleged that Raintree owed Starwood $10 million and that Starwood used plaintiffs' money to pay off its debts instead of building the villas.
Each contract contained a choice of forum provision providing for jurisdiction in Mexico City federal district courts. Although that provision also implied that Mexican law should apply, neither party relied on Mexican law, so Judge Posner found that the provision had been waived. Defendants moved to dismiss the claim based on the choice of forum provision and the District Court granted the motion.
On appeal, plaintiffs alleged that defendants could not rely on the forum selection clause because they were not parties to the original contract, which had been with a Mexican entity that became a Raintree affiliate. Judge Posner noted that plaintiffs cited to no authority for their claim that litigants who are not parties to a contract cannot rely on such a contract's choice of forum provision, and that lack of authority would be grounds enough for affirming the District Court's decision. Nonetheless, Judge Posner decided to "trudge on."
There rule in such cases is that a nonparty to a contract containing a forum selection clause may rely on it if it is "closely related" to the suit. Judge Posner acknowledges that the standard is rather vague but he breaks it down into two elements, “affiliation” and “mutuality,” which apply in this case to Raintree and Starwood respectively. Forum slection clauses can sometimes be enforced by companies related to the original party to the agreement that contains the clause. Thus Raintree may invoke the clause in this case because of its relationship to the Mexican company that entered into the agreement with plaintiffs. As Judge Posner noted, if courts were not willing "in appropriate circumstances to enforce forum selection clauses against affiliates of signatories, such clauses often could easily be evaded."
Starwood can rely on the forum selection claues because plaintiffs allege that Starwood was an undisclosed principal (Posner calls it a "secret principal") of the Mexican entity with which plaintiffs contracted. Under agency law, plaintiffs could have invoked the forum selection against Starwood, and as a result of the principle of mutuality, that means that Starwood can also invoke the clause against plaintiffs.
Plaintiffs make the additional argument that since the entire agreement was fraudulent, defendants cannot rely on the forum selection clause. Seems sensible, but Posner says it is wrong. Even the contract is fraudulent, that does not make the forum selection clause fraudulent. There is nothing unclear or misleading about the clause. Nothing about it suggest an intent to mislead.