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.
Steven J. Burton, A Lesson on Some Limits of Economic Analysis: Schwartz and Scott on Contract Interpretation, 88 Ind. L.J. 339 (2013)
Jeffrey L. Harrison, The Influence of Law and Economics Scholarship on Contract Law: Impressions Twenty-Five Years Later, 68 N.Y.U. Ann. Surv. Am. L. 1 (2012)
Professor Harrison's paper is not yet up on the Annual Survey website, but it is up on SSRN, and here is the abstract:
This is an update of a work done in conjunction with a contract law conference 25 years ago. My specific assignment was to assess the impact of law and economics scholarship on contract law. I responded by conducting an empirical study of judicial citations to selected law and economics works in order to ascertain the extent to which judges seemed to be relying on the teachings of law and economics. In effect, the effort was part of a general question that concerns all law professors: Does scholarship matter? I have repeated the study with respect to the scholarship sample selected twenty-five years ago. In addition, I have supplemented and expanded the sample of scholarship to include works appearing since the initial effort. The results of this project are the focus of this article. This examination suggests that law and economics scholarship has had two uses. First, it has provided a new rationale for many traditional contract rules. As one would expect this means it is most likely to be invoked when there are pressures to change the law. Second, although the quantity of citations remains modest, it is clear that law and economics scholarship, at least in the context of contract law, has affected the vocabulary and reasoning of courts.
Robert Hockett, Were "It" to Happen: Contract Continuity under Euro Regime Change. 34 U. Pa. J. Int'l L. 277 (2012)
Russell Korobkin, The Borat Problem in Negotiation: Fraud, Assent, and the Behavioral Law and Economics of Standard Form Contracts. 101 Cal. L. Rev. 51 (2013)
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]
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Monday, April 1, 2013
Having recieved comments from numerous quarters, including from this blog's own Meredith Miller, the ABA Task Force on the Future of Legal Education, has announced that it is recommending that all areas of law now be understood as subsidiaries of contracts law. In addition to recommending that all law schools require their students to take six hours of contracts in the first year, the Task Force is recommending that second year students take required courses in Sales, Leases, Licensing and International Sales. Those courses, including related live-client courses, simulations, moot court and trial advocacy competitions, and practica, will constitute much of the second year curriculum.
According to the Task Force sources who asked not to be named because the Task Force's report has yet to be released officially, those elements of the reform proposal were uncontroversial. "Everyone recognizes that all lawyers need a firm grounding in contracts and contract-related areas. The only question disagreement on the Task Force was over whether six credits in the first year was enough. Some members wanted 24."
Somewhat more controversial is the Task Force's recommendation that other areas of law be subsumed within the law of contracts. According to our source, the Task Force is recommending that both Constitutional Law and Criminal Law be re-conceptualized as constituting either actual contracts or social contracts best understood with the traditional doctrinal tools of contracts law. The Task Force concedes that this innovation was in part driven by a desire to reduce students' text book costs. "All they have to buy is one, maybe two books by Randy Barnett, and they are covered," according to our source. In addition, the Task Force recommends that International law courses will now be divided into Private International Contracts and Public International Contracts (Treaties).
When asked if the Task Force anticipated difficulties persuading faculty members from other doctrinal areas to re-conceive those areas in terms of contracts law, our source told us that the Task Force considered the question and could not conceive of a doctrinal area that would not be better understood through contracts doctrine.
UPDATE: THE FULL TASK FORCE PRESS RELEASE CAN BE FOUND HERE.