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.