Friday, February 14, 2014
We at the ContractsProf appreciate your readership. Unfortunately, all of our bloggers are occupied at this time binging on Season 2 of House of Cards. Readers may stare at their screens, visit the TaxProf Blog or any other blog on the Law Professor Blog Network, or pass Valentine's Day by doing whatever it takes to get a free crib from Ikea (hat tip to Rachel Arnow-Richman).
We will resume blogging shortly.
Thank you for your patience.
Thursday, February 13, 2014
This is the third in a series of posts commenting on the cases cited in Jennifer Martin's summary of developments in Sales law published in The Businss Lawyer.
Professor Martin discusses two Statute of Frauds (SoF) cases. The first, Atlas Corp. v. H & W Corrugated Parts, Inc. does not cover any new territory. The second, E. Mishan & Sons, Inc., v. Homeland Housewares, LLC, raises more interesting issues and is a nice illustration of the status of e-mails as "writings" for the purposes of the SoF. The latter does not seem to be available on the web, but here's the cite: No. 10 Civ. 4931(DAB), 2012 WL 2952901 (S.D.N.Y. July 16, 2012).
In the first case, Atlas Corp. (Atlas) sold corrugated sheets and packaging products to H & W Corrugated Parts, Inc. (H&W). Atlas invoiced H&W for $133,405.24, but H&W never paid. Eventually, Atlas sued for breach of contract. H&W never answered the complaint, and Atlas moved for summary judgment. Although the motion was unopposed, the court considered whether the agreement was within the SoF, as the only writings in evidence were the invoices, which were not signed by the parties against whom enforcement was sought. Having had a reasonable opportunity to inspect the goods and not having rejected them, H&W is deemed to have received and accepted the goods, bringing the agreement within one of the exceptions to the SoF, 2-201(3)(c). The contract is thus enforceable notwithstanding the SoF, and H&W, not having paid for the goods, is liable for breach.
Homeland Housewares LLC (Homeland) manufactures the Magic Bullet blender. Homeland entered into an agreement with E. Mishan & Sons, which the Court refers to as "Emson," granting Emson the exclusive right to sell Magic Bullet blenders (not pictured at left) in the U.S. and Canada. Between March 2004 and March 2009, Emson ordered well over 1 million blenders from Household. Although the price fluctuated, it was generally about $21/blender, and Emson paid a 25% up-front deposit. After 2006, the parties operated without a written agreement.
In 2008-2009, the parties agreed to change their arrangement. Household sold directly to Bed, Bath & Beyond, Costco and Amazon, but Emson sought to remain as exclusive distributor to all other retailers. Emson alleges that the parties reached an oral agreement for a three year deal, the details of which were included in an e-mail confirmation that Emson sent on April 2, 2009. Homeland's principal responded the same day in an e-mail stating that Homeland "will need to add some provisions to this. We will [g]et back to you .” Although further discussions ensued, the parties dispute whether the disputed terms were material.
In any case, the parties continued to perform. Emson sought a per unit price reduction as called for in the e-mail confirmation. Homeland refused, citing increased costs. Emson did not push the point. That fact might suggest awareness that there was no binding agreement, or it might just suggest a modification of the existing agreement, which is permissible without consideration under UCC 2-209 so long as the parties agree to it. In March 2010, Emson learned that Homeland was soliciting direct sales to retailers. The parties tried to hammer out a new deal but the negotiations failed. By June 2010, Homeland had taken over all sales of the Magic Bullet in the U.S. and Canada.
Emson sued, and Homeland moved for summary judgment, claiming that the parties had no contract because the SoF bars enforcement of any alleged oral agreement for the sale of goods in excess of $500.
As I have remarked before, I find it curious that courts automatically apply the UCC to distributorship agreements. In this case, if I understand how the transaction worked, Emson may have operated as a bailee for goods that it passed on to retailers. Since it was dealing with large merchants, it likely would only order blenders that it already intended to pass on to merchants. It was basically just a broker. The court might well find that, because of assumption of risk and perhaps other matters, this agreement was in fact one in which goods were sold from Homeland to Emson and then again from Emson to retailers. But it is also possible that the goods passed through Emson and went straight to the retailers, in which case, I'm not sure the UCC should apply. But the parties agreed that the UCC applies to distributorship agreements and the court went along with that. Whatever.
Relying on the merchant exception to the SOF in UCC 2-201(2), Emson characterizes its April 2, 2009 e-mail as a written confirmation sent to a merchant, recieved and not objected to within 10 days. If that exception applies, the parties had a binding agreement. But Homeland argues that its response, referencing additional provisions, was a sufficient objection to take it outside of the ambit of the exception. The court did not resolve that issue but found that material questions of fact remained. The court denied Homeland's motion for summary judgment.
Wednesday, February 12, 2014
Fabrizio Cafaggi, The Regulatory Functions of Transnational Commercial Contracts: New Architectures, 36 Fordham Int'l L.J. 1557 (2013)
Jianlin Chen, Challenges in Designing Public Procurement Linkages: A Case Study of SMEs Preference in China's Government Procurement, 30 UCLA Pac. Basin L.J. 149 (2013)
Maksymilian Del Mar, Exemplarity and Narrativity in the Common Law Tradition, 25 Law & Lit. 390 (2013)
Steven L. Schooner, Reflections on Comparative Public Procurement Law, 43 Pub. Cont. L.J. 1 (2013)
Pedro Telles, The Good, the Bad, and the Ugly: The EU's Internal Market, Public Procurement Thresholds, and Cross-Border Interests, 43 Pub. Cont. L.J. 3 (2013)
Tuesday, February 11, 2014
If you applied for credit, but got turned down with the reason “Your worst bankcard or revolving account status is delinquent or derogatory,” would you understand what that means?
Probably not, at least not for sure. Under the Dodd-Frank Act, lenders are required to send applicants written explanations of why they are denied credit outright or given less favorable terms than those for which they applied. This requirement is aimed at helping consumers understand what they need to do to improve their credit scores. But many of the explanations provided to consumers are drafted by the credit score developers themselves and use confusing terminology or are too short to be useful.
What’s worse: lenders are aware of this problem, but apparently choose to do nothing about it. According to one survey, 75% of lenders “worry” that consumers don’t understand the disclosure notices. Only 10% of lenders said that their customers understand reason codes “well.” This problem is, of course, not isolated to the credit industry, but also prevails in the health care industry and beyond.
Contracts law is not helpful for consumers in this respect either: there is a clear duty to read and understand contracts, even if they are written in a language (typically English) that one does not understand. Perhaps that’s why only 10% of lenders bother to translate documents into Spanish with the effect that many Spanish-speaking monolingual applicants are unable to read the explanations at all.
Some companies offer websites offering “translations” into easier-to-understand and longer explanations of the codes behind credit refusals and what one can do to improve credit. There’s a website for almost anything these days, but for that solution to be sufficiently helpful in the lending context, it must be presumed that these websites are relatively easy to find, free or inexpensive, and easy to use; all quite far from always the case.
As law professors, most of us probably require our students to write in clear, plain English. We don’t take it lightly if they write incomprehensible sentences. The desirability of writing well should be obvious in corporate as well as academic contexts.
... at least, Florida's non-compete law is "truly obnoxious" to New York public policy. The intermediate appellate court in New York (Fourth Department) recently refused to enforce a Florida choice of law provision in a non-compete agreement. Here's the analysis:
We nevertheless conclude that the Florida choice-of-law provision in the Agreement is unenforceable because it is “ ‘truly obnoxious’" to New York public policy (Welsbach, 7 NY3d at 629). In New York, agreements that restrict an employee from competing with his or her employer upon termination of employment are judicially disfavored because “ ‘powerful considerations of public policy . . . militate against sanctioning the loss of a [person’s] livelihood’ ” (Reed, Roberts Assoc. v Strauman, 40 NY2d 303, 307, rearg denied 40 NY2d 918, quoting Purchasing Assoc. v Weitz, 13 NY2d 267, 272, rearg denied 14 NY2d 584; see Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 499; D&W Diesel v McIntosh, 307 AD2d 750, 750). “So potent is this policy that covenants tending to restrain anyone from engaging in any lawful vocation are almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post v Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 86-87, rearg denied 48 NY2d 975 [emphasis added]). The determination whether a restrictive covenant is reasonable involves the application of a three-pronged test: “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 [emphasis omitted]). “A violation of any prong renders the covenant invalid” (id. at 389). Thus, under New York law, a restrictive covenant that imposes an undue hardship on the restrained employee is invalid and unenforceable (see id.). Employee non-compete agreements “will be carefully scrutinized by the courts” to ensure that they comply with the “prevailing standard of reasonableness” (id. at 388-389).
By contrast, Florida law expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant. Florida Statutes § 542.335(1) (g) (1) provides that, “[i]n determining the enforceability of a restrictive covenant, a court . . . [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought” (emphasis added). The statute, effective July 1, 1996, also provides that a court considering the enforceability of a restrictive covenant must construe the covenant “in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement” and “shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract” (§ 542.335  [h]; see Environmental Servs., Inc. v Carter, 9 So3d 1258, 1262 [Fla Dist Ct App]). Thus, although the statute requires courts to consider whether the restrictions are reasonably necessary to protect the legitimate business interests of the party seeking enforcement (see § 542.335  [c]; Environmental Servs., Inc., 9 So3d at 1262), the statute prohibits courts from considering the hardship on the employee against whom enforcement is sought when conducting its analysis (see Atomic Tattoos, LLC v Morgan, 45 So3d 63, 66 [Fla Dist Ct App]).
Based on the foregoing, we conclude that Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is “ ‘truly obnoxious’ ” to New York public policy (Welsbach, 7 NY3d at 629), inasmuch as under New York law, a restrictive covenant that imposes an undue hardship on the employee is invalid and unenforceable for that reason (see BDO Seidman, 93 NY2d at 388-389). Furthermore, while New York judicially disfavors such restrictive covenants, and New York courts will carefully scrutinize such agreements and enforce them “only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post, 48 NY2d at 87; see BDO Seidman, 93 NY2d at 388-389; Columbia Ribbon & Carbon Mfg. Co., 42 NY2d at 499; Reed, 40 NY2d at 307; Purchasing Assoc., 13 NY2d at 272), Florida law requires courts to construe such restrictive covenants in favor of the party seeking to protect its legitimate business interests (see Florida Statutes § 542.335  [h]).
According to the NYLJ, courts in Alabama, Georgia and Illinois have also rejected the Florida law.
You know what else is truly obnoxious? All of the Floridians who complain about how cold it is when it hits 55 degrees...
Brown & Brown v. Johnson (N.Y. App. Div. 4th Dep't Feb. 7, 2014)
This is the second in a series of posts commenting on the cases cited in Jennifer Martin's summary of developments in Sales law published in The Businss Lawyer.
Yesterday, we reviewed a case in which a contract for installation of a home entertainment system was deemed to be a contract for the sale of goods. Well, what about a roof installation contract? The agreement in question in Buddy’s Plant Plus Corp. v. CentiMark Corp. was labeled a Sales Agreement. It provided that Centimark would intall a 10-year acrylic coating to the roofs of nine buildings belonging to Buddy's Plant Plus (Buddy's). After CeniMark completed the work, the roof leaked, and despite years of attempted repairs, the leaks persisted. Eventually, Buddy's brought suit, which after a change of venue, ended up in the District Court for the Western District of Pennsylvania. Buddy's alleged breaches of various warranties, breach of contract and fraudulent misrepresentation.
The court found the parol evidence rule barred the introduction of evidence relating to Buddy's fraudulent misrepresentation claim, so that claim was dismissed. The court also dismissed Buddy's breach of express and implied warranties claims to the extent that they sounded in the UCC. Applying the predominant purpose test, the court found that the Sales Agreement was in fact a contract for services and not a contract for the sale of goods.
It turns out that there is a body of law on roofing contracts, and the authorities weigh heavily in favor of treating such contracts as predominantly involving services. This case was a bit different, since CentiMark did not install a new roof; it installed an acrylic coating. Still, the court found that the coating was incidental to the predominant purpose of the contract, which was the installation of a new roofing system.
The case was permitted to proceed on Buddy's breach of contract claim and on its claim that CentiMark violated the warranty to perform in a workmanlike manner.
Monday, February 10, 2014
Vonage America, part of Vonage Holdings with operations in the United States, Canada, and the United Kingdom, has encountered judicial hostility to the rather ungenerous arbitration provisions in its Terms of Service (“TOS”) agreement. See Merkin v. Vonage America Inc. A class action suit filed in California state court in September 2013 (and later removed to federal district court for the Central District of California) charges that Vonage, a voice over Internet company, billed its customers for a monthly “Government Mandated” charge of $4.75 for a “County 911 Fee,” despite the fact that no government agency mandated such a fee. The suit claims violations of the California Unfair Competition Law, Cal Bus. & Prof.Code §§ 17200, et seq., obtaining money under false pretenses contrary to Cal.Penal Code § 496, violations of the Consumer Legal Remedies Act, Cal. Civ.Code §§ 1750 et seq., fraud, unjust enrichment, and money had and received.
In December 2013, Vonage moved to compel arbitration under the mandatory arbitration provision in the TOS, and to dismiss or stay the case. Vonage contended that every customer who signs up for Vonage services is required to agree to the TOS as part of the subscription process, whether that process is performed online at Vonage's website, or by phone with Vonage sales personnel. The court considered it to be “of particular importance” that the TOS changed repeatedly since the two named plaintiffs signed up in 2004 and 2006. The April 2004 version provided
. . . Vonage may change the terms and conditions of this Agreement from time to time. Notices [of changes in the TOS] will be considered given and effective on the date posted on to the “Service Announcements” section of Vonage's website. . . . Such changes will become binding on Customer, on the date posted to the Vonage website and no further notice by Vonage is required. This Agreement as posted supersedes all previously agreed to electronic and written terms of service, including without limitation any terms included with the packaging of the Device and also supersedes any written terms provided to Retail Customers in connection with retail distribution, including without limitation any written terms enclosed within the packaging of the Device.
The court noted that Vonage modified the TOS 36 times between April 2004 and October 2013 without providing notice to its customers other than posting changes to the TOS on its website. And how it grew! The court estimated that the 2004 version consisted of some 7,500 words organized into 6 sections, while the current 2013 version consists of 13,000 words organized in 18 sections. Still, Vonage insisted that each version contained a mandatory agreement to arbitrate and a mutual waiver of the right to bring or participate in a class action. For example, the current version of the TOS contains a provision that states:
Vonage and you agree to arbitrate any and all disputes and claims between you and Vonage. Arbitration means that all disputes and claims will be resolved by a neutral arbitrator instead of by a judge or jury in a court. This agreement to arbitrate is intended to be given the broadest possible meaning under the law.
The current version of the TOS also contained language restricting the consumer from bringing claims “as a plaintiff or class member in any purported class or representative proceeding.” (The provision purported to restrict both the consumer and Vonage, but the operative language of the restriction clearly applied lopsidedly to the consumer.) Naturally, Vonage took the position that the TOS arbitration provisions covered the individual plaintiffs' claims and barred them from proceeding in a representative capacity.
In response, the plaintiffs argued that they never agreed to the TOS, but the court could not countenance this. Vonage had shown that service sign-up could not be completed, nor could a customer use the service, without accepting the TOS. The best the Plaintiffs could do was to say that they did not “recall ever clicking on an ‘I agree to the Terms of Service’ button, or something similar to that.” Clearly, this was insufficient in the face of clear design information. Further, if the argument is simply about never reading the clickwrap language, the court made it clear that “failure to read a contract is no defense to [a] claim that [a] contract was formed. Moreover, courts routinely enforce similar “clickwrap” contracts where the terms are made available to the party assenting to the contract,” citing Guadagno v. E*Trade Bank and Inter–Mark USA, Inc. v. Intuit, Inc.
The plaintiffs’ ultimate position, however, was that in any event the TOS was unconscionable, and therefore unenforceable under California law, relying on the Ninth Circuit’s 2013 decision in Kilgore v. KeyBank, Nat. Ass'n, which in turn relied upon the Supreme Court’s 1996 decision in Doctor's Assocs., Inc. v. Casarotto. The import of these cases was that generally applicable contract defenses – including fraud, duress, or unconscionability – were available to invalidate an arbitration agreement without contravening the mandate of the Federal Arbitration Act to counteract “widespread judicial hostility to arbitration agreements” and to reflect “a liberal federal policy favoring arbitration,” as the Supreme Court noted in its 2011 decision in AT&T Mobility LLC v. Concepcion.
On the issue of unconscionability, the parties launched into an extended debate as to which version of the TOS was relevant to the argument – the version as of the date of sign-up, or the current version, which was arguably more “consumer friendly.” The court swept all of this aside, declaring that it was “not necessary to resolve which version of the TOS controls for purposes of the unconscionability analysis. Even assuming that Vonage is correct and the current (allegedly more consumer-friendly) TOS is the salient version of the TOS, the Court finds that . . . the arbitration agreement contained in the current TOS is unconscionable.” Hence, the court assumed for purposes of its analysis and explanation that the current TOS governed.
Unlike the situation in Rent–A–Center, West, Inc. v. Jackson, the TOS did not include any provision “delegating” the issue of unconscionability to the arbitrator, despite the language giving the arbitration agreement “the broadest possible meaning under the law.” The court therefore proceeded with its own analysis. It began with the basic proposition that, per Kilgore, to be considered invalid under California law a contract must be both procedurally and substantively unconscionable. As to procedural unconscionability, the court found that the TOS evinced “a substantial degree of both oppression and surprise.” There was no dispute that the TOS was a contract of adhesion, which was the threshold inquiry. The consumer was confronted with the TOS during sign-up, and there was no real choice or possibility of negotiation. The consumer “must either accept the TOS in the entirety, or else reject it and forego Vonage services.” While there is support in older California case law for the proposition that adhesion and oppression are not identical (see, e.g., Dean Witter Reynolds, Inc. v. Superior Court), recent Ninth Circuit case law on the subject argues that contracts of adhesion are per se oppressive. See Newton v. Am. Debt Servs., Inc. Beyond this, the court found other clear features of oppression – the company’s unilateral ability to modify the TOS, “the largely unfettered power to control the terms of its relationship with its subscribers,” the lack of any “balance of bargaining power” – and concluded that the TOS involved a high degree of oppression.
The second factor in procedural unconscionability analysis is the question of surprise. The court was quick to emphasize that “surprise is not a necessary prerequisite for procedural unconscionability where, as here, there are indicia of oppressiveness,” citing the 2004 California case Nyulassy v. Lockheed Martin Corp. However, the court did find that there were significant features of surprise – arbitration terms buried within a lengthy contract, no separately provided arbitration agreement, no requirement that consumers separately agree to the agreement – although there was a TOS table of contents and a bolded, cautionary instruction introducing the provision. On balance, however, the court considered the finding of surprise to be “augmented by Vonage's repeated modification of the TOS” in 36 versions updated without any prior notice to the consumers. This led to a strong showing of surprise, and the court concluded that “[b]ecause the arbitration provision involves high levels of both oppression and surprise, the Court finds a high degree of procedural unconscionability.”
As to substantive unconscionability, the court’s view of the pertinent case law was that an arbitration provision was substantively unconscionable if it was “overly harsh“ or generated “one-sided results.” The court found that the TOS lacked mutuality – while purporting to require arbitration of “any and all disputes between [the consumer] and Vonage,” the TOS actually carved out exceptions for any type of claim likely to be brought by Vonage, for example, small claims, debt collection, disputes over intellectual property rights, claims concerning fraudulent or unauthorized use, theft, or piracy of services. Accordingly, the court concluded that the arbitration provision lacked even a “modicum of bilaterality,” and was therefore substantively unconscionable. Given the high degree of procedural unconscionability as well, the court found that the arbitration provision was unconscionable.
For several reasons, severance of the offending features was not appropriate. The high degree of procedural unconscionability tainted “not just the specific carve-out provision, but also the TOS and arbitration provision more generally.” Furthermore, previous versions of the TOS as well contained a variety of provisions that were likely to operate in an unconscionable way – a forum selection provision likely to be extremely inconvenient for consumers, restrictions on the ability of arbitrators to award relief to consumers, a shortened limitations period. Finally, the repeated modifications of the TOS made it difficult for the court to determine “what the TOS would look like in the absence of the offending provision.” In light of the repeated modification of the contract, it was unclear what contractual relationship could or should be conserved.
Two final points of general application are worth noting. First, the implications of the case suggest a broader impact on the telecommunications sector generally. Vonage had tried to argue that the contract was not oppressive because the plaintiffs had the option to procure telecommunications services from other providers, and thus had meaningful alternatives to contracting with Vonage. The court found this argument unpersuasive, and observed, somewhat ominously,
Vonage presents no evidence that plaintiffs in fact had meaningful alternatives to agreeing to arbitrate their claims. At most, Vonage presents evidence that the telecommunications market is competitive. . . . But Vonage does not demonstrate that plaintiffs could have procured equivalent telecommunications services from these competitors without being required to sign a similarly restrictive arbitration agreement. Indeed, as Vonage itself points out, “a ‘sizable percentage’ of [telecommunications and financial services companies] use arbitration clauses in [their] consumer contracts.” . . .
One might well wonder who among Vonage’s competitors will be next up for a class action challenge. Will they be “vonaged” as well?
Second, the Merkin decision may raise questions about the effectiveness of ostensible “opt-out” provisions that on-line providers tout in anticipation of criticism of their subscription practices. Vonage tried to argue that the TOS was not oppressive because a provision gave subscribers the possibility of opting out of any substantive change to the arbitration provision, through the transmittal of an “opt-out notice” within thirty days of the time the TOS was modified. The Court found this claim to be unpersuasive in the absence of prior notice. As the court explained,
Vonage did not provide separate notice to its subscribers when modifying the TOS; modifications were instead effective at the time they were posted to the Vonage website. As such, opting out would require a subscriber to constantly monitor the Vonage website for modifications to the TOS in order to ensure that the brief thirty-day window did not elapse. Indeed, Vonage itself appears to admit that no Vonage subscriber has ever availed himself of the thirty-day opt-out. . . . In such circumstances, the right to opt-out does not act as a meaningful check on Vonage's power to unilaterally impose modifications on its subscribers and provide subscribers with a meaningful opportunity to avoid the impact of those modifications.
Should the Merkin court’s view of the linkage between prior notice, opt-out, and validity become widely endorsed, online merchants might well find themselves in the shocking position of being required to provide meaningful notice to their consumers if they wish to continue to oppress them. Would this be crazy . . . or crazy generous to consumers?
A couple of weeks ago, we noted Jennifer Martin's summary of developments in Sales law published in The Businss Lawyer. Today's is the first in a series of posts commenting on the caselaw featured in that article.
Stephen Tanzer (Tanzer) hired Audio Visual Artsitry (AVA) to install electronic and entertainment equipment in Tanzer's home. We're not talking about an 8-track player and a Walkman. The contract called for nearly $80,000 of work, including about $56,000 worth of equipment and just under $10,000 in labor and programming costs. AVA's work was completed during construction of Tanzer's 15,000 square foot, $3.5 million home. Three years, one flood, one lightning strike, and innumerable changes and disputes after the parties entered into their agreement, Tanzer fired AVA. AVA delivered its invoice for about $120,000, of which just over $43,000 was outstanding. Tanzer disputed the amount and AVA sued for breach of contract.
The trial court found in AVA's favor awarded damages of about $35,000. Tanzer appealed, and the main issue of interst to us in Audio Visual Artistry v. Tanzer was his claim that the UCC should not apply to the transaction. In determining whether Article 2 of the UCC applies to a mixed contract involving both goods and services, Tennessee applies the predominant purpose test. In applying the test, Tennessee courts look to four factors:
- the language of the contract;
- the nature of the business of the supplier of goods and services;
- the reason the parties entered into the contract, and
- the amounts paid for the rendition of the services and goods, respectively.
Rejecting Tanzer's appeal and affirming the trial court, Tennesse's Court of Appeals found that all four factors weighed in favor of treating the transaction as a sale of goods covered by the UCC's Article 2. In short, this is an easy case under the predominant purpose test. But what if the court had applied the gravamen test? Then it might have to work out the nature of the problems with the contract. Was this a case of faulty goods or faulty installation?
Sunday, February 9, 2014
This article in the WSJ coincides perfectly with my syllabus as we are now finishing up our segment on offer and acceptance. Apparently, in the early to mid-nineties, the band Rocket from the Crypt agreed to let in free to their concerts anyone with a tattoo of the band’s logo.
As with many messy offer and acceptance scenarios, it started informally. The band members got tattoos of the logo – of a rocket blasting out of grave – and a few of their friends decided to do the same. Eventually, the band decided to let anyone with the tattoo get in free to see them play. They were a small band then and so whoever had the tattoo was probably a friend (or a friend of a friend) of a band member. But the band grew in popularity – and so did the number of tattooed fans. At their 2005 farewell concert, 500 rocket-tattooed fans got in free.
Now the band is preparing for their reunion tour. Tickets are selling out. There’s just one small problem. Many of the venues where they are scheduled to play don’t want to honor the free-admission-with-tattoo policy.
In my humble opinion, it doesn’t sound like the band actually made an offer to anyone, much less the public at large. The terms weren't definite - how big did the tattoo have to be? Could it be anywhere? For how long would fans get in free? Were there any limits?
But the band did honor the “tattoo-as-ticket” in the past. Does that then give rise to an implied contract? Or is there an equitable estoppel argument that could be raised given the fans’ reliance?
As interesting as this may be to ponder for contracts profs, in the end, I think there should be no enforceable contract and no estoppel claim for the simple reason that the band never intended to make an offer to the public at large. Furthermore, it doesn’t seem reasonable for someone to get a tattoo based upon what they understand to be the band’s informal policy of letting tattooed fans in free. The practice was a custom that grew organically, rather than a promise that must be kept as long as the band plays or the tattoo lasts. Not everything is a contract. If there was some sort of actual promise made, the band's promise was likely one to make a gift (free admission) to show their appreciation to anyone who had a tattoo. In other words, the band members weren't bargaining for fans to get a tattoo, and they weren't bargaining for them to show up to the venue with a tattoo - rather, motivated by affective reasons, they made a donative promise to let in their most loyal fans, the ones with tattoos, for free.
Thursday, February 6, 2014
This is the fifth in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.
Defendant Dean V. Kruse Foundation (Kruse) operates a World War II and automobile museum in Auburn, IN. It owned a property, but it could not generate sufficient income on the property to meet expenses, and so it sought to sell the property. Plaintiff Jerry Gates (Gates) eventually purchased the property at auction for $4.2 million.
The Purchase Agreement required a deposit of $100,000 in earnest money. After voicing concerns about the property's condition and title, Gates terminated the Purchase Agreement. Kruse threatened that it would seek specific performance. Eventually, it sold the property to a third party for $2.35 million.
Gates eventually sued Kruse and its realtor for breach of contract, fraud and conversion. Kruse counterclaimed for breach of contract and slander of title. The trial court granted summary judgment to Gates and ordered Kruse to return the earnest money with interest. The Indiana Court of Appeals reversed and remanded with instructions to enter summary judgment in favor of Kruse and to hold a hearing on damages. At that hearing, Kruse sought damages of about $2.5 million plus prejudgment interest. The damages represented the difference between the contract price and the price on resale. Kruse also sought a $200,000 buyer's premium that was part of the Purchase Agreement, but was willing to set off the $100,000 earnest money against the amount owed.
The trial court determined that the provision for $100,000 in earnest money was a liquidated damages clause. Kruse had the additional option of suing for specific performance, but it did not do so. The trial court therefore held that its dmaages were limited to the $100,000. Kruse appealed. In Dean V. Kruse Foundation v. Gates, the Court of Appeals once again reversed the trial court and remanded with instructions.
Kruse argued that the liquidated damages clause was in fact an impermissible penalty clause, among other reasons because the Purchase Agreement provided for specific performance. Under Indiana Law, "liquidated damages clauses are generally enforceable where the nature of the agreement is such that damages for breach would be uncertain, difficult, or impossible to ascertain." After reviewing relevant precedents, the Court of Appeals concluded that the clause at issueindicated an intent "to penalize the purchaser for a breach rather than an intent to compensate the seller in the event of breach." The first prong of the test thus suggested a penalty clause.
The Court next considered whether the alleged penalty was disproportionate in relation to the amount to be lost in case of breach. The Court could not determine whether it was at the time Gates bid on the property. Liquidated damages clauses are used where the potential harm is uncertain. So, the question was whether or not damages were uncertain. Incredibly, the Court of Appeals found that they were not, because there was expert testimony presented that the market value of the property at the time of the breach was $3.5 million.
Huh? The property sold once for $4.2 million and then again for $2.35 million. Since the parties could not know in advance when a breach would occur, and factual record reveals that the value of the property fluctuated considerably, to say that the parties could have known in advance the harm that would result from a breach seems quite fanciful. Nevertheless, the Court of Appeals struck down the earnest money provision as a penalty clause.
Kruse also argued on appeal that its remedies were not limited to the liquidated damages provision and specific performance. The Court agreed, since the parties had not expressly limited their remedies.
The outcome of the case is that Kruse retained all of its contractual remedies except for the two clearly provided for in the Purchase Agreement: the earnest money, which was struck down as a penalty, and the right of specific performance, which Kruse chose not to exercise. This all seems quite backwards. If it was a penalty clasue, it was a penalty clause that protected Kruse's interest in forcing Gates to stick with the deal. If the penalty proved inaccurate, it seems quite odd that Kruse should have standing to argue that the penalty it imposed was inappropriate. I have never heard of a penalty clause being struck in favor of a claim for damages 25 times higher than the alleged penalty.
The case was remanded back to the trial court again for a calculation of damages.
Wednesday, February 5, 2014
This is the fourth in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.
In teaching contracts, we often feel a bit guilty about presenting the world of contracts as if contracts involved two people meeting, dickering over terms and then knowingly consenting to an agreement. Most contracts don't happen that way nowadays. Most contracts that consumers enter into are standard form contracts with terms to which they agree without knowing what they are. And contracts among business entities tend to be relational contracts in which it is difficult to extract from the parties' complex interactions the moment when an offer was made and acceptance occurred.
So it's nice to have a straightforward case involving two homeowners dissatisfied with the quality of work performed by a man hired to lay tile in their home. Interesting contractual issues arise in such cases as well.
In 2008, Ramon and Stacey Halum entered into a written contract (how quaint!) with Michael Thalheimer for Thalheimer to remove carpeting and tiles from their home and to install new tiles. When Thalheimer completed the work, the Halums paid him in full and also gave him two $100 gift cards, which he regarded as a bonus. But the parties also agreed that Thalheimer would return to fix six unsatisfactory tiles.
Thalheimer never came, and the Halums hired someone else to do the work. They then sued Thalheimer for breach of contract, negligence and breach of the implied warranty of habitability. After a bench trial, they won a judgment of over $14,000 against Thalheimer, covering labor and materials paid to the man who re-did their floors.
On appeal in Thalheimer v. Halum, Thalheimer invoked the economic loss doctrine, seeking to limit recovery to damages for breach of contract where the Halums' loss was purely economic in nature. In response to this, the Halums noted that their son was injured by the improperly installed tiles. The trial court found Thalheimer liable both for breach of contract and for negligence in connection with the Halums' son's injury. The Court of Appeals found that the economic loss doctrine does not preclude recovery in a case such as this one in which an independent tort has been alleged. The Court of Appeals construed Thalheimer's remaining objections as a claim that the son was not really injured, but the Court of Appeals refused to be drawn into a factual dispute already resolved at trial.
The warranty issue is a bit more interesting. The parties' agreement included the following warranty:
“All workmanship guaranteed for two (2) years from date of completion.”
On my reading of the case, it seems that Thalheimer argued that he should have beeen permitted to repair the tiles himself rather than having to pay for the full replacement costs. But the Court of Appeals agreed with the trial court that by being dilatory in responding to the Halums' requests that he repair the faulty tile, Thalheimer had voided the warranty, freeing the Halums to hire another installer. There was a potentially relevant ambiguity in the warranty, which might have guaranteed only quality workmanship and not quality tile, but the Court of Appeals found that the trial court did not err in construing the ambiguity against Thalheimer, the drafter. Contra proferentem lives!
Tuesday, February 4, 2014
RECENT HITS (for all papers announced in the last 60 days)
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal
December 6, 2013 to February 4, 2014
According to this article from The New York Times, Detroit filed suit on Friday, seeking to invalidate complex transactions that it used to finance its debts. Detroit claims that the contracts at issue were illegal and are thus unenforceable.
The transactions brought in $1.4 billion for the city, but it now claims that they were an unlawful scheme to get around a ceiling on the amount of debt the city could take on and that it thus has no obligation to make payments on the "certificates of participation" issued in connection with the transactions. Detroit is also seeking to cancel some related "interest-rate swaps" with two banks that obligate the city to pay tens of millions of dollars annually to the banks. Just a few weeks ago, Detroit had offered to pay $165 million to get out of the contracts, but the bankruptcy judge rejected that as "too much money." Paying nothing seems like a better deal for the city, if they can find a legal basis to get out of the obligation.
Monday, February 3, 2014
We learn more about public policy limits on enforcement of arbitration clauses in a January 2014 ruling of the SDNY in National Credit Union Admin. Bd. v. Goldman, Sachs & Co. The case is a $40 million suit filed in September 2013 by the National Credit Union Adminsitration as Liquidating Agent of failed credit unions Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union. A spinoff from the capital markets collapse of 2008, the complaint alleges that Goldman, Sachs – through GS Mortgage Securities Corp. – misrepresented the quality of securities sold in 2006 and 2007 to the two credit unions, in violation of sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), and the Texas Securities Act, Tex.Rev.Civ. Stat. Ann. art. 581, § 33 (2013).
Goldman’s immediate response was to move for an order to compel arbitration, based on arbitration provisions in a 1992 cash account contract between Goldman and Southwest that appeared to govern “any controversy” between the parties. Citing 12 U.S.C. § 1787(c), the NCUA had repudiated the Cash Account Agreement between Southwest and Goldman Sachs. The court found that the NCUA had met the requirements of the statutory provision, and therefore the agency had broad authority to repudiate contracts that might burden its administration of a troubled credit union. Accordingly, the court denied Goldman’s motion.
While this ruling is certainly consistent with growing policy skepticism about arbitration clauses discussed in an earlier Global K post, we need to keep in mind what the ruling does and does not represent. First, it is by no means the final word in this litigation. As the court noted in passing, Goldman had expressly reserved the right to file a motion to dismiss in the event that the court rejected the motion to compel arbitration. There is no reason to doubt that such a motion will be forthcoming.
Second, we should not over-read the ruling as a repudiation of arbitration clauses. In the course of its discussion, the court was careful to note the strong policy of the Federal Arbitration Act (FAA) “to counteract ‘widespread judicial hostility to arbitration agreements’ and [to] reflect ‘a liberal federal policy favoring arbitration,’ ” quoting AT&T Mobility LLC v. Concepcion.
Nevertheless, the ruling does accord considerable credibility to the position that, despite the strong and longstanding FAA policy in favor of arbitration, a broad arbitration clause frustrates supervisory efforts to resolve institutional failures and should not be enforced in a financial institutions receivership. This observation leads to the third point to be noted – that in a regulated industry, contract law expectations skew in favor of overarching supervisory policy. Like the corresponding policy that applies to failed banks in FDIC receivership under 12 U.S.C. § 1821(d) and § 1823(e), § 1787(c) allows the NCUA as conservator or liquidating agent to “disaffirm or repudiate” any contract or lease of which the failed credit union is a party, if the conservator or liquidating agent determines in its discretion that the performance would be “burdensome” to it, and the disaffirmance or repudiation would “promote the orderly administration of the credit union's affairs.” Significantly, the Second Circuit has long taken the same position as National Credit Union Administration in cases dealing with bank receiverships. See, e.g., Resolution Trust Corp. (“RTC”) v. Diamond, 45 F.3d 665, 670 (2d Cir.1995); Westport Bank & Trust Co. v. Geraghty, 90 F.3d 661, 668 (2d Cir.1996). While the credit union statute allows for claims for damages for the contract repudiation, such claims are “limited to actual direct compensatory damages,” and expressly exclude claims for “lost profits or opportunity.” We must await further developments in this litigation to assess how far contracts principles skew in favor of supervisory intervention.
This is the third in a series of posts that draw on Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.
Shannon Garrett was an employee of a sub-contractor working on the construction of Lucas Oil Stadium in Indianapolis (pictured). She was injured on the job and sought to recover from the construction manager on the project, Hunt Construction Group (Hunt). She was not employed by the construction manager but claimed that it had a legal duty of care for jobsite safety and was vicariously liable for the negligence of her employer, Baker Concrete Construction, Inc. (Baker). Her claims against Baker were governed by Indiana's Worker's Compensation Act, but the Act does not prevent her from suing any other entity in tort.
While the trial court ruled in Garrett's favor on the issue of various liability, the Court of Appeals reversed on that issue. The Court of Appeals majority found that Hunt did owe Garrett a contractual duty for workplace safety. In Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court summarily affirmed the Court of Appeals' ruling on vicarious liability, but it also found that Hunt owed Garrett no contractual duty and had assumed none for which it could be liable to her.
Under Indiana case law, a construction manager can assume a duty to a sub-contractor's employee in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager “assumes such a duty, either gratuitously or voluntarily." The Indiana Supreme Court concluded that, while the contracts at issue did impose some duties upon Hunt for jobsite safety, those duties ran to the Stadium Authority and not to "Contractors, the Architect, or other parties performing Work or services with respect to the Project." On the contrary, the contracts provided that Baker was “the controlling employer responsible for [its own] safety programs and precautions.”
The tougher question was whether Hunt had gratuitously or voluntarily assumed a duty for jobsite safety. As to that, the Court held that, in order for a construction manager to assume a legal duty of care for jobsite safety, it "must undertake specific supervisory responsibilities beyond those set forth in the original construction documents." After reviewing the facts of the case, the Court found that Hunt had not done so "for any part of the project on which Garrett was working."
Justice (now Chief Justice) Dickson dissented. He found that there remained material facts in dispute and would not have decided the case on a motion for summary judgment.
Saturday, February 1, 2014
Running out of examples of unilateral contracts? Well, here's one: Hong Kong tycoon Cecil Chao offered $65 million to any man that could get his lesbian daughter's hand in marriage. That is, if a person could reasonably believe that Chao intended to enter into this bargain (it seems that he was in fact serious, especially in light of his wealth and his rejection of his daughter's sexuality):
Chao's daughter Gigi handled the situation with incredbile grace, writing an open letter to her father:
In her letter, Gigi Chao tells her father that she "will always forgive you for thinking the way you do, because I know you think you are acting in my best interests."
And she says she takes responsibility for some of her father's misplaced expectations.
When he first announced the colossal dowry in 2012, she said at the time she found it "quite entertaining."
But this week she appeared to set the record straight.
"I'm sorry to mislead you to think I was only in a lesbian relationship because there was a shortage of good, suitable men in Hong Kong," she writes. "There are plenty of good men, they are just not for me."
Here's Gigi in her own words:
It sounds like quite a few men responded to the offer with attempts to win Gigi's heart. But it is now too late. Even though Chao will not recognize his daughter's relationship with her long-time partner (really, wife - given that they wed in France even though the marriage is not recognized in Hong Kong), Chao has now revoked the offer.