ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

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Sunday, May 18, 2014

More on the Structure of Cable Contracts

By Myanna Dellinger

Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few. 

Luckily, change may finally be on its way.  The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology.  The price?  About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves. 

How does this work?  Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations.  In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease.  In other words, Aereo records show for its subscribers so that they don’t have to. 

That sounds great, right?  Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows).  They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.

Of course, the great American tradition of filing suit was followed.  Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.

Stay tuned for the outcome in this case…

May 18, 2014 in About this Blog, Commentary, Current Affairs, E-commerce, Famous Cases, In the News, Recent Cases, Television, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, May 12, 2014

No Frequent Complaining Allowed about Frequent Flyer Programs

By Myanna Dellinger

The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg).  Contracts ProfBlog first wrote about the case on April 3.

In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel.  The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles.  According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer.  The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines.  He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.

The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement.  The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.

Really?  Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!..  The opinion may at first blush read as such and have that somewhat chilling effect.  However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.

The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.”  These days, that may be hard to do.  First, most airlines appear to have more or less similar frequent flyer programs.  Second, what airline these days has a  truly “good” reputation?  Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.   

One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable.  I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes.  A few times, I have had the good fortune to fly first or business class, but most times, I fly economy.  Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.”  - Guess what, the fares always had increased the times I asked for a change.  Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta.  I was told that it was impossible to change the ticket as it was “deeply discounted.”   I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors.  I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.”  Remember that these days, airfare often has to be bought months ahead of time to get the best prices.  In the meantime, life happens.  Unexpected, yet important events come about.  Changes to airline tickets should be realistically feasible, but are currently not on these conditions.

What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation.  My mother is elderly and lives in Europe.  I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services.  Such is life in a globalized world for many of us.  In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States.  Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently.  I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy.  It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.   

Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa.  For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist.  Two years ago, my father was passing and I was called to his deathbed.  Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…).  The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.

In the United States, “market forces” are said to dictate the pricing of airfare.  In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours).  Strange, since both markets are capitalist and offer freedom of contracting.  Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States.  A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms.  Under heavy criticism, that plan was soon given up.  In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies.  Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.

 

May 12, 2014 in Commentary, Current Affairs, Famous Cases, In the News, Recent Cases, Travel, True Contracts | Permalink | Comments (0) | TrackBack (0)

Thursday, May 8, 2014

Vermont First State to Require Labeling of GMOs

By Myanna Dellinger

On May 8, 2014, Vermont became the first state in the nation to require foods containing GMOs (genetically modified organisms) to be labeled accordingly.  The law will undoubtedly face several legal challenges on both First Amendment and federal pre-emption grounds, especially since giant corporate interests are at stake.

Scientists and companies backing the use of GMOs claim that GMOs are safe for both humans and the environment.  Skeptics assert that while that may be true in the short term, not enough data yet supports a finding that GMOs are also safe in the long term.

In the EU, all food products that make direct use of GMOs at any point in their production are subjected to labeling requirements, regardless of whether or not GM content is detectable in the end product.  This has been the law for ten years. 

GMO stakeholders in the United States apparently do not think that we as consumers have at least a right to know whether or not our foods contain GMOs.  Why not, if the GMOs are as safe as is said?  A host of other food ingredients have been listed on labels here over the years, although mainly on a voluntary basis.  Think MSGs, sodium, wheat, peanuts, halal meat, and now gluten.  This, of course, makes perfect sense.  But why should GMOs be any different?  If, for whatever reason, consumers prefer not to eat GMOs, shouldn’t we as paying, adult customers have as much a say as consumers preferring certain other products? 

Of course, the difference here is (surprise!) one of profit-making: by labeling products “gluten free,” for example, manufacturers hope to make more money.  If they had to announce that their products contain GMOs, companies fear losing money.  So why don’t companies whose products don’t contain GMOs just volunteer to offer that information on the packaging?  The explanation may lie in the pervasiveness of GMOs in the USA: the vast majority (60-80%, depending on the many sources trying to establish certainty in this area) of prepared foods contain GMOs just as more than 80% of major crops are grown from genetically modified seeds.  Maybe GMOs are entirely safe in the long run as well, maybe not, but we should at least have a right to know what we eat, it seems.

Bon appétit!

 

May 8, 2014 in Commentary, Current Affairs, Food and Drink, In the News, Legislation, Science, True Contracts | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 30, 2014

Handling Shipping and “Handling” Charges

By Myanna Dellinger

A class-action lawsuit filed recently against Amazon asserts that the giant online retailer did not honor its promise to offer “free shipping” to its Prime members in spite of these members having paid an annual membership fee of $79 mainly in order to obtain free two-day shipping.

Instead, the lawsuit alleges, Amazon would covertly encourage third-party vendors to increase the item prices displayed and charged to Prime members by the same amount charged to non-Prime members for shipping in order to make it appear as if the Prime members would get the shipping for free.  Amazon would allegedly also benefit from such higher prices as it deducts a referral fee as a percentage of the item price from third-party vendors. 

The suit alleges breach of contract and seeks recovery of Prime membership costs for the relevant years as well as treble damages under Washington’s Consumer Protection Act.  Most states have laws such as consumer fraud statutes, deceptive trade practices laws, and/or unfair competition laws that can punish sellers for charging more than the actual costs of “shipping and handling."  In some cases that settled, companies agreed to use the term “shipping and processing” instead of “shipping and handling” to be more clear towards consumers. 

On the flip side of the situation is how Amazon outright prevents at least some private third-party vendors from charging the actual shipping costs (not even including “handling” or “processing” charges).  For example, if a private, unaffiliated vendor sells a used book via Amazon, the site will only allow that person to charge a certain amount for shipping.  As post office and UPS/FedEx costs of mailing items seem to be increasing (understandably so in at least the case of the USPS), the charges allowed for by Amazon often do not cover the actual costs of sending items.  And if the private party attempts to increase the price of the book even just slightly to not incur a “loss” on shipping, the book may not be listed as the cheapest one available and thus not be sold. 

This last issue may be a detail as the site still is a way of getting one’s used books sold at all whereas that may not have been possible without Amazon.  Nonetheless, the totality of the above allegations, if proven to be true, and the facts just described till demonstrate the contractual powers that modern online giants have over competitors and consumers. 

A decade or so ago, I attended a business conference for other purposes.  I remember how one presenter, when discussing “shipping and handling” charges, got a gleeful look in his eyes and mentioned that when it came to those charges, it was “Christmas time.”  When comparing what shipping actually costs (not that much for large mail-order companies that probably enjoy discounted rates with the shipping companies) with the charges listed by many companies, it seems that not much has changed in that area.  On the other hand, promises of “free” shipping have, of course, been internalized in the prices charged somehow.  One can hope that companies are on the up-and-up about the charges.  Again: buyer beware.

April 30, 2014 in Commentary, Current Affairs, E-commerce, Famous Cases, In the News, True Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, April 18, 2014

Making the Fine Print Fair Symposium

For those of you unable to attend the "Making the Fine Print Fair" Symposium, hosted by the Georgetown Consumer Law Society and Citizen Works -Fair Contracts.org, here is a link to a Livestream of the program.  It was an absolutely terrific event with a great mix of academics, consumer advocates, regulators and practitioners.  The amazing line-up of speakers, included FTC Chair Edith Ramirez, consumer advocate Ralph Nader and NYT bestselling author Bob Sullivan. 

April 18, 2014 in Conferences, Current Affairs | Permalink | Comments (0) | TrackBack (0)

Monday, March 31, 2014

More on the Fairness of Contractual Penalties

More on the Fairness of Contractual Penalties

By Myanna Dellinger

In my March 3 blog post, I described how the Ninth Circuit Court of Appeals just held that contractual liquidated damages clauses in the form of late and overlimit fees on credit cards do not violate due process law.  A new California appellate case addresses a related issue, namely whether the breach of a loan settlement agreement calling for the repayment of the entire underlying loan and not just the settled-upon amount in the case of breach is a contractually prohibited penalty.  It is.

In the case, Purcell v. Schweitzer (Cal. App. 4th Dist., Mar. 17, 2014), an individual borrowed $85,000 from a private lender and defaulted.  The parties agreed to settle the dispute for $38,000.  A provision in the settlement provided that if the borrower also defaulted on that amount, the entire amount would become due as “punitive damages.”  When the borrower only owed $67 or $1,776  (depending on who you ask), he again defaulted, and the lender applied for and obtained a default judgment for $85,000. 

Liquidated damages clauses in contracts are “enforceable if the damages flowing from the breach are likely to be difficult to ascertain or prove at the time of the agreement, and the liquidated damages sum represents a good faith effort by the parties to appraise the benefit of the bargain.”  Piñon v. Bank of Am., 741 F.3d 1022, 1026 (Ninth Cir. 2014).   The relevant “breach” to be analyzed is the breach of the stipulation, not the breach of the underlying contract.  Purcell.  On the other hand, contractual provisions are unenforceable as penalties if they are designed “not to estimate probable actual damages, but to punish the breaching party or coerce his or her performance.” Piñon, 741 F.3d at 1026. 

At first blush, these two cases seem to reach the same legally and logically correct conclusion on similar backgrounds.  But do they?  The Ninth Circuit case in effect condones large national banks and credit card companies charging relatively small individual, but in sum very significant, fees that arguably bear little relationship to the actual damages suffered by banks when their customers pay late or exceed their credit limits.  (See, in general, concurrence in Piñon).  In 2002, for example, credit card companies collected $7.3 billion in late fees.  Seana Shiffrin,  Are Credit Card Law Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).  Thus, although the initial cost to each customer may be small (late fees typically range from $15 to $40), the ultimate result is still that very large sums of money are shifted from millions of private individuals to a few large financial entities for, as was stated by the Ninth Circuit, contractual violations that do not really cost the companies much.  These fees may “reflect a compensatory to penalty damages ratio of more than 1:100, which far exceeds the ratio” condoned by the United States Supreme Court in tort cases. Piñon, 741 F.3d at 1028.  In contrast, the California case shows that much smaller lenders of course also have no right to punitive damages that bear no relationship to the actual damages suffered, although in that case, the ratio was “only” about 1:2. 

The United States Supreme Court should indeed resolve the issue of whether due process jurisprudence is applicable to contractual penalty clauses even though they originate from the parties’ private contracts and are thus distinct from the jury-determined punitive damages awards at issue in the cases that limited punitive damages in torts cases to a certain ratio.  Government action is arguably involved by courts condoning, for example, the imposition of late fees if it is true that they do not reflect the true costs to the companies of contractual breaches by their clients.  In my opinion, the California case represents the better outcome simply because it barred provisions that were clearly punitive in nature.  But “fees” imposed by various corporations not only for late payments that may have little consequence for companies that typically get much money back via large interest rates, but also for a range of other items appear to be a way for companies to simply earn more money without rendering much in return.

At the end of the day, it is arguably economically wasteful from society’s point of view to siphon large amounts of money in “late fees” from private individuals to large national financial institutions many of which have not in recent history demonstrated sound economic savvy themselves, especially in the current economic environment.  Courts should remember that whether or not liquidated damages clauses are actually a disguise for penalties depends on “the actual facts, not the words which may have been used in the contract.”  Cook v. King Manor and Convalescent Hospital, 40 Cal. App. 3d 782, 792 (1974).

March 31, 2014 in Commentary, Contract Profs, Current Affairs, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, March 21, 2014

Microsoft's Terms of Service and Privacy

Microsoft has been in the news recently for accessing a user's Hotmail account without a court order. Microsoft revealed this information as part of a lawsuit it filed against a former employee who it accussed of stealing trade secrets.  The company received information that a French blogger had access to Windows operating system software code and wanted to find out who was the blogger's source.  Conveniently for Microsoft, the blogger had a Microsoft-operated Hotmail account.  The company's accessing of the emails and instant messages of the blogger was lawful because - you guessed it - it was permitted under the company's terms of service which state:

 

We also may share or disclose personal information, including the content of your communications:

  • To comply with the law or respond to legal process or lawful requests, including from law enforcement and government agencies.
  • To protect the rights or property of Microsoft or our customers, including enforcing the terms governing your use of the services.
  • To act on a good faith belief that access or disclosure is necessary to protect the personal safety of Microsoft employees, customers or the public.

Lest you think you can escape the intrusions of corporate peeking into personal communications by moving to another email provider, a quick check of the terms of service of Yahoo and Google showed nearly identical language in their privacy policies. 

 

Google’s terms of service state:

We will share personal information with companies, organizations or individuals outside of Google if we have a good-faith belief that access, use, preservation or disclosure of the information is reasonably necessary to:

  • meet any applicable law, regulation, legal process or enforceable governmental request.
  • enforce applicable Terms of Service, including investigation of potential violations.
  • detect, prevent, or otherwise address fraud, security or technical issues.
  • protect against harm to the rights, property or safety of Google, our users or the public as required or permitted by law.

Yahoo’s is similar:

You acknowledge, consent and agree that Yahoo may access, preserve and disclose your account information and Content if required to do so by law or in a good faith belief that such access preservation or disclosure is reasonably necessary to: (i) comply with legal process; (ii) enforce the TOS; (iii) respond to claims that any Content violates the rights of third parties; (iv) respond to your requests for customer service; or (v) protect the rights, property or personal safety of Yahoo, its users and the public.

Interestingly, Microsoft's terms of service give the company less discretion to snoop through our emails than Google or Yahoo -- it can only do so to protect the company and its users.  Google or Yahoo can access communications to protect third party property interests.  But they wouldn't really do that without a court order, would they?  Oh, right.

March 21, 2014 in Commentary, Current Affairs, Miscellaneous | Permalink | Comments (0) | TrackBack (0)

Monday, March 17, 2014

“Strictly Confidential” Means Don’t Boast about Settlement on Facebook

An employee sues his employer for age discrimination and retaliation.  The parties reach an $80,000 settlement agreement pursuant to which the existence and terms of the settlement are to be kept “strictly confidential.”  The employee is only allowed to tell his wife, attorneys and other professional advisers about the settlement.  A breach of the agreement will result in the “disgorgement of the Plaintiff’s portion of the settlement payments,” although the attorney would, in case of a breach, be allowed to keep the separately agreed-upon fee for his services.  The employee tells his teenage daughter about the settlement and being “happy about it.”  Four days later, she boasts to her 1,200 Facebook friends:

“Mama and Papa Snay won the case against Gulliver.  Gulliver is now officially paying for my vacation to Europe this summer.  SUCK IT.”

The employer does not tender the otherwise agreed-upon settlement amount, citing to a breach of the confidentiality clause of the contract.  The employee brings suits, wins at trial, but loses on appeal.  The employee’s argument?  He felt that it was necessary to tell his daughter “something” about the agreement because, some sources state, she had allegedly been the subject of at least some of the retaliation against her father.

The appellate court emphasized the fact that the agreement had called for the employee not to disclose “any information” about the settlement to anyone either directly or indirectly.  Settlement agreements are interpreted like any other contract.  Thus, the unambiguous contractual language “is to be given a realistic interpretation based on the plain, everyday meaning conveyed by the words,” according to the court.  The employee did precisely what the confidentiality agreement was designed to prevent, namely advertise to the employer’s community that the case against them had been successful.

What could the employee have done here if he truly felt a need to tell his daughter about the deal?  Pragmatically, he could have made it abundantly clear to his daughter that she was not to tell anyone, obviously including her thousands of Facebook “friends,” about it.  Hopefully she would have abided by that rule...  The court pointed out that the employee could also have told his attorney and/or the employer about the need to inform his daughter in an attempt to reach an agreement on this point as well.  Having failed to do so, “strictly confidential” means just that.  As we know, consequences of breaches of contract can be ever so regrettable, but that does not change any legal outcomes. 

The case is Gulliver Sch., Inc. v. Snay, 2014 Fla. App. LEXIS 2595.

March 17, 2014 in Contract Profs, Current Affairs, Famous Cases, Labor Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, March 3, 2014

European Parliament Approves Common European Sales Law

EU FlagAs reported here on Out-Law.com, the EU Parliament approved the proposed Common European Sales Law designed to apply to transnational sales conducted by telephone or through the Internet.  Despite opposition from the German and UK governments, the new law found overwhelming support in the EU Parliament, passing by a vote of 416-159, with 65 abstentions. 

The law is now placed before the EU's Council of Ministers, which can adopt the proposal into law.  The EU's Justice Commissioner, Viviane Reding, spoke out in favor of the law, saying that he would cut down on transactions costs by creating a uniform sales law throughout Europe.  The savings would be especially helpful to medium and small business, which account for 99% of all businesses in the EU.  

We summarized the characteristics of the proposed sales law (in its then-current version) here.

You can find the version approved by the EU Parliament here (click on "texts part 3" and go to page 83 of the document that should open up).

Hat tip to Peter Fitzgerald.  

March 3, 2014 in Current Affairs, E-commerce | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 11, 2014

Got It? The Challenges of Understanding “Legalese” and “Businessese”

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. 

February 11, 2014 in Contract Profs, Current Affairs, True Contracts | Permalink | Comments (0) | TrackBack (0)

Friday, January 31, 2014

Sperm Donor Ordered to Pay Child Support Despite Agreement

I like to remind my 1Ls Contracts students that a contract is private law between two parties, but it doesn't override public law.  This story is last week's news, but I thought I'd blog about it anyway because it provides a pretty good example of this point.  In 2009, William Marotta responded to a Craigslist ad posted by two women for a sperm donor.  All three parties agreed - and signed an agreement to the effect - that Marotta waived his parental rights and responsibilities.  The Kansas Department for Children and Families sought to have Marotta declared the father and responsible for payments of $6,000 that the state had already paid and for future child support. 

Unfortunately for Marotta, a Kansas state statute requires a physician to perform the artificial insemination procedure.  The Shawnee County District Court Judge Mary Mattivi ruled that because the parties "failed to conform to the statutory requirements of the Kansas Parentage Act in not enlisting a licensed physician...the parties' self-designation of (Marotta) as a sperm donor is insufficient to relieve (Marotta) of parental rights and responsibilities."

Note that the couple was not seeking to invalidate the contract - it was the Kansas state agency. 

It's unclear whether the parties will appeal.

 

[Nancy Kim]

 

January 31, 2014 in Current Affairs, In the News, Miscellaneous, True Contracts | Permalink | Comments (0) | TrackBack (0)

Monday, January 27, 2014

Severe Economic Disruptions from Climate Change

Severe Economic Disruptions from Climate Change

For many, climate change remains a far off notion that will affect their grandchildren and other “future generations.”  Think again.  Expect your food prices to increase now, if they have not already.  Amidst the worst drought in California history, the United Nations is releasing a report that, according to a copy obtained by the New York Times, finds that the risk of severe economic disruptions is increasing because nations have so dragged their feet in combating climate change that the problem may be virtually impossible to solve with current technologies. 

The report also says that nations around the world are still spending far more money to subsidize fossil fuels than to accelerate the urgently needed shift to cleaner energy.  The United States is one of these.  Even if the internationally agreed-upon goal of limiting temperature increases to 2° C, vast ecological and economic damage will still occur.  One of the sectors most at risk: the food industry.  In California, a leading agricultural state, the prices of certain food items are already rising caused by the current drought.  In times of shrinking relative incomes for middle- and lower class households, this means a higher percentage of incomes going to basic necessities such as food, water and possible medical expenses caused by volatile weather and extreme heat waves.  In turn, this may mean less disposable income that could otherwise spur the economy. 

Disregarding climate change is technologically risky too: to meet the target of keeping concentrations of CO2 below the most recently agreed-upon threshold of 500 ppm, future generations would have to literally pull CO2 out of the air with machinery that does not yet exist and may never become technically or economically feasible or with other yet unknown methods.

Of course, it doesn’t help that a secretive network of conservative billionaires is pouring billions of dollars into a vast political effort attempting to deny climate change and that – perhaps as a consequence – the coverage of climate change by American media is down significantly from 2009, when media was happy to report a climate change “scandal” that eventually proved to be unfounded.

The good news is that for the first time ever, the United States now has an official Climate Change Action Plan.  This will force some industries to adopt modern technologies to help combat the problem nationally.  Internationally, a new climate change treaty is slated for 2015 to take effect from 2020.  Let us hope for broad participation and that 2020 is not too late to avoid the catastrophic and unforeseen economic and environmental effects that experts are predicting.

Myanna Dellinger

Assistant Professor of Law

Western State College of Law

 

January 27, 2014 in Current Affairs, Food and Drink, In the News, Legislation, Science, Television | Permalink | Comments (1) | TrackBack (0)

Wednesday, January 22, 2014

A $1 Billion Dollar Unilateral Offer

Warren Buffett and Quicken Loans have teamed up to help make teaching about unilateral contracts and interpretation so much more interesting.  The offer?  One billion dollars to anyone who fills out a perfect 2014 NCAA tournament bracket.

Say what?  Is this serious?  Or is it like that Pepsi commercial - you know the one.

Although at first, this might sound like a joke, once you learn the odds are, by one estimate, one in 9.2 quintillion, you --a reasonable person -- would realize this offer was serious.

All you have to do is fill out a perfect bracket.  (Now might be the time for me to mention that I once won my law firm's pool one year.  Strange but true).

But wait - there's more.  The Business Insider reports that Quicken, which is actually running the contest, will award $100,000 to 20 of the most accurate but not perfect brackets "submitted by qualified entrants in the contest to use toward buying, refinancing or remodeling a home."  The company will also donate $1million  to Detroit and Cleveland non-profit organizations. 

Get ready for March Madness....

 

[Nancy Kim]

 

 

January 22, 2014 in Current Affairs, Games, In the News, Miscellaneous | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 15, 2014

Bridge & Tunnel

Bridge: It hasn't been a good week for New Jersey governor Chris Christie who is embroiled in a scandal ("bridgegate") after one of his aides arranged to close lanes to the George Washington bridge, causing traffic in Fort Lee, a town where a democratic mayor did not support Christie's re-election.  

Tunnel: Over in Washington, Seattle may see traffic delays of its own.  The State Department of Transportation has declared that the Highway 99 tunnel team in “material breach of contract” because of different barriers than lane closings -- barriers to participation by small, minority-owned contracting firms.  The Seattle Times reports:

The DOT threatens sanctions unless Seattle Tunnel Partners (STP) makes rapid improvement and the team leaders participate in meetings with DOT. Disadvantaged Business Enterprises (DBEs) led by minorities and women are supposed to receive 8 percent of the work, but as of last fall, by some measurements the rate was less than 2 percent, according to a scathing federal civil-rights review.  The tunnel contractors are led by the U.S. arm of Spanish-based Dragados, and by California-based Tutor-Perini.

Lynn Peterson, the DOT secretary, released a letter Monday that recognizes efforts by STP to improve, but demands more.

What sanctions will mean is not yet clear.  The DOT could exert leverage by reducing or delaying progress payments that STP periodically receives for tunnel work. Peterson mentions that as one option in her letter, which follows a state review by attorney Richard Mitchell.

STP has the leverage of already having a tunnel machine in the ground, and already collecting more than $700 million to date. The most extreme outcome, to switch prime contractors, could easily run up tens or hundreds of millions of dollars, and cause delays. Peterson writes that she would prefer collaboration to litigation. An excerpt:

DBE_snip

Among other ideas, the state now recommends breaking contracts into smaller pieces so minority and women-led firms have a better chance to compete.

The federal investigation was prompted by a complaint by Elton Mason, owner of Washington State Trucking in Kirkland, who tried unsuccessfully to bid on a contract to transport excavated dirt.  STP awarded the prime trucking contract to a larger company, Grady Excavating of Mukilteo, which DOT later disqualified from its DBE status. The KING 5 Investigators have aired several stories aboutfailures in the minority contracting programs for Highway 99 and other projects.   Although Initiative 200 forbids quotas in minority hiring, the tunnel job is one-third federally funded, and therefore subject to hiring goals under federal affirmative-action rules.

Mason vented his exasperation Monday at what looks to him like another round of process. Mason said he’s had two meetings recently with state DOT and STP, but not a job offer.  All it should take is for Peterson to make a phone call and demand that Mason and other minority contractors be hired immediately, he said.

 Christie could only hope for a Seattle tunnel scandal to eclipse his coverage in the news cycle.  Not likely.

January 15, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, January 13, 2014

GLOBAL K: Bitcoins – Actually a Virtual Problem

Over the past year, there has been an explosion of interest – and a frenzied up-swing in trading – in bitcoins. Writing in The New York Times in late December 2013, in an article called Into the Bitcoin Mines, Nathaniel Popper noted that “The scarcity — along with a speculative mania that has grown up around digital money — has made each new Bitcoin worth as much as $1,100 in recent weeks.” From a socio-economic perspective, this offers an unusual opportunity to observe the emergence and development of an entirely new, and so far unregulated, kind of market. Scholars like Wallace C. Turbeville interested in the law and policy of financial services regulation are now presented with an important opportunity to test assumptions we often blithely make about the ways in which regulation interacts with business and commercial activity.

Policymakers may confront a moment of truth – to regulate or not to regulate, and when, and how. Earlier this month, National Taxpayer Advocate Nina Olson argued that the IRS should give taxpayers clear rules on how it will handle transactions involving bitcoin and other digital currencies accepted as payment by vendors. The Senate Homeland Security and Governmental Affairs Committee held hearings on bitcoins and other “cryptocurrencies” several weeks ago, and may have a report on the situation early next year after further consideration, but Committee Chair Sen. Thomas Carper (D-Del.) seems to be taking a “wait and see” attitude. Meanwhile, the People’s Republic of China has already banned banks from using bitcoins as a currency, while U.S. regulators have not addressed the use of virtual currencies, even as an increasing number of vendors – including Overstock.com – have announced that they will accept them in payment for transactions.

One basic problem is the difficulty in determining what is involved in bitcoin creation and trading. Unfortunately, we are as yet at the mercy of metaphors. For example, within the first six paragraphs of his NYT piece, Popper refers to bitcoins as “virtual currency,” “invisible money,” “a speculative investment,” “online currency,” and “a largely speculative commodity.” In point of fact, bitcoins are book-entry tokens awarded for successfully solving highly complex algorithms generated by an open-source program, The program is disseminated by a mysterious, anonymous sponsor or group known only as Satoshi Nakamoto – the digital world’s version of Keyser Söze.

Determination of the proper legal characterization of bitcoins is essential if we are to choose appropriate transactional and regulatory approaches. For example, if bitcoins really are a “virtual currency” – a meaningless phrase, a glib metaphor – then fiscal supervision by the Federal Reserve might be the most appropriate approach to regulating bitcoin activity. Further, if they are in any significant sense “currency,” then treatment under the U.S. securities regulation framework would be problematic, since “currency” is excluded from the statutory definition of “security” in section 3(a)(10) of the Securities Exchange Act. Similarly, if bitcoins are viewed as some sort of currency, they would then likely be an “excluded commodity” under section 1a(19)(i) of the Commodity Exchange Act. On the other hand, if bitcoins are viewed as derivatives of currency or futures contracts in currency, then they may be subject to securities regulation, or possibly commodities regulation, depending upon the basic characteristics and rights of the financial product itself. The exact delimitation between treatment as a security and treatment as a commodity is currently the subject of study and proposed rulemakings by the SEC and the CFTC.

Recent news reports have noted that bitcoins are beginning to be accepted by more and more vendors as a form of payment. If in fact it becomes a commonplace that bitcoins operate as a payment mechanism, then we must deal with the possibility that they should be subject to transactional rules of the UCC and the procedures of payment clearance centers. It is at this point that the contractual aspects of bitcoins become critical features of our analysis.

Conceivably, we might go further and argue that bitcoins are functionally a type of note – relatively short-term promises to pay the holder – in which case, they would be subject to UCC article 3, exempt or excluded from securities registration requirements, but possibly still subject to securities antifraud rules. This is an attractive alternative, since it would give us some definite transactional rules to work with, plus antifraud protection against market manipulation – if we could figure out what “manipulation” should mean in the strange new world of cryptocurrencies.

 

Michael P. Malloy

 

January 13, 2014 in Commentary, Current Affairs, E-commerce | Permalink | TrackBack (0)

Prospects for Reform at the Consumer Financial Protection Bureau

CFPB
President Obama announcing nomination of Richard Cordray as CFPB Director

The New York Times reported last week on what it called The Consumer Financial Protection Bureau's (CFPB) next "crusades."  That would not be my preferred term, but yes, the regulatory agenda is ambitious. 

As the story recounts, The CFPB has already fined major companies, including American Express, GE Captial Retail Bank and Ocwen Financial for misleading business practices.  Last Friday, it issued new regulations for the mortgage industry.  

The CFPB's agenda in the coming year includes the following areas:

  • Arbitration (see our earlier blog post on the CFPB's preliminary report);
  • Bank overdraft fees;
  • Student loans;
  • Debt collection;
  • Credit report disputes; and 
  • Prepaid cards

It is an ambitious agenda.  Let's see if it will have much of an impact on consumer financial protection.

[JT]

January 13, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, December 16, 2013

Consumer Financial Protection Bureau Preliminary Report on Arbitration

KirgisUPDATE: Paul Kirgis (pictured) provides a synopsis on the ADR Blog here.

Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructs the Consumer Financial Protection Bureau (the “Bureau”) to study the use of pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic.  This document, dated December 12, 2013, presents preliminary results reached in the Bureau’s study to date. 

Below are excerpts, with emphasis added, from the Executive Summary of the Bureau's preliminary findings:

  • In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to such clauses. (In 2009 and 2010 several issuers entered into private settlements in which they agreed to remove the arbitration clauses from their credit card consumer contracts for a defined period. If those issuers still included such clauses, some 94% of credit card loans outstanding would now be subject to arbitration.)
  • In the checking account market, larger banks tend to include arbitration clauses in their consumer checking contracts, while mid-sized and smaller banks and credit unions do not. We estimate that in the checking account market, which is less concentrated than the credit card market, around 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
  • In our [General Purpose Reloadable] GPR prepaid card sample, for which data are more limited than for our credit and checking account samples, arbitration clauses are included across the market.  Some 81% of the cards studied, and all of the cards for which market share data are available, have arbitration clauses in their cardholder contracts.
  •  Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis. Around 90% of the contracts with arbitration clauses— covering close to 100% of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration—include such no-class arbitration provisions. . . .
  • The AAA is the predominant administrator for consumer arbitration about credit cards, checking accounts, and GPR prepaid cards.
  • From 2010 through 2012, there was an annual average of 415 individual AAA cases filed for four product markets combined: credit card, checking account, payday loans, and prepaid cards.23 The annual average was 344 credit card arbitration filings, 24 checking account arbitration filings, 46 payday loan arbitration filings, and one prepaid arbitration filing. These numbers do not indicate the number of cases in which the filing was “perfected” and the matter proceeded to arbitration. . . . 
  • Not all these arbitration filings were made by consumers. For the three product markets combined, the standard AAA “claim form” records consumers filing an average of under 300 cases each year.  The remaining filings are recorded as mutually submitted or made by companies.
  • From 2010 through 2012, around half the credit card AAA arbitration filings were debt collection disputes—proceedings initiated by companies to collect debt, initiated by consumers to challenge the company’s claims in court for debt collection, or mutual submissions to the same effect. More than a quarter of these debt collection arbitrations also included non-debt consumer claims. . . . 
  • In contrast, very few of the checking account and payday loan AAA arbitration filings from 2010 through 2012 were debt collection arbitrations.
  • From 2010 through 2012, a slight majority (53%) of consumers were represented by counsel in the AAA arbitrations that we reviewed for these three product markets. For non-debt collection disputes, 61% of consumers had a lawyer at some point in the arbitration proceeding. For debt collection arbitrations, 42% of consumers had legal representation at some point in the proceeding. Companies were almost always represented by outside or in-house counsel in both debt collection and non-collection arbitrations.
  • From 2010 through 2012, almost no AAA arbitration filings for these three product markets had under $1,000 at issue. . . . There were an annual average of seven arbitrations per year filed with the AAA that concerned disputed debt amounts that were at or below $1,000. 
  • From 2010 through 2012, for arbitration filings before the AAA involving these three products, the average alleged debt amount in dispute was $13,418. The median alleged debt amount in dispute was $8,641. Looking only at filings that did not identify a disputed debt amount, and excluding one high-dollar outlier, the average amount at issue was $38,726, and the median $11,805.
  • Most arbitration clauses that we reviewed contain small claims court carve-outs. In 2012, consumers in jurisdictions with a combined total population of around 85 million filed fewer than 870 small claims court credit card claims—and most likely far fewer than that—against issuers representing around 80% of credit card loans outstanding.
  • Credit card issuers are significantly more likely to sue consumers in small claims court than the other way around. In the two top-30 counties by population in which small claims court complaints can be directly reviewed by electronic means, there were more than 2,200 suits by issuers against consumers in small claims court and seven suits by consumers against those issuers. . . .

 [JT]

December 16, 2013 in Current Affairs, Legislation | Permalink | TrackBack (0)

Sunday, December 15, 2013

GLOBAL K: SANCTIONS APPLIED, LESSONS IMPLIED

London, UK: Current events smiled on GLOBAL K last week and offered an example of how contemporary economic sanctions programs interact with transnational contract activity. (See last week’s Global K.)  While I was lecturing at the Centre for Commercial Law Studies in London, the news broke about possible sanctions violations by a British bank in its payment transfer practices.

 

On December 11, 2013, the British press was full of the news that Royal Bank of Scotland plc (RBS) had agreed to pay £62 million ($100 million) to settle charges by U.S. state and federal banking authorities that it had violated U.S. sanctions against Iran, Burma, Libya and Sudan, and possibly Cuba according to some news accounts. The three agencies involved – the Office of Foreign Assets Control (OFAC) in the Treasury, the Federal Reserve Board, and the New York State Department of Financial Services – coordinated their investigation with the UK Financial Conduct Authority. According to OFAC, from 2005 to 2009 (the Daily Mail asserted it was 2002-2011), RBS payment practices impeded U.S. economic sanctions. References to critical information about certain payment transfers that would have triggered a blocking of funds and payments – such as the fact that an Iranian party might be interested in one end or the other of the transfer – were excluded from documentation covering payments sent to or through U.S. financial institutions. By some accounts, these payment transfer practices involved more than 3,500 US dollar transactions worth £320 million ($523 million) routed through US banks. Two aspects of this situation are worthy of specific comment.

 

First, the nature of the claimed violations varies somewhat as you look from one sanctions program to the next, even if the payment activities were essentially the same. For example, under the Iran sanctions, foreign financial institutions such as RBS are quite specifically targeted by prohibitions in the sanctions program. A foreign financial institution would be prohibited from knowingly “[f]acilitat[ing] the activities of ... a person subject to financial sanctions” under U.N. sanctions against Iran,” engaging in “money laundering to carry out” such an activity, or facilitating “efforts by the Central Bank of Iran or any other Iranian financial institution to carry out” such an activity. 31 C.F.R. 561.201 (2013). Under the Burmese Sanctions Regulations, the focus would be on transactions and transfers involving “property and interests in property” of the direct targets of the sanctions, which would be prohibited where the property or interest was “in the United States, ... hereafter [came] within the United States, or … [came] within the possession or control of U.S. persons.” 31 C.F.R. 537.201 (2013). The Sudanese Sanctions Regulations contain a similar prohibition on transactions and transfers (31 C.F.R. 538.201 (2013)), but its facilitation prohibition applies on its face only to “U.S. persons.” 31 C.F.R. 538.206 (2013). Likewise, the Cuban Assets Control Regulations would prohibit transactions and transfers involving “property and interests in property” of any Cuban national. (31 C.F.R. 515.201 (2013).) However, beyond this basic sanction, if RBS were considered to be acting on behalf of a blocked Cuban national in these transfers, then it might be deemed to be a “specially designated national” of Cuba and as such it would itself be a direct target of the Cuban sanctions, See 31 C.F.R. 515.302,515.306 (2013) (defining “national,” “specially designated national”). Hence, given the incidence of significant variation as one moves from one sanctions program to the next, it becomes more difficult in managing risk in transnational contract activity to generalize as to the risks and appropriate risk management strategies.

 

Second, the likely implications of transnational contract activity on domestic contract activity may also vary significantly as our attention shifts from program to program. Take, for example, the situation of a U.S. citizen who is a holder of a credit card issued by RBS NA, a national bank subsidiary of RBS. In many of the sanctions situations identified above, the impact of the RBS violations on her contractual relationship would be adventitious. The substantial fine might marginally raise the cost of doing business with the card issuer, assuming that the bank chose to pass some portion of this indirect cost of doing business throughout the enterprise. Even at $100 million, it is unlikely that the credit card holder would even feel the effects of the event. However, if aggressive action were taken against RBS under the Cuban sanctions – a contingency that is essentially eliminated by the bank’s settlement, one would imagine – the effect on the credit card holder would be quite dramatic. As an ongoing contract party of a specially designated national, she herself would be potentially committing a direct violation of the Cuban Assets Control Regulations, because U.S. persons are prohibited from entering into contracts with Cuban nationals – even with specially designated nationals – in the absence of a license. So unless you are a great humanitarian like Beyoncé and hence above the law, avoid entering into contracts and other transactions with specially designated nationals of Cuba.

 

 

Michael P. Malloy

December 15, 2013 in Commentary, Current Affairs | Permalink | TrackBack (0)

Tuesday, December 10, 2013

GLOBAL K: ECONOMIC SANCTIONS AND TRANSNATIONAL CONTRACTS

In late November 2013, negotiators reached agreement on a temporary accord under which Iran would halt much of its nuclear program and roll back some existing elements of it, and  the United States agreed to $6 billion to $7 billion in sanctions relief, including releasing approximately $4.2 billion in oil revenue “frozen” in banks outside the United States. (The United States would continue to enforce other substantial sanctions that remain in place.) Recent coverage and commentary about the six-month U.S.-Iran deal calls to mind the fact that economic sanctions have become a pervasive feature of the transnational contract environment. (See this Table)

Source: M. P. Malloy (ed.), Economic Sanctions (Cheltenham, UK: Edward Elgar Publishing, forthcoming).

 

 

Two things are noteworthy about this situation. First, there is such a considerable array of sanctions in place – unilateral and multilateral, trade and financial, direct and indirect – that a state negotiating with Iran has an extensive menu from which to choose when it starts horse-trading. Second, it is probably not safe, as many casual observers still do, to view economic sanctions as unusual or “exigent,” rather than a commonplace feature of contracting in the transnational market.

 

It could be a year or more before we know the outcome of the ongoing maneuvering between Iran and the “P5-plus-1 countries” – the permanent members of the U.N. Security Council plus Germany – but contracts practitioners and commentators should learn one thing right now. The immediate lesson to be drawn is that the potential impact of sanctions is an increasingly pervasive risk factor in transnational contracting. The risk factor arises from three distinct circumstances in contemporary transnational practice. 

 

First, the resurgence of U.N. mandatory sanctions practice under Chapter VII of the U.N. Charter. Prior to 1990, U.N. sanctions practice was limited and ineffective – the classic example being the curiously stunted trade sanctions against the break-away Southern Rhodesian regime in the1960s. In response to the Iraq invasion of Kuwait in 1990, however, and largely under the leadership of the George H.W. Bush Administration, U.N. mandatory sanctions broadly and effectively isolated the occupied Kuwait and stymied the Iraqi Government, as a prelude to the first Gulf War. The success of this program led to frequent and pervasive application of mandatory sanctions as the primary U.N. Security Council response to many crises over the decades that followed. This development means that there is now a formidable array of sanctions programs in which implementation is mandatory for all U.N. member states, actively monitored by the Security Council through sanctions committees. As a result, moving contract activities off-shore – a typical maneuver in many pre-1990 sanctions situations (including the Southern Rhodesian sanctions) – is no longer an easy and viable option. In addition, many states – and principally the United States – have continued to promulgate unilateral sanctions programs, often paralleling multilateral sanctions, and these have benefited from the newly pervasive incidence of sanctions as a risk factor in transnational contract practices.

 

Second, the emergence of “smart sanctions” strategies in the design of sanctions programs. Contemporary sanctions are often more carefully targeted, and include specific and distinct sanctions against intermediaries – e.g., business brokers, freight forwarders, purchasing agents, banks and other financial intermediares – which means that the direct and indirect costs of sanctions avoidance and evasion have grown significantly for indirect and secondary contract actors who would not have otherwise viewed themselves as “targets” of sanctions programs. 

 

Third, the existence of licensing authority within sanctions programs. Ironically, the existence of authority within participating member states to license activities and transactions otherwise affected by a sanctions program, subject to oversight by U.N. sanctions committees, has increased the ongoing compliance and enforcement impact of sanctions programs. This feature has resulted in greater accountability for transnational contract parties.

 

The casual observer might respond that generally applicable contract doctrines of impracticability (or impossibility) and frustration would ameliorate the impact of these developments in sanctions practice. To the contrary, I believe that the interaction of these doctrines with current practice in transnational business may be more complicated than one might expect at first glance. 

 

It is true that, under Restatement of the Law - Contracts (Second) § 261, a party to a contract affected by sanctions might claim that performance has been rendered “impracticable,” thus discharging its duty to perform. However, § 261 is grounded on the occurrence of an event “after a contract is made” that occurs “without his fault.” The pervasiveness and persistence of an array of sanctions programs challenges both of these premises. There is no end of sanctions already in place, and in the typical sanctions program the party bears the burden of demonstrating that it did not know, nor had no reason to suspect, that the subject transaction was prohibited or restricted. As comment d to § 261 observes, “If the event that prevents the obligor's performance is caused by the obligee, it will ordinarily amount to a breach by the latter. ... If the event is due to the fault of the obligor himself, this [§ 261] does not apply. As used here ‘fault’ may include not only ‘willful’ wrongs, but such other types of conduct as that amounting to breach of contract or to negligence.” Of course, this dilemma exists quite aside from any administrative or criminal consequences that might be visited on the parties by a sanctions-enforcing state. Goods or services that are the subject of the contract may be susceptible to being “blocked” or “frozen” by the enforcing state.

The same problem would exist for a contracting party who attempted to invoke the doctrine of discharge by a supervening frustration under Restatement (2d) § 265. This may be a particular concern for indirect or intermediary parties, a point that is neatly demonstrated by Illustration 5 under § 265:

 

A contracts to sell and B to buy a machine, to be delivered to B in the United States. B, as A knows, intends to export the machine to a particular country for resale. Before delivery to B, a government regulation prohibits export of the machine to that country. B refuses to take or pay for the machine. If B can reasonably make other disposition of the machine, even though at some loss, his principal purpose of putting the machine to commercial use is not substantially frustrated. B's duty to take and pay for the machine is not discharged, and B is liable to A for breach of contract.

 

Furthermore, given the typical licensing regime that is included in sanctions programs, “impracticability” may be even less apparent in a particular contracting situation. As comment d to § 261 goes on to note, “ ‘impracticability’ means more than ‘impracticality.’ A mere change in the degree of difficulty or expense . . . unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.” 

 

One might respond, however, that if performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, then the regulation or order is “an event the non-occurrence of which was a basic assumption on which the contract was made,” according to Restatement (2d) § 264. Comment a to § 264 undercuts this argument, however, because “[w]ith the trend toward greater governmental regulation, however, parties are increasingly aware of such risks, and a party may undertake a duty that is not discharged by such supervening governmental actions, as where governmental approval is required for his performance and he assumes the risk that approval will be denied. ... Such an agreement is usually interpreted as one to pay damages if performance is prevented rather than one to render a performance in violation of law.” This problem is underscored by Restatement (2d) § 266, dealing with existing impracticability or frustration. In a situation in which, at the time a contract is made, the party's performance is impracticable without his fault “no duty to render that performance arises,” but only if this fact is one which it had “no reason to know,” a difficult position to maintain in an environment of persistent and pervasive sanctions programs.

 

All of this suggests a need for caution and proactive monitoring of contract activity in the transnational market. It is extremely naïve – if not outright disingenuous – to assume that one can casually rely on traditional doctrines of impracticability (or impossibility) and frustration in transnational commerce. Over-reading these doctrines can result in bitter lessons, and embarrassment, in the modern environment of transnational contract practice.

 

 Michael P. Malloy

 

December 10, 2013 in Commentary, Current Affairs | Permalink | Comments (0) | TrackBack (0)

Monday, December 2, 2013

GLOBAL K: BRAZIL AND THE CISG

The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) continues to collect state parties. The CISG will enter into force for Brazil on 1 April 2014, and for Bahrain on 1 October 2014. With that, Brazil and Bahrain will become the 79th and 80th States Party to the CISG, respectively. 

 

The delay in entry into force is built into CISG art. 99, and does not suggest any particular caution on the part of either state. What may require some explanation, however, is why it took almost 25 years after Brazil approved the final text of the CISG and signed the Final Act of the Conference, before it finally acceded to the convention on 5 March 2013. According to local commentators, a large part of the delay is due to extraneous political considerations. Legislative inaction on this front was common under a previous authoritarian political system, as the regime was skeptical of – if not outright hostile to – multilateral initiatives to advance private international law. Efforts by Brazilian academics, the Bar Association of Brazil, and business interests progressively pressed for Brazil to engage in such initiatives, and the end result was that Brazil rejoined the Hague Conference on Private International Law in 2001 and began the internal process for accession to the CISG in 2011.

 

Brazil’s accession is a particularly significant development. Brazil’s economy is the largest among Latin American states, and the second largest in the Western Hemisphere. The existence of a common set of default rules governing trade in goods, irrespective of the significant differences in U.S. and Brazilian legal traditions, creates potential efficiencies for the future of economic relations between the two states. Furthermore, from the perspective of economic development policy, the existence of modern, uniform framework for contracts for the sale of goods involving one of the fastest-growing major economies in the world is a positive feature.

 

The increasing likelihood that regional contract activity in the Americas may implicate the CISG underscores the need for U.S. academics to ensure that our students at least understand that the convention exists as part of U.S. contract law. This generally applicable source of federal contract law constitutes the default rules that apply to an expanding range of regional contract situations. It has been a commonplace that parties can always make a contractual choice of law that would remove the CISG from the mix. However, what you don’t know can’t be planned against, and who is to say that local law – as opposed to the CISG default rules – is necessarily optimal for a given contracting situation? 

 

Michael P. Malloy

December 2, 2013 in Commentary, Current Affairs | Permalink | Comments (0) | TrackBack (0)