April 25, 2013
What Do Assignments of Rights and Bad Opera Have in Common?
It's the end of the semester which means that I'm finally covering third parties. One of my favorite (and pretty simple) cases in this unit is Rumbin v. Utical Mutual Insurance, Co. Mr. Rumbin, who had settled a personal injury case, was due regular payments under an annuity purchased by Utica and issued by Safeco. When he faced foreclosure and other financial hardships, Rumbin sought a declaratory judgment approving his assignment of rights to J.G. Wentworth. After a student recites the facts, I often pause the class to ask, "How many of you have heard of Mr. Wentworth before?" Usually, about half of my class has heard of him while the other half is thinking, "J.G. who?" For those who haven't heard of him, I offer this clip, which sums up Mr. Rumbin's situation rather nicely and features Mr. Wentworth himself at the end as the conductor:
If you watch and later find a way to get the "877-CASH-NOW" earworm out of your head, please let me know. I've been stuck with it for nearly 24 hours now.
[Heidi R. Anderson]
April 22, 2013
Thoughts on Tongish v. Thomas and UCC § 2-713
A lot of very smart contracts scholars, including to name just a few, Omri Ben-Shahar and Lisa Bernstein (here), Victor Goldberg (here), and Peter Siegelman and Steve Thel (e.g., here), have thought long and hard about the seeming conflict between UCC § 2-713 and the general principles of damages set out in UCC § 1-305 (formerly § 1-106). Most of them support the ruling in Tongish v. Thomas, to which I have just been introduced in teaching Sales for the first time this semester. I am uncomfortable with the decision for two reasons, which I will set out below.
But first, a brief summary of the case: Tongish agreed to sell his sunflower seeds to the Decatur Coop Association (the Coop) for a fixed price. The Coop had a deal with Bambino Bean & Seed, Inc. (Bambino) to sell the seeds to them for whatever price the Coop paid plus $0.55 per 100 pounds. The price of seeds went up and Tongish breached. The trial court awarded the Coop its lost profits, which came out to $455.51. The Court of Appeals vacted that award and remanded the case for a calculation of damages based on UCC § 2-713 (and the Kansas Supreme Court upheld that ruling). UCC § 2-713 allows a buyer to recover the difference between makret price at the time buyer learned of the breach and the contract price. Under this section, the Coop would recieve not $455 but something like over $5500, despite the fact that it would not have been able to charge Bambino anything more than what it paid Tongish for his seeds. In short, under the damages awarded by the appellate courts, the Coop gets about $5000 more than expectation damages.
I do not like the result, at least not based on the court's reasoning. Subsequent law review articles (cited above) provide more sophisticated defenses of § 2-713 based on economic theory. I cannot address those arguments here. Instead, I focus on two issues: fault and contract and the court's characterization of UCC § 2-713 as a "statutory liquidated damages provision."
First, the case is grist for the mill of Friend of the Blog, Steve Feldman, who has been trying unsuccessfully for years to persuade me that courts not only do consider moral fault in assessing damages but should do so. In Tongish, the Kansas Court of Appeals distinguished the case from a California case, Allied Canners Packers, Inc. v. Victor Packing Co. In Allied, the California court limited the buyer's remedy to actual loss. That case was different, says the Kansas court, because in Allied, the seller's crop had been destroyed and so it had no goods that it could deliver to buyer. Here, Tonigish breached simply becasue the price went up, and so "the nature of Tongish's breach was much different" from that in Allied, because the Kansas court found, "there was no valid reason" for Tongish's breach. Whether or not the court is right that there was no valid reason for the breach depends on one's views on the doctrine of efficient breach. More to the point, I find no language in the UCC that indicates that the measure of damages turns on the state of mind of the breaching party. That is, where in the UCC does it say that whether or not one can recover damages in excess of actual loss depends on whether the breach was innocent or willful?
The Kansas court then proceeds to an actual statutory analysis and notes the principle that a specific clause (in this case § 2-713, which the court reads to provide damages in excess of actual loss) trumps a general clause (§ 1-305, which limits damages to expectations). Allowing the specific clause to trump the general clause generally makes sense, but I would invoke another canon of contruction and read § 1-305 as articulating the general remedial scheme in light of which the remainder of the Code is to be read. Section 1-305 puts parties on notice that, unless they set out their own remedial schemes, though allocation of risk, liquidated damages and the like, they should expect that traditional expectation damages will be the most they can hope for in case of breach.
Read in that light, § 2-713 does nothing more than describe the usual mechanism for calculating expectation damages. It does not contemplate a contract such as the one at issue in Tongish in which the Coop, very far from demanding liquidated damages in the case of breach, has protected itself against loss by linking its purchase price from Tongish to its sale price to Bambino. In so doing, it invited the very sort of efficient breach in which Tongish engaged, and it is absurd for it to now to claim entitlement to (effectively) a disgorgement remedy when it failed to negotiate such a remedy at the time of contracting.
The Kansas court cites to Robert Scott's argument that limiting recovery to lost profits in such cases creates market instability by encouraging breach if the market fluctuates to the seller's advantage. Applying § 2-713 to permit recovery of damages in excess of actual loss, on the other hand, "encourages a more efficient market and discourages the breach of contracts," says the court. Once again, that determination turns on one's understanding of efficiency. In any case, to the extent that the circumstances in Tongish encouraged breach, they were entirely a product of the way the parties drew up their contracts. They in effect, allocated the risk of breach to the Coop, which had protected itself by finding a buyer who would accept any price so long as it was the same price as what the Coop had paid, plus a $0.55/100 lb. handling fee. To allow the Coop to recover cover costs on top of lost profits actually creates an incentive for sellers with contractual protections such as the Coop had, to encourage breaches, since the court allowed them recovery ten times in excess of their actual harm.
March 04, 2013
Victor Goldberg on Columbia Nitrogen
We posted earlier in the semester about the baffling case Columbia Nitrogen v. Royster. Victor Golberg (pictured) wrote to us to recommend his book chapter on the subject in his Framing Contract Law (2007). Professor Goldberg names Columbia Nitrogen, together with Nanakuli Paving as a "Terrible Twosome," that should render law professors apoplectic. That is so because when courts use course of dealing or custom to set aside fied price terms, contracting parties can have "little confidence in their ability to predict the outcomes if their disputes do end up in litigation" (p. 162).
John Murray, writing in 1986, praised the decision for evidencing "a sophisticated judicial understanding of the major modifications in contract law" and for its "sophistication with respect to [UCC §] 2-207." But Professor Goldberg sees a darker story, in which CNC's counsel attempted to undo, by whatever means necessary, what had turned out to be a bad bargain." As a result, says Professor Goldberg, the court "converted a straightforward agreement into an incoherent mess" (p. 187).
Happily, according to Professor Goldberg, Columbia Nitrogen is not followed. Contractual relationships are governed by two complementary systems: legal enforcement, which has strict rules, and social enforcment, which is governed by informal norms. The mistake of the court and the "potential cost of Columbia Nitrogen" is to infer legal rules from social rules in a way that allows legal rules to hamstring informal social norms (p. 188).
It is a nice piece of wisdom to pull out of a troublesome opinion. The full details of the case, going well beyond what is available in the published opinion, can be found in PRofessor Goldberg's book.
February 21, 2013
A Modern Twist on R.R. v. M.H. and Statutory Interpretation?
There's a theory among some of my foodie friends that, when it comes to food, bacon makes everything better. I'm considering a similar theory for teaching Contracts via hypos: when it comes to Contracts hypos, celebrities make everything better. Hypos work. Sure, they "taste" just fine using names like "Buyer," "Client," and "Sub-Contractor," and I use those names most of the time. But using names like "Jason Patric, you know, the guy from Lost Boys and Narc" often makes the hypo better, at least for the few people over 25 who remember those movies. So, in the interest of making hypos better via celebrity a.k.a. bacon, I bring you this story from TMZ (see, you don't actually have to go to sites of ill repute; you can count on me to go to them for you and only bring you the somewhat good, quasi-clean stuff).
As TMZ reports, actor Jason Patric is in a custody dispute with his ex-girlfriend, Danielle Schreiber. Upon their break-up in 2009, Patric allegedly agreed to compensate Schreiber for her troubles via donating his sperm instead of by paying her. Presumably, in exchange for Patric's promised sperm, Schreiber would not sue Patric for support payments. Simple enough (sort of). But wait, there's more! Patric allegedly would donate his sperm to Schreiber only if she also promised not to seek support from him for the child; Schreiber agreed. If this agreement actually was reached, Schreiber must have believed that Patric's sperm was so valuable that she was willing to forgo support payments for herself and for the child that would result. [Insert skepticism here.]
How does this relate to Contracts hypos? It works as a hypo for R.R. v. M.H., which many of us use to teach how a contract can be deemed unenforceable if it violates public policy. In R.R. v. M.H., the court must decide whether to enforce the surrogacy agreement between a fertile father, married to an infertile wife, and the surrogate mother, who also happens to be married, and who was inseminated with the fertile father's donor sperm. I won't go into the case in more detail here; instead, I would like to focus one part of the case has a direct parallel to the Jason Patric dispute.
In R.R. v. M.H., a state statute provided that the husband of a married woman inseminated with donor sperm was treated as the legal father of the child, with all of the associated benefits and obligations that fatherhood carried along with it. The statute was supposed to facilitate the common practice of women being inseminated by a (usually anonymous) sperm donor. Strictly applying the statute to the facts in R.R. v. M.H. would have led to an absurd result. Specifically, it would have meant that the legal father of the child born to the surrogate would have been the surrogate's husband, who had no real interest in the child. The court wisely argued its way around that literal application and ruled differently.
The Patric dispute also involves a law of unintended consequence much like that involved in R.R. v. M.H. A California law states as follows:
"(b) The donor of semen provided to a licensed physician and surgeon or to a licensed sperm bank for use in artificial insemination or in vitro fertilization of a woman other than the donor's wife is treated in law as if he were not the natural father of a child thereby conceived, unless otherwise agreed to in a writing signed by the donor and the woman prior to the conception of the child."
Applying this law to the Patric situation could, like the law in R.R. v. M.H., produce an absurd result. Let's paraphrase the statute with applicable facts in parentheses:
"The donor of semen (Patric) for use in artificial insemenation of a woman (Schreiber) other than the donor's (Patric's) wife (they weren't married) is treated in law as if he (Patric) were not the natural father unless otherwise agreed in a signed writing."
So, even though Patric and Schreiber had been romantically involved, the formalized donation and the couple's unmarried status could negate Patric's claims to custody. It is not clear whether the statute applies and, not being admitted in California, I'd rather not analyze it further. But it always surprises me how what seems like a one-in-a-million kind of case does, in fact, repeat itself. Eventually.
[Heidi R. Anderson]
February 18, 2013
Teaching Sales 7: Valparaiso Students Revolt Against Entrustment Doctrine
"Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law.
Notwithstanding the clearly expansive nature of the doctrine, my students would not accept that, for example, a mechanic with whom you had left your car for repairs could sell same car and your only remedy against the mechanic (under the UCC) would be a suit for damages. When I informed them of the true state of the law, their outrage was unquenchable.
"You could still have the authorities pursue criminal charges for theft," I offered.
Not good enough.
Backing away from the lectern and eyeing the emergency exit, I pleaded, "There are likely state statutory protections that would enable you to recover the car. After all, the buyer is going to have a problem when he tries to register title to the car."
Still not satisfied.
Finally, left with no other choice, I threw Karl Llewellyn under the bus. "Look, I just teach this stuff," I said. "I didn't draft the UCC. Blame Karl! Blame Karl!! Blame Karl!!!!
I put up a white flag from the teaching station that I was hiding behind to avoid the projectiles headed my way, and then it came to me. "Wait," I said. "Let's talk about Kahr v. Markland." In that case, a man gave Goodwill a bag of clothes. Unbeknowst to him, the bag also included valuable sterling silver. The court held there had been no entrustment because Kahr intended to donate the clothes but not the silver. It's reasoning is as follows:
An entrustment requires four essential elements: (1) an actual entrustment of the goods by the delivery of possession of those goods to a merchant; (2) the party receiving the goods must be a merchant who deals in goods of that kind; (3) the merchant must sell the entrusted goods; and (4) the sale must be to a buyer in the ordinary course of business. ( Dan Pilson Auto Center, Inc. v. DeMarco (1987), 156 Ill. App. 3d 617, 621, 509 N.E.2d 159, 162.) The record establishes there was no delivery or voluntary transfer of the sterling silver because plaintiffs were unaware of its place in the bags of clothes.
But wait! Whence the court's notion that "there was no delivery or voluntary transfer"? Saying that there was no delivery in this case is more than a stretch. It's simply factually untrue. And saying that the transfer was not voluntary turns on what the term "voluntary," means. Nobody put a gun to Kahr's head. He just made a mistake. In any case, voluntariness is not an element of the test for entrustment as laid out by the Kahr court.
Of course, I merely thought all these things. I didn't say them for fear of my students' wrath.
But how about this hypothetical based on personal experience: I donate a bunch of books to Goodwill, including an old copy of Atlas Shrugged with a hideous paper cover on it. One week later, my wife asks me where her copy of Atlas Shrugged is. Since she is always after me to clear away old books that we are not going to read or re-read, I proudly announce that I delivered it to Goodwill.
Her jaw drops. "But that was a first edition bearing the inscription, "I know who John Galt is, It's you. Yours, with a passion hot enough to forge Rearden steel, Ayn." We rush to Goodwill, but we are too late. The book was snapped up faster than a locomotive powered by an engine that transforms atmospheric static electricity into kinetic electricity. Did I entrust it to Goodwill?
There is a bit of a discussion of the Kahr case on The Faculty Lounge blog.
February 12, 2013
A Limerick for Locke
I recently covered the implied duty of good faith and fair dealing in part through the fun case of Locke v. Warner Bros. In Locke, the LA County Superior Court found that Warner Brothers' alleged failure to even consider Ms. Locke's movie proposals could violate the implied duty of good faith and fair dealing in their contract. Although Warner Brothers was not obligated to produce Ms. Locke's projects, it was obligated to exercise its discretionary power regarding her proposals in good faith. If Warner Brothers had, as Ms. Locke alleged, never actually considered her proposals, it would have violated their contract.
After Ms. Locke survived summary judgment, the case later settled. Prior to that time, Ms. Locke also had suggested that Warner Brothers never seriously considered her proposals as a favor to her ex, Clint Eastwood. Locke and Eastwood had worked together on the movie, The Outlaw Josey Wales (poster pictured to the right), and cohabitated for several years therafter. When the two actors split, Eastwood allegedly convinced Warner Brothers to give Locke the "first look" deal as part of his settlement with her and perhaps had even reimbursed Warner Brothers for the money it paid to Locke under its deal with her.
Inspired by this tale of love and faith lost, student Catherine Witting crafted the following limerick and authorized me to share it with the world.
Locke sued the Dubya B,
Saying "Don't you patronize me!
Clint may pay the bill,
But discretion is still
Subject to good faith guarantee!"
For a more recent case that tracks the facts of Locke, see this post regarding director John Singleton from 2011.
Teaching Sales 6: Another Problematic Case
Yesterday, I bellyached about a Ninth Circuit opinion with which I disagree. Today, I would like to complain about a Second Circuit decision with which I disagree, although not quite so passionately. The case is Bayway Refining Co. v. Oxygenated Marketing and Trading. The relevant facts are pretty simple. Oxygenated Marketing and Trading (OMT) send an order to Bayway Refining Co. (Bayway) for 60,000 barrels of a gasoline blendstock. Bayway sent a conflirmation that specified all of the relevant terms of the agreement and also included the following language:
Notwithstanding any other provision of this agreement, where not in conflict with the foregoing, the terms and conditions as set forth in Bayway Refining Company's General Terms and Conditions dated March 01, 1994 along with Bayway's Marine Provisions are hereby incorporated in full by reference in this contract.
Bayway's General Terms included a "Tax Clause" that required the purchaser to pay all taxes associated with the transaction. OMT never asked for and Bayway never sent a copy of its General Terms. Bayway then sent the blendstock and OMT accepted delivery. The taxes associated with the transaction came to nearly $500,000. Bayway paid the tax and then sued OMT to recover.
The Second Circuit correctly saw the outcome of the case as turning on the battle of the forms. Under UCC § 2- 207(1), Bayway's confirmation constitutes an acceptance of OMT's offer even though it contained additional terms. Under 2-207(2), because both parties are merchants, the additional terms become part of the contract unless one of three exceptions apply. The relevant exception in this case is materiality. The Second Circuit correctly noted that the Tax Clause was not per se material, in that there was no clear legal rule that had already determined such clauses to be material. So the Court proceeded to determine materiality based on a common law test, under which a clause is material if it causes surprise or (perhaps) hardship.
The court defined "surprise" as meaning that "under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term." The court found that no surprise occurred in this case because provisions like the Tax Clause were common (although not universal) in the industry. New York law is not clear on whether hardship is an element of its materiality analysis for the purposes of the battle of the forms. The Second Circuit did not reach the issue because it found that OMT could not show hardship in this case. OMT claimed hardship because "it is a small business dependent on precarious profit margins, and it would suffer a loss it cannot afford." The Second Circuit was unmoved because "any loss that the Tax Clause imposed on OMT is limited, routine and self-inflicted."
I have two problems with the Second Circuit's analysis. First, its discussion of surprise did not address the fact that clause at issue was part of an agreement incorporated by reference and never shared with OMT. While that fact might not change the outcome in the case, since the court found the evidence of industry practice convincing enough to put OMT on constructive notice, it strikes me as at least worthy of mention in the context of a discussion of surprise.
Second, I think the court could have treated the Tax Clause as relating to price. Industry practice suggested that sometimes contracts like the one at issue in the case included language like the Tax Clause, but in other cases the tax was just added to the price of the product. If OMT's original order included a price term, then Bayway's confirmation containing a price term plus the Tax Clause introduces not an additional term but a different term. I think the best reading of UCC § 2-207(2) suggests that different terms knock each other out. We then proceed to § 2-207(3) to enforce a contract consisting of the agreed-upon terms plus any additional terms the UCC can provide. The court should have been able to then determine the fair market price for the 60,000 barrels of a gasoline blendstock. Such an approach might have resulted in a Solomonic ruling or it might have made clear that one party or the other was trying to pull a fast one.
February 11, 2013
Teaching Sales 5: White v. Summers and Diamond Fruit Growers
Last week, I taught an infuriating case called Diamond Fruit Growers v. Krack Corp. The case infuriates me not only because I think the Ninth Circuit bungled the battle of the forms so as to eliminate the UCC's § 2-207's important innovations and replaced them with with a rule unknown in either the code or the common law, but because James White, co-author with Robert Summers of the standard treatise on the Uniform Commercial Code, endorses the opinion. I can't understand why. Summers disagrees with his co-author but without the passion or incredulity that I think the context demands.
The parties to the contract at issue had been doing business together for ten years. Metal-Matic provided metal tubing for Krack's air conditioning business. The parties' practice was that Krack would send Metal-Matic an annual estimate of its needs, and Metal-Matic would send back its own acknowledgment form disclaiming warranties and consequential damages. Moreover, capitalizing on the langauge of § 2-207(1), Metal Matic's form included the following: "Metal-Matic, Inc.'s acceptance of purchaser's offer or its offer to purchaser is hereby expressly made conditional to purchaser's acceptance of the terms and provisions of the acknowledgment form."
The effect of that language under the UCC should be to make Metal-Matic's response into a counter-offer which would govern the parties' transactions once Krack, having notice of the terms, had accepted delivery. In this case, we know that Krack had notice of the terms, because it tried to get Metal-Matic to remove the disclaimer of warranties and limitations of damages, and Metal-Matic refused to do so. Having continued to accept delivery on that basis, Krack should be bound by Metal-Matic's terms.
Krack delivered some air conditioning units to Diamond Fruit Growers, but some of the Metal-Matic tubing failed, causing harm to Diamond Fruit Growers products. Diamond sued Krack and Krack turned around and filed a third-party complaint againts Metal-Matic. Metal-Matic's disclaimers and limitations on damages were now in play.
The court noted the important principle of neutrality underlying § 2-207. In contrast to the common law mirror image rule and last shot rule, the UCC is designed to avoid privileging either the offer or the counter-offer. Determining that it therefore could not give effect to Metal-Matic's unilaterally imposed terms, it looked to the UCC, as is proper under § 2-207(3), to supply the missing terms of the contract that had been formed by the parties' conduct. Since the UCC does not provide for limitations of damages and disfavors disclaimers of warranties, the court found that Metal-Matic's terms were out.
The court was focused on avoiding a return to the common law's last shot rule:
That result is avoided by requiring a specific and unequivocal expression of assent on the part of the offeror when the offeree conditions its acceptance on assent to additional or different terms. If the offeror does not give specific and unequivocal assent but the parties act as if they have a contract, the provisions of section 2-207(3) apply to fill in the terms of the contract.
The are numerous problems with this approach. Most obvsiouly, the UCC does not require a specific and unequivocal expression of assent by the offerer to additional terms. It certainly could have done so if the framers of the UCC so intended. More fundamentally, the result at which the court arrives is inconsistent with the principle of neutrality at the heart of the UCC"s approach to the battle of the forms. Indeed, the court's solution to the problem presented advantages the offeror far more than did the common law. Under the court's approach, the offeror is not only master of the offer; she is master of the transaction, and the offeree can do nothing through its writings to add terms to the contract.
The court suggests that allowing Metal-Matic to prevail in this situation would be arbitrary because it would turn only on which party sent the form last. But that is not so. Metal-Matic conditioned its acceptance on Krack's assent to its terms. Krack did not do likewise. Sticking to the language of the forms at issue in this transaction, Metal-Matic's terms would govern regardless of the order in which the parties exchanged forms. Here we have two sophisticated parties who knew what they were about. Metal-Matic insisted on its terms and Krack acquiesced because it needed the tubing.
The outcome of the case thus seems extremely unfair. Although I don't think it changes the UCC analysis, one might feel differently about the equities in the case if Krack were unaware of the terms and accepted the goods thinking that they were warranted, etc., but that was not the case here. Krack took the goods knowing the terms on which it accepted them. The court should not bail out commercial parties in these circustances, and courts do not bail out consumers who are bound by shrink-wrap terms to which they never expressly and unequivocally assent.
But James White, in § 2-13 of the White and Summers Treatise suggests otherwise, apparently on the ground that the UCC does not recognize acceptance by performance in this context. That's very odd, because the UCC is all about the liberalization of rules, including rules of offer and acceptance. As Summers points out, even the common law recognizes acceptance by performance and Summers sees no injustice given the parties' conversation about the disputed terms. White thinks the proper remedy for seller is to refuse to ship until buyer assents to its terms, but since a straight reading of the UCC would give a seller no reason to think such express assent necessary, I do not think Metal-Matic was on notice of that requirement.
February 05, 2013
Teaching Webster v. Blue Ship Tea Room
In a previous post, I shared a way to illustrate the differences between certain types of chicken for the frequently-used ambiguity case, Frigaliment. For today's random teaching tip, I am leaving chicken behind and moving on to fish. Because I have the luxury of a six-credit Contracts course, I have time to cover warranties, both express and implied, for sales of goods. The case I use to teach the implied warranty of merchantability, Webster v. Blue Ship Tea Room, involves fish chowder. The primary issue is whether a fish bone in a cup of New England fish chowder sold to Ms. Webster at the Blue Ship Tea Room resulted in a breach of the implied warranty of merchantability. The court answered, "no," but not before going into the details of the way chowder is made in New England. After I call on a student to share the facts of the case, I say that I've unearthed this clip showing exactly how the fish chowder was made (start at 0:17):
I also encourage students to craft their own limericks for cases--just as our own Prof. Telman has done. The latest student limerick submitted was for Webster. Kudos to student Sareena Beasley for this one:
And to those who say that Contracts is the driest 1L class, I say,"puh-shaw!"
[Heidi R. Anderson]
January 30, 2013
A New Stambovsky?
[Edited: Apologies to my co-blogger, Nancy Kim, for posting this before reading our own blog to see that she already covered it. I'll keep this up for the links to the cases but please read Nancy's post for a more in-depth analysis of the materiality issue.]
For professors who teach nondisclosure as a "reason not to enforce a contract," (that's what the book I use calls "defenses"), Stambovsky v. Ackley often is a favorite case due its entertaining facts. In the case, the buyers of a Nyack, NY house (pictured) seek to have the contract rescinded due to the home being haunted by poltergeists. The haunted condition was known by the sellers but was not disclosed to the buyers.
I am particularly fond of the case in part because the opinion is filled with puns such as, "[I]n his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, [however,] I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.". Puns aside, the case is instructive because it helps students understand the difference between nondisclosure versus misrepresentation and gets some students to question their faith in caveat emptor. The fact that I teach the case right around Halloween is a nice bonus.
The only potential problem with the case is that it's somewhat dated (yes, something from the 1990s can feel dated to current first-year students). Thankfully, a student of mine from last semester just sent me a link to this newer version of Stambovsky out of Pennsylvania (what do ghosts love about the mid-atlantic states?). In this new dispute, the buyer, a recent widow, is seeking to rescind the contract for sale of a home based on the nondisclosure of a murder-suicide in the home in the same year she agreed to purchase it. The trial court granted summary judgment to the sellers and the appellate court affirmed, finding that, "psychological damage to a property cannot be considered a material defect in the property which must be revealed by the seller to the buyer." The buyer now has appealed the case to the Supreme Court of Pennsylvania. No one knows how that court will exorcise its discretion (ba-dum-bum).
[Heidi R. Anderson]
January 22, 2013
Another Visual Aid for Frigaliment, the Chicken Case
We here at ContractsProf Blog can't seem to get enough of the "Chicken Case," also known as Frigaliment. Many of us use this case when teaching the "ambiguous term" exception to the parol evidence rule. In the case, the seller argued that the written contract term of "chicken" meant any type and age of chicken of the specified size while the buyer argued that "chicken" meant only "roasters and fryers" of the specified size, which are younger and appreciably better than older "fowl."
Students who are only familiar with Chick-Fil-A and the packaged chicken parts in the grocery store tend not to appreciate the practical difference between the two sides' meanings. Confused students? ContractsProf bloggers to the rescue!
For a picture that says it all, see Prof. Snyder's post from 2010. For a video-based explanation of the issues in the case from none other than Hitler, see my post from last year. Prof. Miller also has offered another video-based teaching aid to use. Today, I bring you this clip, the source of which I cannot remember.
Apologies to whomever showed this clip to me first (a former student? a previous post on this blog that is not coming up in my search?).
I like this clip because you only need to take a few seconds of class time and it sticks with the students more than a 2-D picture thanks to Ms. Child's natural charm.
[Heidi R. Anderson]
January 21, 2013
Teaching Sales 4: What Could Be Better than Nanakuli?
In theory, if you are looking for a case to illustrate the UCC's potential liberality in letting in trade usage evidence to modify a written contract, nothing could be better than Nanakuli Paving v. Shell Oil. One cannot avoid feeling gobsmacked by the Ninth Circuit's insouciance as it uses parol evidence to alter a clear, unambiguous price term. And it's fun to say "Nanakuli."
But Nanakuli is long. In order for students to understand it, they have to appreciate the idiosyncrasies of the asphaltic paving industry in Hawaii and they have to know quite a bit of detail about the the relationship between Nanakuli and Shell. If you have six credits to play with, luxuriate in Nanakuli's details, but if you are on a time budget, do I have a case for you!
Whaley and McJohn's Problems and Materials on the Sale and Lease of Goods includes Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971), which is just as outré as Nanakuli but much, much shorter. The case is about a phosphate sale, most likely for the manufacture of fertilizer. Despite the image at left, there's nothing sexy about the case, other than the fact that its logical contortions (like those in Nanakuli) are reminiscent of the Kama Sutra. Still, it's a good way to hammer home the point that, under the UCC, one cannot expect the parol evidence rule to provide much protection against the introduction of course of dealing, course of performance and trade usage evidence.
December 20, 2012
From Our Self-Promotion Department: Telman on Totten (Again)
They say that doing the same thing over and over and expecting different results is the hallmark of insanity. But it's also the hallmark of scholarship. I have just posted on SSRN the shortest version yet of my argument for why we should not conflate the state secrets privilege with the Totten doctrine. The good people over at the American University National Security Law Brief have agreed to publish it, so it should be up with them early next year.
Totten establishes a justiciability rule: people who enter into voluntary secret agreemetns with the government cannot sue to enforce those agreements because doing so would violate the implied terms that the agreements are to be kept secret. Thus, Totten, estate administrator for a man who alleged that he had entered into a spy contract with President Lincoln (here pictured before he became either a vampire hunter or Daniel Day Lewis) but had not been paid, could not recover on the contract. That basic principle was subsequently expanded in Tenet v. Doe to bar not just suits on contracts but all suits to enforce secret agreements with the government.
So, I have my issues with Totten, which I think has become overbroad, as I explained here. But the point of the current article is simple and straightforward: The state secrets privilege is an evidentiary privilege. It is neither a contracts doctrine nor a justiciability doctrine. The conflation of Totten with the SSP has resulted in the unwarranted pre-discovery dismissal of colorable claims alleging tort and constittuional violations by the government and its contractors.
But for those who want to see the draft, you can download it on SSRN here. This is the abstract:
The state secrets privilege (SSP) has become a major hindrance to litigation that seeks to challenge abuses of executive power in the context of the War on Terror. The Supreme Court first embraced and gave shape to the SSP as an evidentiary privilege in a 1953 case, United States v. Reynolds. Increasingly, the government relies on the SSP to seek pre-discovery dismissal of suits alleging torts and constitutional violations by the government. Lower federal courts have permitted such pre-discovery dismissal because they have confused the SSP with a non-justiciability doctrine derived from an 1875 case, Totten v. United States. The Totten doctrine only applies to claims brought by people who have entered into voluntary relationships with the government, but it is now being invoked when the government seeks dismissal of tort claims through the SSP. While the government should invoke the SSP whenever necessary to prevent disclosure of information that might jeopardize national security, such invocations of the SSP should never result in pre-discovery dismissal.
October 29, 2012
Contracts Limerick of the Week: Bloor v. Falstaff Brewing
At right is a drawing of the Ballantine brewery in Newark as it appeared in the late 19th century. Founded in 1840, the brewery grew to be one of the largest in the United States by the end of the 19th century. Recognizing that nobody without a gut full of beer could enjoy the American passtime, Ballantine cleverly partnered with the New York Yankees. Through its partnership of that storied team, Ballantine grew to become the third most popular beer in the United States.
Sadly, in the 1960s the brand declined. As Judge Friendly recounts in his opinion for the Second Circuit in Bloor v. Falstaff Brewing Corp., in 1969, the brewery suffered the indignity of acquisition by a real estate conglomerate with no experience in brewing. After bleeding money for a few years, the conglomerate sold Ballantine to Falstaff Brewing Corporation in return for some cash and a promise to use "its best efforts to promote and maintain a high volume of sales" of Ballantine beer. If it ceased to sell the beer entirely, the contract provided for liquidated damages.
Falstaff chose not to promote Ballantine beer. It's marketing strategy was summarized by Falsataff's controlling shareholder as follows: We sell beer, F.D.B. the brewery. You come and get it. That didn't work very well for Ballantine, and its volume of sales plummeted. The trustee of what remained of Ballantine sued alleging breach of the best efforst clause and seeking liquidated damages. Judge Friendly's conclusion is summarized below:
Bloor v. Falstaff Brewing Corp. Limerick
Falstaff had to adhere
To its deal to sell Ballantine beer.
Volume’s not killer
When there’s Bud, Coors and Miller.
Still, its efforts must be sincere.
October 22, 2012
Larry Cunningham Responds, Part I: Politics in Contracts
Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor of Law at the George Washington University Law School. He is also the author of Contracts in the Real World.
Before wrapping up the symposium about Contracts in the Real World, I wanted to offer two posts on main themes of the contributions–which were wonderful.
The first concerns the role of politics in contract law adjudication. It emerged as a theme from several posts, explicitly by Dave and Miriam, implicitly byJake’s discussion of Baby M and by Nancy’s of ProCD, and more obliquely in Tom’s (and Miriam’s) reference to my notion of the “sensible center” in contract law.
Perhaps the safer way to put the point would be to say that the common law of contracts is among the least political of subjects in law. The book does recognize the potential for political factors, of course, including variation among states. And while it celebrates the impressive power of the common law of contracts to deal neutrally with change, it also notes limits.
This is most explicit in the case of Baby M and its contrast with California’s Baby Calvert. I agree with Jake, and his agreement with Dave, that these two cases illustrate the driving role that judicial worldviews, and perhaps local state outlooks, can play in the approach to a case and the outcome.
The pairing of the two cases helps to show such features, in a context where opposition seems particularly acute. This is the context of “public policy,” an area where the common law of contracts is often inferior to administrative or legislative solutions precisely because at stake are exquisitely political decisions. That’s why p. 56 notes that judges on both (or all) sides of the debate about surrogacy contracts “usually concede that better solutions are likely to come from legislation. As magisterial as the common law of contracts is, many of society’s vexing puzzles should be resolved by the legislative branch of government.”
The differences between California and New Jersey on surrogacy contracts reminds me of the differences, to which Dave adverts, between California and New York on the parol evidence rule. In California, Chief Justice Roger Traynor helped to forge a weak parol evidence rule, stressing context and reflecting skepticism of the unity of language, compared to New York, where judges since Andrews and Cardozo (noted at pp 7-8) have shown greater interest in finality and the security of exchange transactions.
Those differences, in the doctrine and underlying attitudes, are real. But as this example shows and Dave notes, this is not so easy to classify in political or ideological terms. It may be due more to New York’s history as a commercial center and may reflect something about how California is just a more relaxed place in general.
I think the example of ProCD, about which Miriam, Nancy and Jake commented, is an instance of the potential but vague role of politics or judicial worldview in contract adjudication. In the book, I summarize the case as a possible precedent for the main case, which concerned consumers “assenting” to inconspicuous terms in an on-line license—the Netscape spyware case. The ProCD precedent, I note, pointed in opposite directions for the Netscape case, forcing the judge to choose whether to follow in its path or not. The judge chose not to. The related facts seem to support that outcome. So far so good.
But given the charged setting of electronic commerce, I suspected that readers would have a sneaking suspicion that something else is going on. So I identify the judges—something done rarely in the book, as follows: at page 28 “[ProCD was written by] Frank Easterbrook, the federal judge in Chicago appointed by President Ronald Reagan” . . . and at page 27 “Netscape was written by Judge Sonia Sotomayor for a federal appellate court in New York, several years before her promotion by President [Barack] Obama to the U.S. Supreme Court.”
The real problem with ProCD may be more akin to the real problem with Baby M: even the common law of contracts nods. The issues are so novel and vexing that legislatures should act. Even the UCC—part of a long tradition in sales law recognizikng the limits of the common law—may not be readily adaptable to the world of electronic commerce, as Miriam’s post about ProCD hints.
But to return to the broader thrust of the sensible center and the generally apolitical quality of contract law, consider two points Jennifer made in her post. The first concerns the political fury that erupted amid the AIG bonus contracts. While politicians were calling for scalps and the company’s PR team intoned about the sanctity of contracts, Jennifer notes the op-ed I wrote summarizing the comparatively cool tools and results recognized by the common law of contracts.
Jennifer also calls attention to the list of conclusions at the end of Contracts in the Real World. Look at those statements of earthy contract law (some listed here) and it will be difficult to deny the truth or to detect a political or ideological edge within the spectrum of American political discourse. Let contract law do its knitting, and my own answer to Dave’s excellent question is that contract law really is pragmatic.
[Posted by JT]
Jennifer Taub on Cunningham: “Unpopular” Contracts and Why They Matter
Professor Lawrence Cunningham knows the law and his audience. With Contracts in the Real World: Stories of Popular Contracts and Why They Matter, he brings contract doctrine to life. Cunningham concisely, yet colorfully, covers how courts resolve a variety of deals gone wrong. This book is ideal to help students develop an understanding of how the law is used to sort between those bargains that will be enforced and those that will not, as well as what remedies are available when things do not go as the parties to the agreement initially planned.
Contracts in the Real World has considerable range. It starts with a wrecked wedding party, an event few experience though many may fear. A dispute between a couple and a banquet hall venue results from a regional power outage during the reception. This fact pattern echoes the type of phone call a recent law graduate might receive from an exasperated family member punctuated with the dreaded question — you’re a lawyer, can we get our money back? The book provides a sensible explanation of how the wedding dilemma would resolve, and weaves together this type of personal situation with more public, celebrities’ disputes and classic contract decisions. These classic decisions are better appreciated in this fashion, when they are used to explain the outcomes of more modern disputes. For example, Sherwood v. Walker (the fertile cow – mutual mistake case) dating back to 1887 resonates when it is used to analyze a divorce settlement dispute concerning millions of dollars invested with Bernard Madoff’s Ponzi scheme.
What makes the book particularly compelling, is that mixed in with relatable fact patterns and entertaining battles are significant matters of policy.Contracts in the Real World accomplishes this, for example, when it covers some very unpopular contracts. These include the infamous agreements under which American International Group (AIG) paid out $165 million in cash bonuses to roughly 400 employees. According to the New York Times, among those who received more than $1 million a piece were 73 employees of the AIGFP business unit. This was the same business unit that helped enable the housing bubble and related Financial Crisis of 2008 by providing credit protection (selling credit default swaps) on high-risk mortgage-linked securities. The AIG bonuses were announced in 2009, just months after the US government paid $85 billion for a nearly 80% ownership stake in AIG. This was a part of the $182 billion government commitment to rescue the giant insurance firm when it approached insolvency due, in large part, to its inability to make payments to counterparties on its credit default swaps.
The public outrage over the AIG bonuses is included in Chapter 3 which covers the concepts of “excuses and termination.” These bonus contracts were entered into in early 2008, well before the bailout. The agreements which promised bonus payments in 2009 and 2010 were designed to encourage employees to stay with AIGFP. In response to an irate public, in 2009, AIG which was by then a ward of the state, insisted that the contracts with these employees were ironclad. Yet, the company did not publicly reveal the actual language of the agreements nor were legal theories that would have excused performance discussed. Those opposed to paying the bonuses, including certain members of Congress suggested imposing up to a 100% tax on them. In this manner even the opposition seemed to treat as true the faulty premise that contract law requires all agreements to be performed without any exceptions. Cunningham attempted to correct this misperception. In a contemporary op-ed in the NYT and in Contracts in the Real World he suggested that contract doctrine might have been a moderating measure, an alternative to either unexamined payments on the one hand or demands for government confiscation, on the other. It also would have been a teachable moment. Though that moment passed, through this book, the lesson is not lost.
Finally, beyond these thoughtful presentations of popular and unpopular contracts, this book includes in the final chapter twenty statements the reader is invited to determine are true or false, to test comprehension of contract law. This useful list serves as a proxy for the book’s (and a course’s) intended learning outcomes. Given the comprehensive scope and easy style of Cunningham’s book, this is a natural choice to assign as a supplement to a casebook. Or, one might be tempted to use it as the primary textbook, and supplement it with the UCC, a number of the referenced cases and other favorites, highlighting where jurisdictions vary. Students may learn faster when they are so guided and engaged. Should this leave extra time in the semester, it might be used for contract negotiation and drafting, skills that nearly all attorneys need but few learn in law school.
[Posted by JT]
Dave Hoffman on Cunningham: Is Contract Law Really Pragmatic?
Dave Hoffman is the James E. Beasley Professor of Law at Temple University's Beasley School of Law.
I’ll begin by joining the others who’ve written in already to praise Larry’s excellent Contracts in the Real World. It is highly accessible, entertaining, and offers a ream of examples to make concrete some abstract and hard doctrinal problems. Larry has the gift of making complex problems seem simple – much more valuable and rare than the common academic approach of transforming hard questions into other hard questions! This would be an ideal present to a pre-law student, or even to an anxious 1L who wants a book that will connect the cases they are reading, like Lucy, Baby M, or Peevyhouse, to problems that their peers are chatting about on Facebook.
Larry’s typical approach is to introduce a salient modern contract dispute, and then show how the problem it raises was anticipated or resolved in a famous contract case or cases. Larry often states that contract “law” steers a path between extremes, finding a pragmatic solution. This approach has the virtue of illustrating the immediate utility of precedent for guiding the resolution of current disputes, and comforts those who might believe that courts are alwayspolitical actors in (caricatured) Bush v. Gore or Roberts/Health Care Cases sense. It has the vice of de-emphasizing state-by-state differences in how contract law works, as well as the dynamic effects of judicial decisions on future contracts. But I think that for its intended audience, these vices can be easily swallowed.
I wanted to offer one question to provoke discussion: is it actually true that politics is as removed from contract law as Larry’s narrative appears to suggest, and how would we know? The contracts law professor listserve is full of laments about judges turn away from Traynor & his perceived progressive contract doctrines – and I certainly know of colleagues who teach that there are “liberal” and “conservative” versions of the parol evidence rule, for instance. But what does this actually mean, and how does it connect with the scholarship on judicial politics generally? As it turns out, this question has been understudied, probably because political scientists have yet to find a way carefully operationalize what a “liberal” or a “conservative” outcome in a contracts case would be, and thus to usefully regress case outcomes against a judge’s political priors. Many authors (Sunstein et al. 2004; Christy Boyd and I, 2010) have found ideological effects outside of the typical con law regime (particularly in “business law” areas). But I’m aware of a few empirical papers analyzing the political valence of how contract doctrine comes to be. (Snyder et al. n.d.) Some have suggested that contract law is a particularly hard area to study because selection effects loom so large. I would also note that most contract law “work” occurs at the state court level, where ideological measures are either explicit or very obscure.
If we found good measures, my own hypothesis would be that a particular judge’s worldview matters a great deal to how he or she resolves contract disputes – with priors about how much a person should be responsible for their own choices, and their perspective on market discipline, shaping how they understand the facts and thus apply the law. Contract cases are powerfully controlled by judges – probably more so than in other areas of private law. Contract doctrine would reflect these individual choices, and we’d thus be left not withone ”pragmatic” contract law, but rather many competing strands. I’d thus close by urging readers of Larry’s book to think a bit about the cases not picked out and illuminated in the narrative – where the judges are less wise and more human.[Posted by JT]
Don Langevoort on Cunningham: Contracts and "Contracting"
Donald C. Langevoort is the Thomas Aquinas Reynolds Professor at Georgetown Law.
Like all the reviewers so far, I am a big fan of Larry’s book. My interest in his approach comes partly from his way of bringing the subject alive, but more (and the book varies in the extent to which it does this deliberately) because it moves readers toward situating themselves in the time and place at which the bargain was struck and events play themselves out. Erik Gerding makes this point, too, and I want to elaborate on it. A case like Wood v. Lucy Lady Duff Gordon asks why the deal was expressed as it was, and thus what was the deal, really? There is a good bit of writing in law and economics that tries to theorize about deal-making, and Victor Goldberg, among others, have done some very rich work on Lucy, among other cases. I desperately want to engage my contracts students with these ideas, but find it hard to do without devoting more time than my 4 credits in a semster allows. “Contracts in the Real World” gives the students a base for many of these intuitions (especially the chapter on interpretation and parol evidence), and I hope that it will at least stimulate their interest in thinking more about contract doctine in this way. What I hope for most is that Larry or some reader will follow up on this volume with another dealing more explicitly with the “what were they trying to do?” and “was this a good way to do it?” questions. I’m familiar with a couple of efforts in this direction, but so far they don’t work for me. The person who pulls off that book in a rich, sophisticated but engaging way will earn my undying gratitude. For now, however, I’m happy enough that Larry has given contracts students and teachers not only a great introduction to the human workings of contract law, but also some valuable impressions of the work-a-day world out of which some very interesting deals were conceived.
[Posted by JT]
Erik Gerding on Cunningham: Contracts Outside the Box
Erik Gerding is an Associate Professor at the University of Colorado Law School
Let me start out with a criticism of Larry’s book: it is too much fun. I had a hard time breaking off just a chunk of Contracts in the Real World to write about and found myself spending several hours reading one interesting vignette after another on famous and infamous contracts.
The book will make a wonderful companion text to a traditional contracts casebook. Its value is not just in its engaging account of contract stories or in giving context to chestnut cases, but in providing a very intuitive framework for understanding contract law. The traditional contracts course, perhaps by virtue of having the doctrine of consideration at its heart, can be one of the most confusing in the One-L year. Students are often left to divine the inner structure (or lack thereof) of contract law on their own, likely while cramming for finals. Sometimes the epiphany comes. For many students it does not.
Larry has a real genius for laying out the doctrinal building blocks in a very thoughtful and accessible structure. He groups cases around a rough life cycle of contracts, with chapters devoted to “Getting In: Contract Formation,” to “Facing Limits: Unenforceable Bargains,” to “Paying Up: Remedies.” The layout of the book combined with its lucid writing demystifies contracts.
The layout may at first appear to make this book an ill fit as a companion text to many case books, because many of the cases appear in Contracts in the Real World under a different doctrinal heading than in a particular case book. For example, in the case book I currently use Batsakis v. Demotsis appears in the chapter on “consideration.” Larry places this classic next to cases on unconscionability. I also teach Lucy, Lady Duff Gordon in consideration, while Larry situates it in “Performing: Duties, Modification, Good Faith.”
These differences actually demonstrate a strength of the book. Some disconnect between the organization of a primary case book and a companion text forces students to move beyond a facile understanding of contract law in terms of rigid doctrines. Seeing cases in different contexts and fitting into different doctrinal boxes can help students see that lawyering involves more than memorizing black letter rules and putting issues into the right doctrinal box. Indeed, sometimes different doctrinal boxes can apply to the same problem and lead to the same result (witness rules on past consideration and duress). At other times, the choice of the doctrinal box makes a huge difference (see those same two doctrines). Accomplished students can move from memorizing blackletter law to seeing the possibility of creative lawyering. Larry’s organization – both intuitive and surprising – will help students at both stages.
One final strength of the book is Larry’s choice to include not only court cases but many contemporary contract disputes that never reached the courtroom (such as the dispute between NBC and Conan O’Brien). This brings into the classroom a wider panorama of how lawyers encounter and shape contractual problems in practice. After all, few contracts and few lawyers find their way into a courtroom. Most disputes are resolved in the shadow of law.
I also have a wish list for Larry’s next project (from personal experience, I can tell you how invigorating it is for an author who has just finished a book to be asked “what’s next?’). One of the limitations of the traditional contracts curriculum is how rarely students read and interpret – let alone negotiate or draft – actual contracts. It would be incredibly helpful as a professor to have some of the source contracts behind these stories. Although some of these contracts are already contained in a judicial opinion (Carbolic Smoke Ball) and many will not be public (Conan’s deal with NBC), others might be available with some digging. Having real and full contracts would allow professors to meet many of the items on Professor Collins’ wish list, such as transactional perspectives and drafting exercises. Although some lawyers litigate over failed contractual relationships, many more help parties plan prospectively – including by drafting and negotiating deals. For most attorneys, contracts are not an autopsy subject, to be dissected in a court opinion, but a living thing.
Professor Cunningham’s book provides a joyful reminder of the life in contracts.
[Posted by JT]
October 01, 2012
Contracts Limerick of the Week: Wood v. Boynton
Once again, I have to express my gratitude to Christina Kunz and Carol Chomsky. Because of their casebook, I have finally had the opportunity to teach Wood v. Boynton, which is just a really fun case to teach. The students can relate to it, divide up relatively evenly on each side of the case, and can easily see the trouble with the old common law rule that tried to draw Aristotelian distinctions between mistakes as to essential qualities and mistakes that only go to the value of the consideration.
Mrs. Wood, being in need of cash, returned to Mr. Boynton's jewelry store to see if he was still intersted in purchasing for $1 a rough stone found by her husband. Boynton renewed his offer, and the two made the exchange. The rough stone, which Mr. Wood had guessed was a topaz, turned out to be a diamond. According to Wikipedia, Mr. Boynton sold it to Tiffany's for $850. Some time later, J.P. Morgan bought the diamond, now known as the Eagle Diamond, and gave it to the American Museum of Natural History in New York. It was later stolen and perhaps cut into smaller stones. The Eagle Diamond is no more, but here is a picture of it (from five angles) in its glory:
But to get back to our story. Upon learning that she had sold a diamond, Mrs. Wood sought rescission based on fraud or mutual mistake. There seems to have been no fraud, as Mr. Boynton, though a jeweler, had never seen an uncut diamond before. The court also rejected mistake, as there was no mistake that the thing was a stone. The only mistake, said the court, was as to its value, and such mistakes are not a ground for rescission.
Wood v. Boynton Limerick
Wood found and then sold a rough stone.
Its value was then quite unknown.
Later, she’d holler
Having sold for a dollar
Ere the doctrine “mistake” was full-grown.
I think that, under the test articulated in the Restatement (Second) of Contracts, rescission would have been available.