Tuesday, March 4, 2014
I wish I could say that this were a Kelsen and Contracts Conference, but I can say that there will be some contracts scholars among the participants. And that suffices as a hook for me.
For those readers who are not Kelsen accolytes, if you know people who are (especially if they are philosophers, sociologists, or political scientists), please spread the word.
With the aid of the ContractsProf Blog Bump, Gregory Stein premiers at #1!
Monday, March 3, 2014
About one-third of the time while teaching copyright, I realize we are actually dealing with contract issues. This is particularly true when one party has been granted rights at one time and then technology changes meaning whatever term was used now may have a different and broader meaning. Plus, the Copyright Act has its own Statute of Frauds provision requiring transfer of ownership to be in writing.
Here is were the film The Stuff comes in. (Effects Asociates v. Cohen, 908 F.2d 555 (9th Cir. 1990)). Haven't heard of it? That's understandable; it's not exactly Oscar material. If you want to see what I mean, take a look here.
The creator of the very special effects for The Stuff (yogurt taking over the world) felt that the producers of the film had infringed the copyright on the special effects sequences. There was no written grant of permission to use the segments made by the special effects specialist and, supposedly, no grant of permission.
The film producer evidently found writings to be silly. As Judge Kosinski describes it, the position taken by the defendant was something like,"Moviemakers do lunch, not contracts." (I often feel the same way about contracts teachers.)
Although there was no writing, it was also clear that the special effects creator had done the work at the request of the producer and turned it over to the producer with the understanding that it would used in the film.
Still, the Copyright Act could not be clearer -- no writing, no transfer. But, there is a narrow exception. The writing requirement does not apply to nonexclusive licenses. Accordingly, Kosinski bails out the fim maker by finding an implied grant of a non exclusive license. Of course, had there been a writing, it almost certainly would have been for exclusive use. Almost certainly, that is what the parties intended.
There is a happy ending. For those of you interested in enriching your contracts or copyright classes with serious American made art, The Stuff is available from Netflix. Or, if you are teaching Law and Trivia (aren't we all), you should know that it stars Garrett Morris.
Contracts between credit card holders and card issuers typically provide for late fees and “overlimit fees” (for making purchases in excess of the card limits) ranging from $15 to $40. Since these fees are said to greatly exceed the harm that the issuers suffer when their customers make late payments or exceed their credit limits, do they violate the Due Process Clause of the Constitution?
They do not, according to the United States Court of Appeals for the Ninth Circuit (In re Late Fee & Over-Limit Fee Litig, No. 08-1521 (9th Cir. 2014)). Although such fees may even be purely punitive, the court pointed out that the due process analyses of BMW of North America v. Gore and State Farm Mut. Auto Ins. Co. v. Campbell are not applicable in contractual contexts, but only to jury-awarded fees. In Gore, the Court held that the proper analysis for whether punitive damages are excessive is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” and finding the award of punitive damages 500 times greater than the damage caused to “raise a suspicious judicial eyebrow”. 517 U.S. 559, 581, 583 (1996). The State Farm Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages … will satisfy due process. 538 U.S. 408, 425 (2003).
Contractual penalty clauses are also not a violation of statutory law. Both the National Bank Act of 1864 and the Depository Institutions Deregulation and Monetary Control Act provide that banks may charge their customers “interest at the rate allowed by the laws of the State … where the bank is located.” 12 U.S.C. s 85, 12 U.S.C. S. 1831(d). “Interest” covers more than the annual percentage rates charged to any carried balances, it also covers late fees and overlimit fees. 12 C.F.R. 7.4001(a). Thus, as long as the fees are legal in the banks’ home states, the banks are permitted to charge them.
Freedom of contracting prevailed in this case. But should it? Because the types and sizes of fees charged by credit card issuers are mostly uniform from institution to institution, consumers do not really have a true, free choice in contracting. As J. Reinhardt said in his concurrence, consumers frequently _ have to_ enter into adhesion contracts such as the ones at issue to obtain many of the practical necessities of modern life as, for example, credit cards, cell phones, utilities and regular consumer goods. Because most providers of such goods and services also use very similar, if not identical, contract clauses, there really isn’t much real “freedom of contracting” in these cases. So, should the Due Process clause apply to contractual penalty clauses as well? These clauses often reflect a compensatory to penalty damages ratio higher than 1:100, much higher than the limit set forth by the Supreme Court in the torts context. According to J. Reinhardt, it should: The constitutional principles limiting punishments in civil cases when that punishment vastly exceeds the harm done by the party being punished may well occur even when the penalties imposed are foreseeable, as with contracts. Said Reinhardt: “A grossly disproportionate punishment is a grossly disproportionate punishment, regardless of whether the breaching party has previously ‘acquiesced’ to such punishment.”
Time may soon come for the Supreme Court to address this issue, especially given the ease with which companies can and do find out about each other’s practices and match each other’s terms. Many companies even actively encourage their customers to look for better prices elsewhere via “price guarantees” and promise various incentives or at least matched, lower prices if customers notify the companies. Such competition is arguably good for consumers and allow them at least some bargaining powers. But as shown, in other respects, consumers have very little real choice and no bargaining power. In the credit card context, it may be said that the best course of action would be for consumers to make sure that they do not exceed their credit limits and make their payments on time. However, in a tough economy with high unemployment, there are people for whom that is simply not feasible. As the law currently stands in the Ninth Circuit, that leaves companies free to virtually punish their own customers, a slightly odd result given the fact that contracts law is not meant to be punitive in nature, but rather to be a resource allocation vehicle in cases where financial harm is actually suffered.
My student, Sam Henderson (who blogs here), directed my attention to this report on the Legal Informatics Blog about blockchain contracting and conveyancing systems. Blockchain technology is apparently one of the many things that makes Bitcoin transactions foolproof, genius-proof, and completely impervious to rampant speculation, financial catastrophe and the bankruptcy of major dealers in the virtual currency. So, like Bitcoin itself, applying blockchain technology could only democratize and decentralize commercial law, or so maintains this blog post on Thought Infection.
What a strange idea.
Contracts are private legislation. They are already about as democratic and decentralized as they could possibly be. Sure, they are governed by the relevant laws of the relevant jurisdictions, but blockchain technology would not change that. In any case, the law of contracts already permits the parties to choose the law that will govern them (within reason), so that's pretty decentralized and democratic.
What is not democratic and decentralized about commercial law is the fact that contracts tend to be drafted by the powerful and imposed upon people as take-it-or-leave it deals through form contracting. Given the complexity of the technologies associated with Bitcoin, it seems unlikely that adding layers of technology to commercial law would render it more democratic and less centralized.
Unfortunately, Thought Infection's post is misinformed about contracts. He writes
Whereas today contracts are restricted to deals with enough value to justify a lawyers time (mortgages, business deals, land transfer etc…), in the future there is no limit to what could be codified into simple contracts. You could imagine forming a self-enforcing contract around something as simple as sharing a lawnmower with your neighbor, hiring a babysitter, or forming a gourmet coffee club at work. Where this could really revolutionize things is in developing nations, where the ability to exchange small-scale microloans with self-enforcing contractual agreements that come at little or no cost would be a quantum leap forward.
Here are the problems with this as I see it:
- Contracts are not restricted; they are ubiquitous;
- Contracts do not require lawyers; they are formed all the time through informal dealings that are nonetheless legally binding so long as the requisite elements of contract formation are present;
- To some extent, Thought Infection's imagined contracts already are contracts, and to the extent that they are not contracts it is because people often choose to form relationships that are not governed by law (e.g., do you really want to think about the legal implications of hiring a baby sitter -- taxes, child-labor laws, workman's comp . . . yuck!); and
- Microloans are already in existence, and the transactions costs associated with contracts do not seem to be a major impediment.
Look, I'm not a Luddite (I blog too), but I also don't think that technology improves our lives with each touch. Technology usually makes our lives more efficient, but it can also make our lives suckier in a more efficient way. Technology does not only promote democracy and decentralization; it also promotes invasions of privacy by the panopticon state and panopticon corporations or other private actors, reification of human interactions, commidication and alienation. It has not helped address income disparity on the national or the global scale, ushered in an era of egalitarian harmony overseen by benevolent governments or pastoral anarchy.
As to contracts specifically, however, there are lots of ways to use technology that are available now and are generally useful. Last week, we discussed Kingsley Martin's presentation at KCON 9. Kingsley has lots of ideas about how to deploy technology to improve sophisticated contracting processes. But for the more mundane agreements, there is a nifty little app that a couple of people mentioned at KCON 9 called Shake. For those of you looking for a neat way to introduce simple contracts to your students, or for those of you who want to make the sorts of deals that Thought Infection thinks we need blockchain to achieve, Shake is highly interactive, fun and practical.
As 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.
Friday, February 28, 2014
The Food and Drug Administration proposed big changes to nutrition labels on food packages. These changes would include putting calorie counts in large type. The serving sizes would also reflect typical serving sizes (meaning they will be bigger). The purpose of the redesign is to make certain information salient and to increase comprehension. Will it do so? There's evidence that lots of people already read nutrition labels (although apparently a lot of commenters at the NYT blog here don't). The redesign is intended to make it easier for those who already read labels to find the information they want (such as calorie count). What's interesting is that the goal here wasn't to improve reading of the labels - it was to make finding the information and understanding it easier for those who were already interested.
What does the revised nutrition label have to do with wrap contracts? Wrap contracts (browsewraps, clickwraps) are basically notices. Like nutrition labels, you take them or leave them. Will making information more salient increase reading? It has to - in other words, certain information (such as calorie count) can't be missed. But the goal isn't to increase reading. It's to increase awareness of certain information. By increasing awareness, the labels may encourage consumers who may not otherwise have cared, to pay attention to what's on the labels. But more importantly, it makes it harder for companies to get away with selling foods with excessive calories to unsuspecting consumers. For those suspecting consumers (those who know and don't care about calorie count), it does nothing and it's not intended to affect them. Furthermore, it may provide some marketplace incentives for companies to adjust their ingredients. As the NYT article notes, when the category for trans fats was added in 2006, it both raised consumer awareness and resulted in companies reducing or eliminating the ingredient from their food.
Wrap contracts, like nutrition labels, contain information that people care about but often can't find. It's clear, for example, that most people are starting to care about their online privacy. Privacy is the "calories" information. But it' s not easy to find out how companies are using personal information. Online privacy policies are densely written and typically hard to find, requiring several "clicks" to access. Why not have some "labeling" requirements for wrap contracts? It's high time that they had some sort of a redesign since consumers aren't reading them. I know many think disclosure requirements are a lost cause, but I'm not one of them. Naysayers always protest that consumers don't read terms, but that's because they're unreadable. Would requiring that terms be both salient and concise increase reading of terms? I think increasing reading as a goal is desirable but shouldn't be framed as the objective. The objective should be to increase the salience (prominence) of certain information. Increasing the prominence makes the information more relevant. This may ultimately increase reading, but that's not the goal (at least in my view). The goal is to heighten awareness of terms - that's different from encouraging consumers to read (which, given the state of contracts, is not efficient...) But in order for disclosure to work it has to be accompanied by redesign. The visual has to draw attention to the textul. Like nutrition labels, a redesign of wrap contracts is long overdue.
Some may say the new labeling won't work. The reason I think it will have a positive effect? Some food companies are already protesting. As my favorite nutritionist Marion Nestle (who likes the new labeling) said, the new labeling will be "wildly controversial." Nobody likes to draw attention to their flaws. Food companies are no exception.
Thursday, February 27, 2014
Readers of this blog will remember that last year we hosted a lively symposium on Margaret Jane Radin's book, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law.
The debate about mass consumer form contracts is far from over....
Wednesday, February 26, 2014
Daniel A. Crane, Bargaining over Loyalty. 92 Tex. L. Rev. 253 (2013)
Dan Dalrymple, Maj., U.S. Army, Make the Most of It: How Defense Counsel Needing Expert Assistance Can Access Existing Government Resources, Army Law. 35 (2013)
Mark Franke, Suitability and Non-Maleficence: A Proposal for Insurance Producer Regulatory Reform, 26 Loy. Consumer L. Rev. 73 (2013)
Osnat Jacobi & Avi Weiss, Allocation of Fault in Contract Law, 36 Int'l Rev. L. & Econ. 1 (2013)
David McGowan, Tenth Annual Baker Botts Lecture. The Unfallen Sky, 51 Hous. L. Rev. 337 (2013)
Michael Pillow, Liberty over Death: Seeking Due Process Dimensions for Freedom of Contract. 8 Fla. A&M U. L. Rev. 39 (2012)
Anthony J. Sebok, & W. Bradley Wendel, Duty in the Litigation-Investment Agreement: The Choice between Tort and Contract Norms When the Deal Breaks Down, 66 Vand. L. Rev. 1831 (2013)
Tuesday, February 25, 2014
The University of Tennessee ContractsProf Gregory M. Stein has just posted Will Ticket Scalpers Meet the Same Fate as Spinal Tap Drummers? The Sale and Resale of Concert and Sports Tickets on SSRN. Here is the abstract:
Some people purchase concert or sports tickets for their own entertainment and then are unable to use their tickets. They may have a scheduling conflict, or their favorite team may be underperforming. Other people buy tickets with the intention of giving them as gifts. Still others purchase with the goal of reselling the tickets at a profit. This Article examines the transferability of tickets to performances and sporting events.
What, exactly, is a “ticket”? What property and contract rights does the initial ticket holder acquire? Does the holder have the legal power to transfer these rights? To what extent can the initial ticket seller limit that transferability? Does it matter whether the initial purchaser planned to sell at a profit all along? If there is a profit to be made, who is entitled to keep the resale premium? More generally, what are the economics of the market in ticket sales and resales?
Part I of this Article asks what legal rights a ticket creates under contract and property law and whether the party who acquires a ticket is legally empowered to reconvey it. Part II looks more globally at the economics of the market in sales and resales of tickets. Part III examines and compares the roles of the private market and the government in transactions involving the sale and resale of event tickets. Finally, Part IV looks to the future, suggesting some directions the ticket resale market may and should take as technology and the law continue to evolve and as the political process functions.
Monday, February 24, 2014
We had an all-star afternoon panel on Contract Law and Social Justice. The panel was moderated by Robin West, who gave a killer Keynote Speech over lunch. That speech will be forthcoming in the St. Thomas Law Review, as will Amy Schmitz paper, discussed below, so look out for that.
Danielle Hart started off the panel with a paper on Contracts and Inequality. Her talk took issue with the claim that the state is absent in contract law. In fact, she regards contract law as public law because the state is neither netural nor minimal, and contract law in action helps to create and perpectuate inequality. She illustrated her point with a case of a fairly typical subprime mortgage loan to an African-American women in a predominantly minority neighborhood. The state helped manufacture the desire for homeowneship; the state created the residential housing market through regulation and deregulation of the housing market; and the state decides on enforcement and enforces judgment.
The result is that law promotes inequality. Parties to contracts are not equal, but contract law ignores structural inequality in bargaining power and applies rules "neutrally" without adjusting for structural inequality. Thus the stronger party gets the better end of the bargain. And getting into contracts is much easier than getting out of them, especially with the new hurdles to litigation including the Twombly/Iqbal line of cases, as well as standard contract terms such as binding arbitration clasues and class action waivers. The result is an endless cycle in which those with more power continually can use contracts to extract favorable terms in each successive contractual relationship and those without bargaining power are made worse off through unfavorable bargains.
Returning to her illustration involving the African-American borrower, Professor Hart noted that the banks that made subprime loans before the mortgage meltdown are mostly doing fine, but there is now a remarkable racial disparity in wealth in American households (over $113,000 for White households; about $5-6000 for African American and Hispanic households). The numbers are very low for African-American and Hispanic households because so much of their wealth was tied up in their homes, which they lost in the subprime crisis. This illustrates Professor Hart's cycle of contracts law serving the interests the better off at the expense of the poor.
Hila Keren next presented her paper on Contract Law and the Responsive State, in which she addressed what can be done in light of the very depressing state of things as described in Professor Hart's paper. Professor Keren regards contracts as a mode of social regulation and offered ways in which we can use contracts law to further socially desireable ends. She does so in the context of two patterns of market exploitation. The first is "predatory prenups;" that is, prenups in which a woman is coerced into a marriage relationship because of particular vulnerabilities. Second, in predatory loan agreements, people enter into unfavorable loans because they were vulnreable, low-income, unsophisticated, first-time buyers.
Inequalities are increased if judges refuse to intervene to protect exploited parties. Professor Heren agrees with Professor Hart that judges are increasingly refusing to intervene. Her proposal is to replace our neo-liberal theory with a revamped vulnerability theory to underpin contracts doctrine. Neo-liberal theory associates equality with non-discrimination; vulnerability theory focuses on the right of individuals to participate in society and to have their human dignity recognized and protected. Neo-liberal theory regards the subject as the private, autonomous individual; under vulnerability theory we are all vulnerable and interconnected. Finally, neo-liberal theory regards the state as a threat to individual freedom, while vulnerability theory desires a responsive state that will address human vulnerabilities. In the contractual context, the responsive state simply refuses to enforce exploitative contracts.
Vulnerability theory eanbles us to appreciate that vulnerability is a normal part of life that arises as a product of state policies and politics. Permitting exploitation of such vulnerabilities harms human dignities, and the responsive state ought not to permit such exploitation. Professor Keren supports the recognition of a right not to be exploited through contractual means, and she notes that European law recognizes a norm against contractual exploitation. In the U.S., where that norm is not legislatively enacted (and the prospects are dim), we might be able to make due with a beefed-up version of the doctrine of unconscionability.
Amy Schmitz gave a talk on Acccess to Consumer Remedies in the Squeaky Wheel System. Her talk built on this paper from the Pepperdine Law Review. By "squeaky wheel," Professor Schmitz refers to the fact that only 1/3 of consumers do anything when dissatisfied with a product and few go beyond just calling and complaining. Very wealthy consumers are the most likely to complain about non-conforming consumer goods. Those "squeaky wheels" often get the remedy they wanted and they end up being loyal customers because they are satisfied with customer service.
The same goes with sales. White men are more likely to bargain than women or minority groups. An Ian Ayres study indicated that women paid a 40% mark-up over men in car sales and African Americans and Hispanics paid a 100% mark up over white male consumers. Most people do not bargain or seek to change terms when they enter into contracts, and most people do not read or pay attention to most contractual terms.
So, how do we bring back remedies? How do we compel sellers to stand by their goods? Professor Schmitz suggests that we need a new "handshake" to ignite justice in business-to-consumer contracting. She thinks online dispute resolution (ODR) might be a way to do so in a low-cost, flexible, user-friendly and non-intimidating manner.
Charles Knapp delivered a paper called Unconscionability: Once More Unto the Breach. He has been tracing the progress of unconscionability doctrine in the U.S. in a series of law review articles, including this one and this one. His main argument at this point is that courts have developed a comprehensive body of law on unconscionability. The doctrine comes up a lot in all sorts of contexts, and the courts know how to deal with unconscionability. The doctrine is more pervasive than one might think. Unconscionable behavior also comes up frequently in the interpretation of state and federal statutes. Courts have also recognized unconscionability as a sword as well as a shield, permitting recovery of large claims based on court findings that certain agreements are unconscionable. Judges with conscience should not enforce unconscionable agreements because lots of people and corporations do not have consciences.
Peter Linzer commented on the papers. He noted Chuck Knapp's important contribution in helping us to recognize that unsconscionability is not a doctrine that we embraced in the 60s and 70s and then it ran its course. It is alive and well and continues to permit court to invalidate contracts when "something smells bad." He noted that consumer contracts are far more complex today than they were in the age of face-to-face transactions, because we work through intermediaries (Amazon, Google, credit card companies) each of which has its own terms that we agree to by clicking or using the product.
Professor Linzer expressed some skepticism that merchants will embrace Professor Schmitz's online dispute resolution mechanisms. Doctrinal solutions to the problems of form contracts also fail because consumers don't want to litigate, and if they do, the odds are stacked against them. He therefore prefers the European route of banning certain contractual provisions through blacklists and greylists. So, we could simply ban pre-dispute binding arbitration in consumer contracts or choice of forum clauses that force the world to come to (e.g.) Microsoft when Microsoft already operates globally. The new Consumer Financial Protection Bureau may be the entity that can actually do these things.
Finally, Professor Linzer noted that consumer spending accounted for 71% of the GDP last year. That makes contracts law an issue of public law.
Saturday, February 22, 2014
Our own Meredith Miller started the panel with a paper on Getting Paid: Contracting in the Naked Economy. Professor Miller's paper is in part a reflection on her experience with freelancers who have been doing work in the new economy and have been experiencing a hard time getting paid. The amount due often does not rise to a level that would justify litigation. Professor Miller began by discussing "the rise in independent work," which is a lose category encompassing the "jobless but not workless." These people are often highly skilled, and big companies prefer to have consultants rather than employees because of liabilities and costs attendant to employees that are not associated with contractual relations with constultants.
On the other side, there is a literature promoting the benefits to workers in being independent workers. There are advantages to not having a boss, to not having to commute, not having face-time at work, etc. Why deal with people when you can stay home in the company of your cats? But there are significant problems associated with being an independent worker, including significantly, not getting paid. Professor Miller presented staggering statistics indicating that a very high percentage of independent workers have a hard time getting paid, and a very small percentage of them hire an attorney or actually proceed to court. She illustrated the problem with this video.
Professor Miller suggested simple solutions for independent workers such as clear definitions and expectations in contracts, payments schedules, process payments or payments in advance, terminations fees and attorneys fees in cases of non-payment. She recommended the Shake App as a means for quickly throwing together useable contracts. She also discussed legislative reforms, such as New York's proposed Freelancer Payment Protection Act, and potential private solutions.
Rachel Arnow-Richman next gave her paper on Modifying Employment Contracts. Professor Arnow-Richman began by discussing the abysmal case law on employment law, and by suggesting that modification is just another area in which the law is bad for workers and largely incoherent. Employment is generally at will these days, and so the notion of modification is difficult because it is not entirely clear that there is a contract to modify. The agreements are relational and the obligations are indefinite. Still, where the employer regards the modification as legally binding (e.g., the creation of non-competes, arbitration provisions, or retraction or modification of a previously promulgated employer policy), the doctrine of modification is applicable.
Professor Arnow-Richman noted two general approaches that have been applied to modification. The unilateral approach focuses on the employee's at-will status with the employee's continued employment constituting the consideration for the modifcation. For example, a Colorado case recently upheld the imposition of a non-compete clause on an at-will employmee because the employer can terminate the contract at any point. If the employer can terminate, it can also introduce a new contract with new terms that the employee accepts by continuing employment. This approach is troubling, because the worker obviously derives no benefit, and the notion that the benefit was continued employment is a sort of fiction, since that employment is still terminable at will. Some courts enforce such unilateral modifications only in the case of some additional consideration, such as a raise. In the at-will context, this is not all that helpful, since the additional consideration will not be relevant to the employee if she is sacked the following day.
The second approach, which Professor Arnow-Richman prefers, is to require advance notice as the consideration. This approach relates to a paper she gave at the AALS Section on Contracts meeting in 2013, which is now forthcoming in the Florida Law Review. There have been cases in which courts have upheld modifications based on reasonable notice. Unfortunately, the courts do not seem to know why they are doing so. Still, Professor Arnow-Richman thinks that there is way to make sense of this approach, and it turns on treating even at-will employment as a bilateral contract. If we so understand at-will employment, and we should, since employment begins with a promissory acceptance and the parties generally anticipate a long-term relationship, then reasonable notice is a standard term for modification.
I had the pleasure of chairing a panel populated by four young scholars all writing on Behavior, Bargaining, Incentives and Contract.
Kenneth Ching went first with his paper on Justice and Harsh Results: Beyond Individualism and Collectivism in Contracts. His paper focused on Cardozo's celebrated opinion in Jacob & Youngs v. Kent in which Cardozo held that, although Jacob & Youngs had not installed Reading pipes as called for in the contract, it had nonetheless substantially performed the contract by installing pipes of similar quality. Professor Ching maintains that Cardozo was wrong on both the facts and the law in the case. The contract in the case made clear that complete performance was a condition of payment, and the law was clear (then and now) that there can be no substantial performance of a condition. Moreover, even if it were possible to substantially perform conditions, Jacob & Youngs did not do so, as Cardozo would have noted had he actually applied the test to the facts of the case.
The case is but a gateway to Professor Ching's larger point about collectivist and individualist approaches to contracts law. Judge Cardozo's opinion seems to take a collectivist (or parternalist) approach to the doctrinal problems that the case raises. That is, Cardozo thinks we are all better off if people aren't held to unreasonable terms that would require the destruction of a home to replace pipes with virtually identical pipes. Judge McLaughlin's dissent seems to be more individualist, focusing on Kent's perspective and his right to insist on the contracts rights for which he had bargained. Professor Ching's approach rejects both collectivist and individualist approaches. He favors a Thomist approach that tries to resolve conflict in line with reason and with the goal of promoting human flourishing. Cardozo's opinion might be attractive from a Thomist perspective. Responding to a question, Professor Ching acknowledged that James Gordely, whose approach informs Professor Ching's, would find for Jacob & Youngs based on unconscionability. Still, Professor Ching maintains, Judge Cardozo reached the wrong result because of his mischaracterization of the facts and the law.
Next up was Andrew Verstein who gave a (his first ever) Prezi presentation (which was super cool) on Ex Tempore Contracting. His paper takes on a tradition that distinguishes between ex ante and ex post approaches to contracts interpretation. In the former, the parties specify how the contract is to be interpreted ("use Reading pipes"), and in the latter, the parties delegate interpretation to an adjudicator ("use merchantable pipes"). In the ex ante approach, the parties determine the meaning of the terms; in the ex post approach, some neutral third party (court or arbitrator) determines the meaning. Ideally, parties decide between precise (ex ante) terms and vague (ex post) terms based on the costs and benefits of choosing specific terms in particular contexts. Parties should draft to minimize the sum of ex ante and ex post costs.
But Professor Verstein contends that there is middle ground between before performance and after (alleged) breach. Some contracts disputes can be resolved during performance. The parties can specify that a particular third party will resolve disputes that arise during performance (ex tempore), and they can be resolved whether the terms are superficially vague or superficially precise. The aim remains to reduce the costs of dispute resolution, and there are many situations in which it is most efficient for the parties to agree to ex tempore dispute resolution, especially in construction agreements. Professor Verstein illustrates this point with the case of the Chinese Ertan Dam, a huge construction project. All disputes relating to that dam were resolved within six months of the dam's completion. This fact is attributable to the existence of netural expert panels (dipute boards) that addressed disputes as they arose and were able to sort out most disputes before the parties became too aggrieved. Reviewing Florida dispute boards, Professor Verstein finds that 98% of disputes are resolved without further conflict and the cost is 10-50% of arbitration. This is not really dispute resolution, Professor Verstein contends; it is ex tempore contracting. And, it turns out, this happens a lot more often than we realize.
Professor Verstein's paper is forthcoming in the William & Mary Law Review and can be downloaded here.
Wendy Netter Epstein next presented her paper on Public Private Contracting and the Reciprocity Norm. Professor Epstein's thesis is that in some public private contracts it is very difficult for the government to reduce agency costs by writing more detailed contracts. Picking up on Professor Verstein's theme, Professor Epstein contends that in certain circumstances it is better to have less detailed contracts with mechanisms for ongoing dispute resolution during contract performance. This approach is most appropriate where there is a shallow market (i.e., very few private contractors bid), a narrow application (e.g., private prisons) or a disempowered group of third-party beneficiaries (e.g., welfare recipients).
While a lot of scholarship has focused on the need for more detailed contracts in this context so as to provide for strong oversight of private actors working in the public interest. Professor Epstein suggests that the result has been to increase the size and complexity of government contracts. However, this solution does not work well because, where there is no well-functioning market, the government cannot effectively moitor and discipline private contractors. Moreover, one point of outsourcing is to promote innovation and creativity, and excessive government monitoring of private contractors undermines that aim. Professor Epstein drawns on research in the behavioral sciences and contends that reciprocity norm, which rewards people for kind actions, constrains actors more powerfully than models based on rational actors would predict. She thus thinks that strict enforcement mechanisms and sanctions regimes often undermine cooperation in the public private contracting context. Governments might be better served by communicating their positive intentions towards private contractors by entering into looser contracts that would permit the parties to chart the course of the collaboration on an on-going basis as the project proceeds.
Finally, Eric Zacks presented a paper on The Moral Hazard of Contract Drafting. One party to a contract can act opportunistically as an economic agent of the other party. The agency relationship arises when one party asks the other party to draft the agreement. That is a delegation of authority that would then be ratified upon acceptance. The danger of agency costs arises in that there may be a disparity between the contract as conceived and the contact as written.
There may be economic value in having one party be the contract preparer. For example, that party might have greater experience and expertise in contract preparation. But the drafter may write the contract is such a way as to enable it to take advantage of the other party after performance has begun. Then the question arises whether the principal (the non-drafting party) is able to monitor the agent (the drafting party). For example, in consumer contracts, it seems unlikely that non-drafting consumers would be capable of both foreseeing and monitoring the agency costs involved in allowing sellers to draft consumer contracts. One solution is for the principal to hire an agent (e.g., a lawyer) to monitor the contract. Or there might be outside monitoring services to prevent opportunistic behavior, such as regulatory agencies or courts, or statutory requirements that certain transactions be written in plain language.
Courts are less likely to intervene when they think the principal (non-drafting party) is sophisticated and has the means to protect itself against opportunistic behavior by the agent (drafting party). In the contractual context, we have more limited ways to discourage opportunistic behavior through incentives for good behavior.
Those not satisfied with this summary of Professor Zacks' argument can download the entire thing here.
Friday, February 21, 2014
Shawn Bayern presented his work in progress on Meta-contextualist Contract Interpretation. Although Professor Bayern began by suggesting that, non-withstanding his previous presentations at this conference in which he denounced formalism and defended contextualist approaches, he really thinks that if asked in any given context, which interpretive regime should apply to a particular transaction, his answer is, "it depends." In short, the answer to the question of textualism vs. contextualism is contextual. Thus, Professor Bayern is a meta-contextualist. Parties should be able to determine what interpretive regime will apply to them. It might well be textualist, but (ah ha!), the text of the parties' agreement should not be dispositive in determining that issue. Rather, courts should look to the context informing that agreement. Happily, this seems to be what courts do. If the parties make clear that they intend to be bound by their text, then courts should take a textual approach. Otherwise, they should not just rely on the text, regardless how clear it is, but should review the text in the context of the negotiations. After all, a contract negotiated at gunpoint should not be binding regardless of its clarity.
Peter Gerhart then presented his paper co-authored with Juliet Kostritsky, Efficient Contextualism. The main point of the paper, like Professor Bayern's, is that the distinction between contextual and textual approaches is not particularly useful. Our real goal is to get at the parties' obligations, and whether we do that with text or context does not really matter. Both approaches, if pursued one-sidedly, have significant drawbacks. Textualism can lead to literalism and absurd results. Contextualism, if unconstrained, can be terribly inefficient and capricious.
Instead Professor Gerhart proposes "efficient contextualism" through determinate reasoning, which requires each party to identify the facts that must be true in order for their interpretation to succeed. While Professor Bayern thinks that the methodology appropriate to each contract must be determined with specific reference to the context in which that contract was negotiated, Professor Gerhard suggests that there can be a uniform approach to interpretation that would in fact be what unites the law of contracts. He used the facts of Jacob & Youngs v. Kent to illustrate. What does "use Reading Pipe" mean in the context of that agreement and what result is surplus maximizing? The answer depends on what the parties knew or reasonably should have known and intended at the time of the agreement. Determinate reasoning should promote efficiency by narrowing the issues in dispute which can then be settled either through motion practice or by a quick trial to resolve the few factual disputes on which the parties' differing contractual interpretations hinge.
Finally, Amir Pichhadze (pictured left in an image from the Yazigallery), an SJD candidate at the University of Michigan whose recent successes have garnered a lot of attention, presented his paper on Transfer Pricing & Contractual Interpretation. The subject matter of his paper is complex, so I will post an abstract that he has shared with me:
As the OECD’s Transfer Pricing Guidelines (“TPG”) and US Regulations recognize, the contractual terms of a controlled transaction are a ‘relevant circumstance’ (i.e. ‘comparability factor’) that ought to be taken into account when conducting the transfer pricing comparability analysis.
The purpose of this paper is to identify that domestic contractual interpretation law has a critical role in this comparability analysis. Firstly, it makes it possible to ascertain the substance of the terms, as they were intended by the parties. This is essential in order to properly recognized and give effect to the transaction as it was structured by the parties. Second, the parties’ contractual intentions make it possible to determine whether the controlled transaction’s surrounding circumstances are linked to the transfer price, which would make them a ‘relevant circumstance’ in the comparability analysis.
In Canada v. GlaxoSmithKline Inc. (“Glaxo case”), for example, if Glaxo Canada intended in the controlled transaction [which was a Supply Agreement with Adechsa, an associated foreign company] to bundle payments for goods received under the expressed terms of the controlled transaction as well as for services received from its parent company [Glaxo Group, which is located in the UK] under a separate Licence Agreement, then that Licence Agreement would have to be taken into account as a ‘relevant circumstance’ because it is linked to (i.e. it has an impact on) the transfer price.
Part 1 of this paper identifies that in order to properly ascertain Glaxo Canada’s contractual intentions, in the Supply Agreement, the courts had to interpret that agreement by applying the relevant principles from Canada’s contractual interpretation law. By failing to do so, the courts have risked making an error of law in their analysis. The extent of their error will be explored in part 2 of this paper. The analysis of the courts’ approach in this case ought to serve an important function. It ought to alert courts in other countries to recognize the role that their domestic contractual interpretation law has in the transfer pricing comparability analysis, so that they avoid making the same errors as those made by the Canadian courts.
Kingsley Martin of KM Standards gave a luncheon address on "The Emergence of Contracts Standards and Its Future Impact on Legal Education." He introduced us to some very impressive technology that can greatly increase the efficiency with which practicing attorneys review standard agreements. Here's what it looked like:
This technology enables an attorney to review a new document, say a merger agreement, by comparing it to a database of say 15 similar documents. It immediately identifies the provisions that are similar to those found in the database, those found in the new document and not in the database, and those not found in the new document but common in other, similar agreements. An attorney can then quickly pinpoint what is missing from the document and might need to be added and what unusual provisions might regard careful scrutiny.
More particularly, the technology can also use the database to identify the most common language used in standard provisions and also variations in standard provisions so that one can see the range of how parties work out standard terms and pick out the language that is best suited for a particular deal.
The steps are to identify the unitary elements of standard form agreements, identify the clauses components and then draft clauses in clear, standard English. Ultimately, Martin thinks that such the technology can help attorneys negotiate optimal terms. For example, if you are trying to find optimal compensation in an employment agreement at a public company, you could go on to EDGAR and get all the filings that disclose compensation terms. The parties then should be able to discern from the data an appropriate compensation package.
How might this affect teaching? He thinks his basic contracts clauses could be reduced to playing cards. One might then run various simulations with students (or one could just choose to characterize the exercise as a "game" that they students "play"). The students can then choose and negotiate using the various cards and see if they can work out a satisfactory deal. Or they may not be able to achieve a satisfactory deal through the use of common terms, and then the challenge is to see if they can draft unique language suitable to their ends.
Anyone interested in seeing what the cards might look like can check them out here.
Jennifer Martin (picutured at left), who did a simply incredible job putting together this conference, welcomed us this morning to sunny Florida.
We then got under way with a plenary session on the work of Linda Rusch (pictured below at right), the conference's honoree. Candace Zierdt chaired the session and introduced Louis Higgins from West Academic. He spoke of how great it has been for him to work with Linda as an author. He claimed that in working with Linda on about 20 books(!), she has never once missed a deadline.
Amy Boss, whom Stephen Sepinuck recognized as the reigning "Queen of the UCC," then spoke of Linda's career as both an academic and as a law reformer. Linda read a number of comments from an impressive array of judges and practitioners who have worked with Linda on law reform projects. Linda is the type of person whose work often goes unnoticed, because it takes place outside of the spotlight among small groups of extremely well-informed experts on commercial law but often comes to shape both complex federal regulations and state statutes. People uniformly compliment Linda for her creativity and organization and for her sense of humor. People are willing to work with Linda on all manner of projects because she is extremely competetent, organized, efficient, approachable and enjoyable to work with. She clearly understands the theoretical underpinnings of commercial law but she never loses sight of the practical.
Next, Neil Cohen spoke of Linda's constant presence in the firmament of commercial law. Her work has not been flashy and evanscent. Rather, she is a steady reminder that there are ways to improve on our work and our understanding of commercial law while also working at improving the law itself. He commended her for her successful revision of Article 7 and for the "unbuilt architecture" of the revised Article 2 that the ALI approved but then fell at the Uniform Law Commission. Professor Cohen made the excellent point that the remedies sections in the original Article 2, which are extremely well-conceived, are not especially well drafted. Linda was significantly involved in reconceptualizing, re-organization and re-writing the Article 2 remedies sections. The failure of state legislatures to adopt the revised Article 2 is a loss to all of us who teach the subject matter, because the legal principles are far more clearly laid out in the revised version (thanks to Linda's work) than they were in the original.
Larry Garvin spoke of having met Linda early in the process of UCC revision in 1996 and watched her move from back-bencher to leader in undertaking elegant revisions, especially to the Article 2 damages sections. Professor Garvin basically added his "I agree" to Professor Cohen's comments and then moved on to an appreciation of Linda's scholarly work since the UCC revisions, focusing especially on her article in the SMU Law Review on the ongoing struggle for balance in Article 2 and on Linda's 2003 Temple Law Review article on products liability. In sum, Professor Garvin noted that Linda's scholarship and law reform efforts generally are characterized by clarity and balance.
Finally, Stephen Sepinuck spoke on behalf of the younger scholars who have benefited from Linda's support and mentoring. Professor Sepinuck highlighted as his favorite of Linda's articles her 2008 article in the Chicago-Kent Law Review on payment systems. When the time comes to revisit the laws of payment systems, Professor Sepinuck suggested that this article will provide the basis for that work. He also noted that the reason very few people know anything about the UCC's Article 7 is that Linda's draft made that section so clear that Article 7 issues almost never need to be litigated. He also noted her important contributions to the Restatement (3d) of Restitution and Unjust Enrichment so as to make certain that nothing in the Restatement is inconsistent with anything in the UCC.
Linda said a few quick words of thanks to the panelists, whom she had gotten to know at many meetings at mediocre hotels in medium-sized cities close to major airports. Professor Zierdt announced that the entire panel will be available on YouTube, so that's somethign to look for soon.
A number of us from the blog are here at KCON 9 in Miami -- the 9th Annual International Conference on Contracts. We may do some live blogging on the panels, or we may just reflect afterwards on the sessions. But for now, let's just say, highs in the 80s, lows in the 70s.
Wednesday, February 19, 2014
Do such words imply an enforceable promise to give an employee additional compensation both for work already performed and for work to be performed in the future if the speaker actually obtains a sizeable chunk of money? (Does it matter to your answer if the words were uttered by Heather Mills, famous or infamous ex-wife of Sir Paul McCartney?..)
Your answer to the former question would probably be a resounding “of course not.” In a recent decision, the United States Court of Appeals for the Ninth Circuit agrees (Parapluie v. Heather Mills, No. 12-55895). The case resembles such Contracts casebook classics old and new as Kirksey v. Kirksey (1945), Ricketts v. Scothorn (1898) and Conrad v. Fields (2007). One might have thought that promissory estoppel and, in this case, promissory fraud and intentional misrepresentation claims had generated enough case law to prevent an appeal. Apparently not, much to the amusement of law students and law professors alike.
At bottom, the facts behind the case against Ms. Mills are as follows: In 2005, Ms. Mills hired Michele Blanchard to conduct PR work for her. Ms. Blanchard was paid nothing for her work from 2005 to 2007. In 2007, however, Ms. Mills and Ms. Blanchard agreed that Ms. Blanchard would be paid $3,000 per month because Mills couldn’t pay Blanchard’s usual fee of $5,000 per month. The payments were made. In 2008, the relationship between the two women soured. Ms. Blanchard quit and sent Ms. Mills an additional invoice for $2,000 per month in arrears. Ms. Blanchard claimed to be entitled to the greater amount because Ms. Mills allegedly misrepresented her financial situation when telling Ms. Blanchard that she could only pay $3,000 a month when she could, allegedly, afford to pay more. In making this assertion, Ms. Blanchard relied on Ms. Mills having expressed an interest in renting a house for $80,000 per month, having bid $30,000 on a cruise at a charity auction, and having once stated about the fee to Ms. Blanchard, “I don’t know if I can pay the entire amount, but I’ll do something” and, after Ms. Blanchard askeed Ms. Mills if she might pay Ms. Blanchard “a little something,” allegedly agreeing that “I’ll take care of you when I get the big money.” Ms. Blanchard claims that the latter statement was a promise to pay her regular fee of $5,000 both in the future and for the work already performed. The court pointed out that Ms. Mills interest in renting expensive housing was just that; an interest. She had in fact only rented “modest” properties via Ms. Blanchard for $2,000-3,000 per week for one week. Perhaps most tellingly of Ms. Mills’ financial state of affairs at the time is the fact that when she attempted to pay for the cruise bid with a credit card, the payment was denied.
Ms. Mills is reported to have obtained a nearly $50 million divorce settlement with a sizeable interim payment around the times listed above. But as the court pointed out, when Ms. Mills did receive this interim payment, she also started paying Ms. Blanchard $3,000 a month, suggesting that her earlier statements about her inability to pay Blanchard were true, not false, when made. Ms. Blanchard’s monthly invoices further stated “the total amount due” as $3,000, negating any inference that the contractual parties intended a retroactive or future payment for more than that amount.
Ms. Blanchard’s attorney may have wanted to read Baer v. Chase (392 F.3d 609, U.S. Ct. of App. for the Third Cir. (2004)). In that case, Robert Baer, a former state prosecutor wishing to pursue a career as a Hollywood writer, similarly claimed that David Chase had promised to “take care of” Baer and “remunerate him in a manner commensurate to the true value of [his services]” should the project on which Baer worked for Chase become a success. It did: the project was the creation and development of what turned out to be the hit TV series The Sopranos. Baer received nothing for his services. The court found that the alleged contract was unenforceable for vagueness because nothing in the record allowed the court to figure out the meaning of “success,” “true value,” and, in general, what it meant to be “taken care of” in this context.
Potentially starstruck employees be ware: if you think that your employer promises you a chunk of money, make sure you find out exactly what you have to do to earn that. Now as well as hundreds of years ago: alleged promisors are unlikely to simply “take care of you” out of the goodness of their hearts. And as always: get the promise in writing!