Wednesday, July 19, 2017
Half a year ago, I blogged here about dispute about a contract for a guitar used by Elvis Presley during his final 1977 tour. The guitar is currently on display at the National Music Museum (“NMM”), which is affiliated with the University of South Dakota. The museum claims ownership to the guitar as the museum bought it under a valid contract with a Mr. Johnson. Mr. Johnson’s former friend and business partner, Mr. Moss of Tennessee, claims that he is the rightful contractual owner of the contract although he, Moss, never paid for or even possessed the $250,000 guitar. A trial court judge in South Dakota ruled that “[u]nder Tennessee and South Dakota law, title to goods does not pass until delivery is made. Here, Johnson never delivered the Martin D-35 guitar to Moss. Because Johnson never delivered the guitar to Moss, Moss never acquired title to the Martin D-35. The court finds NMM is the owner of the Martin D-35.”
In a somewhat erroneous reporting of the case, the USA Today reports that Mr. Moss has now appealed the case to the Eighth Circuit Court of Appeals. Stay, uhm, tuned for more news on this case.
July 19, 2017 | Permalink
Tuesday, July 18, 2017
At ContractsProf Blog, we love it when our readers send us new material or highlight interesting cases. This post below provides an interesting tale of course of performance with a sprinkling of negotiable instruments law. It comes to us courtesy of Keith Paul Bishop, partner with the California corporate and securities law firm of Allen Matkins. You can find Keith's original post on his firm's blog here.
Most creditors likely assume that they have not been paid unless and until they receive checks from their debtors. In many cases that assumption may be correct, but in some cases it won’t be. Section 1476 of the California Civil Code provides:
If a creditor, or any one of the two or more joint creditors, at any time directs the debtor to perform his obligation in a particular manner, the obligation is extinguished by performance in that manner, even though the creditor does not receive the benefit of such performance.
The application of this statute is illustrated by a case, Sleep EZ v. Mateo, Cal. Ct. Appeal Case No. BV 031618 (July 4, 2017). The contract at issue in the case was an apartment lease. The lessor’s manager had instructed the tenant to pay the rent by mail to a post office box and to always pay by money order. The tenant had done so for 30 years until one day the lessor didn’t receive the rent. The trial court gave judgment for the defendant finding that the tenant had purchased a money order for the full amount of the rent due and the lease required that rent be paid “to landlord by U.S. Mail”. The Court of Appeal affirmed, citing Section 1476. In doing so, the Court rejected the landlord’s argument that under Section 3310 of the California Uniform Commercial Code a money order remains unnegotiated until it is honored.
Several facts may distinguish this case from other cases in which a debtor defends on the basis that the check was mailed. First, the record established that the creditor had required rent to be paid only by mail and prohibited payment in person. Second, the record established that the tenant had performed in this manner for several decades. Third, the tenant was able to introduce evidence that she had performed as directed by the landlord (i.e., the receipt for the money order).
Monday, July 17, 2017
A recent case out of Texas, Carnegie Homes & Construction, LLC v. Sahin, No. 01-16-00733-CV, brings up no fewer than three golden discussion topics of contracts law courses: conditions precedent, specific performance, and unclean hands.
The dispute is actually a pretty run-of-the-mill disagreement over a real estate purchase. It just happens to contain a lot of arguments.
First, Carnegie Homes, the buyer, attempted to argue that a number of conditions precedent had never been fulfilled, and therefore none of its obligations to buy the property had been triggered. The contract in question did read it "shall only be effective upon performance of the conditions set forth in Section E of this agreement." But despite calling the contents of Section E "conditions," the court read them and found them to be covenants, not conditions, dictating when and how much Carnegie Homes would pay and how much their respective obligations would be. Rather than conditions, Section E contained mutual promises, and indeed, Section E was called "Terms" instead of conditions. Therefore, the reference to conditions was a mistaken one.
Second, specific performance was deemed to be the proper remedy, because the contract was for the sale of a unique property. Carnegie Homes tried to argue that specific performance was not usually made available to the seller of a piece of property, only to the buyer of that property. However, the court said that specific performance was not so limited and that sellers have the right to seek and be rewarded specific performance just as much as buyers.
Finally, Carnegie Homes tried to argue that unclean hands prevented the seller, Sahin, from receiving relief. The conduct Carnegie Homes complained of concerned Sahin's service of a supplemental petition that alleged Carnegie Homes committed fraud. Sahin served the petition but never filed it. Carnegie Homes, however, was required to disclose it in a loan application, which allegedly caused it to be refused financing, leading to Carnegie Homes's difficulty in fulfilling its obligation to buy the property. The court, however, found that the disclosure to one lender did not block Carnegie Homes from performing the rest of its obligations, and did not act as unclean hands on Sahin's part. The contract did not require Sahin to help Carnegie Homes obtain financing, nor did it condition Carnegie Homes's obligation to pay on the receipt of financing. Therefore, Carnegie Homes was not excused from its obligations and Sahin was entitled to relief.
Friday, July 14, 2017
This week's list is a day late, but hopefully not a dollar short. Enjoy!
Contracts & Commercial Law eJournal
Recent Top Papers (60 days)
As of: 15 May 2017 - 14 Jul 2017
Law & Society: Private Law - Contracts eJournal
Recent Top Papers (60 days)
As of: 15 May 2017 - 14 Jul 2017
Wednesday, July 12, 2017
I'm blogging this case because I had a whole conversation with non-lawyer friends about what the term "renovate" means, and I think maybe they changed my mind about what "renovate" means. I don't know. Upon first reading this case, I spent a lot of time reflecting on all the episode of "House Hunters Renovations" I've watched and what actually happens in them.
Anyway, if you want to go away and watch a marathon of "House Hunters Renovation" at this point, it's okay. I understand. This blog post will still be here for you to contemplate afterward.
The case in question (there is an actual case) is a recent case out of Pennsylvania, Blackburn v. King Investment Group, No. 2409 EDA 2016, and, as you may have guessed, the debate in the case was over the meaning of the word "renovate" in the contract. One party maintained that the term was ambiguous, because it could have required them to demolish the bathrooms at issue or merely to do what was necessary to bring them up to modern standards (which was less than full demolition). The other party argued that it was not an ambiguous term and clearly required demolition.
The court agreed that it was a clear and unambiguous term that required demolition and replacement, and this was what got me to thinking: Do I think that renovation requires demolition? At first my kneejerk reaction was like, "I don't know, I don't think it does." But after conversations with people, I decided maybe it does mean demolition? That doing something less than demolition wouldn't be called renovation but just updating? If you say you're going to renovate your kitchen, does that always imply that you're demolishing the entire kitchen? If you do less than that, is saying you renovated your kitchen misleading?
My struggling with the word leads me to believe maybe it's not clear and unambiguous but I often feel that way with these types of cases. What I find extra-striking about this case is that, while the court proclaimed the term "clear and unambiguous," it did so by relying entirely on parol evidence, and this parol evidence, in my view, just determined what the parties understood "renovation" to mean. I think finding what renovation meant in the context of this contract to these parties makes a lot more sense than declaring it to be a clear and unambiguous term generally.
Tuesday, July 11, 2017
Will an associate who makes a $1.5 billion (yes, with a “b”) clerical error still make partner?... Do law firms owe a duty of care to clients of opposing party’s law firm? The answers, as you can guess: very likely not and no! The case goes like this:
General Motors (“GM”), represented by law firm Mayer Brown, takes out a 2001 loan for $300 million and a 2006 loan for $1.5 billion secured by different real estate properties. JP Morgan acts as agent for the two different groups of lenders. GM pays off the first loan, but encounters severe financial troubles and enters into bankruptcy proceedings before paying off the big 2006 loan. GM continues to follow the terms on that loan, and the bankruptcy court also treats the lenders as if they were still secured.
What’s the problem with this, you ask? When Mayer Brown prepared and filed the UCC-3 termination statement for the 2001 loan, the firm also released the 2006 loan by mistake. The lenders of that were thus not secured under the law any longer even though both GM itself and the bankruptcy court treated them as such. The big loan was simply been converted from a secured transaction into a lending contract. Yikes.
How did this happen? The following is too good to be true, if you are in an irritable or easily amused summer mode, so I cite from the case:
“The plaintiffs' complaint offers the following autopsy of the error: a senior Mayer Brown partner was responsible for supervising the work on the closing. He instructed an associate to prepare the closing checklist. The associate, in turn, relied on a paralegal to identify the relevant UCC-1 financing statements. As a cost-saving measure, the paralegal used an old UCC search on General Motors and included the 2006 Term Loan. Another paralegal tasked with preparing the termination statements recognized that the 2006 Term Loan had been included by mistake and informed the associate of the problem, but he ignored the discrepancy. The erroneous checklist and documents were then sent to [JP Morgan’s law firm] Simpson Thacher for review. The supervising partner at Mayer Brown never caught the error, nor did anyone else. With JP Morgan's authorization, the 2001 Synthetic Lease payoff closed on October 30, 2008 … We must also note that, when provided an opportunity to review the Mayer Brown drafts, a Simpson Thacher attorney replied, ‘Nice job on the documents.’”
The lenders represented by JP Morgan sued not Simpson Thacher or JP Morgan, but… Mayer Brown; counsel for the opposing party, arguing that the law firm owed a duty to them not because Mayer Brown represented them or their agent, JP Morgan, in connection with these loans, but rather because, plaintiffs argued, Mayer Brown owed JP Morgan – not the plaintiffs directly – a duty of care as a client in other unrelated matters! As the court said, an astonishing claim.
A law firm or a party directly must always prepare a first draft of any document. “By preparing a first draft, an attorney does not undertake a professional duty to all other parties in the deal.” In sum, said the court, “there is no exception to the Pelham primary purpose rule, and there is no plausible allegation that Mayer Brown voluntarily assumed a duty to plaintiffs by providing drafts to Simpson Thacher for review.”
The case is Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, States District Court for the Northern District of Illinois, Eastern Division, Case No. 15 C 6742
Monday, July 10, 2017
Over at the hallowed mothership of the Law Professor Blogs Network, TaxProf Blog, Jeff Lipshaw (Suffolk) has written a thought-provoking post entitled "Robot Lawyers, 'Skills Training' and Legal Education." Here are two of the key closing paragraphs:
As a long, long, long time practitioner and generalist, I continue to be amused (or something like that) by the buckets of legal education (the rooms of the Mystery House). For example, it took returning to academia to find out that "commercial law" (i.e. the UCC) is a different area than "corporate law." Within business law, there are corporate camps and "uncorporate" camps, with the latter seemingly most interested in demonstrating why the area in which they happen to write and teach is normatively superior to the other (my friend and co-author, the late Larry Ribstein, being a prime example of the latter).
In the long, long term, I think the crunchable middle will be both doctrine, as traditionally taught, and what today pass for "skills." Both, to a large extent, have the potential of being robotic. The long game is in doing and teaching what robots really can't do, or in managing the robots. I'll put aside both trial and appellate litigation and focus on everything else lawyers do. In the interim, I'd do away with a lot of classes that are merely more yammering away at segments of doctrine by way of litigated cases, reverse the classroom, and make classes ones in which you merely bring doctrine to the party along with all the other theories. (In my own area, I'd do away with the traditional business law courses, and combine with the business school to teach "Law & Finance of Business Entities" with J.D. and M.B.A. students intermingled.)
The whole post is well worth a read and is available in its natural habitat here.
When I teach my students rules of construction and we talk about contra proforentem, I feel like the standard examples I use with them are insurance contracts, where it's easy to identify who the drafter is. A recent case out of Indiana, Song v. Iatarola, Court of Appeals Case No. 64A03-1609-PL-2094 (thank to D.C. Toedt for the new non-paywall link!), involved an actual discussion of who was the "drafter" in a situation where both parties had input in the contract. The Iatarolas seemed to try to argue that Song should be considered the drafter and have the contract construed against him because he was the one who typed it into Microsoft Word. The court pointed out, though, that the rule of construction is about independent drafting, not a situation where both parties contributed to the contractual terms. Who physically types the contract up means nothing if both parties have helped to decide on the terms being typed up. I have never thought to discuss that with my students, but I think I might bring it up, just to be clear on what the rule is talking about.
From time to time on ContractsProf Blog, we like to highlight innovative or interesting teaching materials that will be of interest to our readers. Jay A. Mitchell is the Director of the Organizations and Transactions Clinic at Stanford Law School and is the author of Picturing Corporate Practice (West Academic). In the current push for pedagogy and materials to create law graduates who are more "practice ready," Professor Mitchell's text stands out with its approachable and innovative design choices for engaging students. I asked the Picturing Corporate Practice author if he would tell us more about his book in a guest blog post.
Without further ado, let me turn this post over to Professor Mitchell:
Picturing Corporate Practice is a blend of text and visuals intended to introduce students to corporate and transactional work.
The book includes a brief overview of corporate practice and chapters focused on advice development, transaction planning and management, contracts and other legal documents, board meetings, litigation (from a corporate perspective), SEC filings, corporate pro bono, and client service.
The fun part here is that I collaborated with a graphic designer on the thing. We used a landscape format, paid close attention to layout and typography, built in lots of white space, included 50+ diagrams, timelines, and other graphics, and used a conversational writing style throughout. I’m a big believer in the value of design and typography for legal work-products, course materials, and other information products -- the book reflects that belief.
And I tried to draw on my experience not only from the Stanford Law School clinic but also as a former senior lawyer at a big company (and thus client) and law firm partner, and on the input of the five former students who read the entire manuscript.
Several notes about goals and themes:
- Orientation. Most importantly: I wanted simply to orient folks to the work. Corporate is unfamiliar to most students. I tried to provide some broader ways of thinking about the practice and what we do as corporate lawyers -- build things, design processes, produce products that people use, manage projects, engage in a craft. I think those frameworks can help students start to get their head around the job.
- Documents. The book gives considerable attention to contracts and other legal documents, the core products of the trade. It discusses reading, a fundamental lawyer activity that in my view doesn't receive the attention it deserves. It identifies document characteristics -- business focus, variety, functionality, visibility, longevity, etc. -- and how law is “underneath” and reflected in our documents. There’s coverage of practical tasks like document planning, working with forms, and proofreading. The idea was not only to demystify but also cultivate an appreciation for the many dimensions and implications of legal documents, and for what it takes to do them well.
- Getting Started on a Problem. The book provides tangible suggestions for getting started on a project or document. Students and new lawyers often don’t know how to get going on assessing a business situation, or dealing with a big contract -- I see that in the clinic all the time. So the book includes ideas about how to get traction, how to start getting a grip on a problem, and emphasizes the relevance of common sense and commercial sensibility.
- Visual Thinking. I wanted to make the case for one of those practical suggestions: drawing pictures to facilitate thinking and collaboration. Drawing is an unusually effective tool for thinking, and something that we don’t talk about much in law school. The book includes a brief general discussion, grounded in research from psychology, cognitive science, engineering, and other disciplines, and then lots of ideas and examples across the practice.
- How Things Work. The book includes how-things-work information and vocabulary. Like, what’s a closing? How do covenants and conditions work together? What do board resolutions do? How does an IPO work? What’s a T&R schedule? When the partner says “we need to make conforming changes,” what does she mean? What’s an officers’ certificate? These are questions folks may be reluctant to ask, and stuff that people in firms rarely explain.
- Habits of Mind. The book emphasizes the central importance of ways of working and professional disciplines: organization, attention to detail, project management, diligence, stamina, responsiveness, service orientation…. all things especially important early in one’s career, and generally not big topics of emphasis in school.
- Fun. I try to be direct but encouraging, and to suggest the intellectual and professional enjoyment in the job -- which can be easy to lose sight of in the grind of law school and especially law firm life.
We use this book as a text in my clinic, and it could be used in other transactional skills courses as well; the chapters on deal work and board meetings are relevant to, say, an M&A course. I think the book could be used in 1L lawyering skills and legal writing classes and in contracts and contract drafting courses, with the two chapters about documents being of particular relevance. I’d also love to see visual methods be introduced in lawyering skills or comparable 1L courses -- it’s really useful in this line of work.
Outside of skills and contracts-oriented classes, I can imagine that corporations instructors might find useful the chapter about board meetings. Evidence instructors who want to add a touch of corporate to the curriculum could use the chapter about litigation, which centers on record building and attorney-client privilege in the transactional setting. Public interest and pro bono instructors might find the pro bono chapter useful in briefing students about nonprofit organizations. And the increasing number of lawyers and others interested in legal design might find both the visual methods discussion and the book design itself of interest.
So, the book is a little different, both for the transactional skills space and for the legal education genre generally. I hope folks find it helpful.
More information on Picturing Corporate Practice is available here. Thanks to Jay Mitchell for providing this guest post.
Do you have any innovative contracts, commercial, or transactional teaching materials that would be of interest to our readers that we could highlight on ContractsProf Blog? If so, drop me (Mark Burge) an email with the information, and you might be our next featured guest post.
Friday, July 7, 2017
If You Want to Hold Your Real Estate Development to Its Master Plan, Make Sure It's in Your Contract
A recent case out of Idaho, Swafford v. Huntsman Springs, Inc., Docket No. 44240, serves as a word of warning for those purchasing plots in real estate developments. As someone who recently purchased a plot of land in an in-progress real estate development, I read this case with interest.
The Swaffords bought a plot of land early on in the development's life, based on a master plan that they had viewed. Later, as the development continued underway, Huntsman Springs altered its plans, so that they way it turned out was not as it had been in the master plan the Swaffords had viewed. The Swaffords then sued for breach of contract.
The problem was that the "master plan" had never been part of the Swaffords' contract with Hunstman Springs. The contract did not incorporate the master plan and in fact the contract stated in several places that Huntsman Springs was bound by no other representations outside of the four corners of the contract and, in an integration clause, that the contract was the entire agreement. The contract was much less specific in Huntsman Springs's obligations to the Swaffords, but Huntsman Springs did comply with all of them. Therefore, there was no breach of contract.
Important lesson learned: If you want your developer bound by a master plan, make sure it's in your contract. (Of course, that's possibly easier said than done, depending on power differentials. But, if you allow for reasonable modifications of that master plan in some way, maybe you could accomplish it.)
Thursday, July 6, 2017
Contracts & Commercial Law eJournal
Law & Society: Private Law - Contracts eJournal
Tuesday, July 4, 2017
A recent case out of New York, In re Estate of Edmund Felix Hennel, No. 78, explains when promissory estoppel will overcome the statute of frauds, and the answer is: not always. Sometimes unfairness may result from the failure to overcome the statute of frauds, but promissory estoppel only saves a party in cases of unconscionable injury.
In the case, Hennel's grandsons allegedly reached an agreement with him whereby they would assume maintenance for a particular property and eventually assume ownership, and their grandfather would pay off the property's mortgage in his will. A 2006 will seemed to have terms that supported this oral agreement. However, a 2008 will revoked all previous wills and did not include the same terms, although the grandsons claimed Hennel told them nothing had changed in their agreement. The grandsons assumed ownership of the property but the 2008 will failed to pay off the property's mortgage.
After Hennel's death, his grandsons sued to have the property's mortgage satisfied by their grandfather's estate, but they admitted that they could not satisfy the statute of frauds, since their agreement with their grandfather had been oral. Instead, the grandsons sought to rely on promissory estoppel. The court held, however, that even if they satisfied the elements of promissory estoppel, they would not suffer unconscionable injury if the statute of frauds was enforced, and unconscionable injury was required to allow promissory estoppel to trump the statute of frauds. Here, the grandsons had been able to pay the mortgage out of the rental income the property generated, and the grandsons did not have to expend any personal money to pay the mortgage. In such a case, there was no unconscionable injury.
The court noted that the grandsons could always sell the property if they wished to get out from under the mortgage, considering that the property had an estimated $150,000 worth of equity. The grandsons contended that, had the mortgage been paid as they had been promised, they would have received the full value of the property ($235,000) as equity. The court agreed this loss was unfair, but it was not unconscionable. In fact, the court stated, "cases where the party attempting to avoid the statute of frauds will suffer unconscionable injury will be rare."
Monday, July 3, 2017
What happens when contract and document legal analytic software goes open source? Is RoboLawyer on the horizon? Are unmet needs to legal transactional services about to be fulfilled? Maybe some of both. LexPredict, a legal software company associated with Chicago-Kent law prof Daniel Katz, announced today that we are about to find out. The results should be of great interest to those of us who follow trends in legal tech. Below are some key paragraphs from the press release on the open-sourcing of ContraxSuite:
Over the last decade, we’ve spent many thousands of effort-hours and hundreds of thousands of dollars developing the contract and document analytics tools that we use with clients. These tools, based on enterprise-quality open source frameworks for natural language processing, machine learning, and optical character recognition, have allowed us to quickly and easily attack many problems, from securities filings and court opinions to articles of incorporation and lease agreements.
Today, we are proud to announce that we plan to open source our core platform for document analytics as ContraxSuite. This code base will be hosted on Github under a permissive open-source licensing model that will allow most organizations to quickly and freely implement and customize their own contract and document analytics. Like Redhat does for Linux, we will provide support, customization, and data services to "cover the last mile" for those organizations who need support or assistance.
We believe that the future of law lies in its central role in facilitating and regulating the modern information economy. But unless we start treating law itself like the production of information, we’ll never get there. We hope our actions today will help lawyers and other LegalTech companies accelerate the pace of improvement through more open collaboration.
* * *
The real challenge in contract analytics is to develop the so-called "training data" - the set of documents and labels used to "teach" the machine what separates a lease agreement from a purchase/sale agreement from a retirement benefits plan. Herein lies the true value of the current software and service providers. But, paradoxically, almost all providers get their information from one of two sources - either public sources of agreements, like the SEC’s EDGAR database or evidence from public courts, or private sources of agreements - their clients. Many organizations have therefore paid for the privilege to give away their own information so that someone else can profit.
By open-sourcing ContraxSuite, we hope to change this dynamic. The analysis and standardization of contracts and corporate governance material is key to the transformation of our economy. But blockchain and Smart Contracts aside, there are significant improvements in risk management, compliance, and profitability that can be gained by treating contracts as valuable data. Until legal departments and law firms can be "sequentially motivated," to borrow Professor Agarwal’s language, we will not see this maturation of the industry.
In the near future, we’ll be revealing more details about this open source strategy - including partnerships, support and customization services, and open-source license model. In the meantime, we hope to get everyone thinking fundamentally about how we do business in legal tech. What does the client really want - software licenses, or a real solution?
The full text of the press release is available here.
Sunday, July 2, 2017
Friday, June 30, 2017
Denise Daniels of Minnesota, who says that she has worked with children’s social and emotional development for more than four decades, claims that she pitched her idea for what became the 2015 animated box office success "The Moodsters" to Disney-owned Pixar a number of times between 2005 and 2009 with the understanding that she and her team would be compensated if Disney used her idea.
Ms. Daniels just filed a complaint in federal court in the Central District of Los Angeles stating that she had an implied-in-fact contract that obligated Disney to compensate and credit her if the studio used her idea. Ms Daniels also argues that "The Moodsters" would have featured five color-coded, anthropomorphic characters, each representing a single emotion: happiness, sadness, anger, love and fear. The characters would reside in an abstract world within a child. The movie "Inside Out" features five characters based on the emotions joy, sadness, anger, fear and disgust. The characters reside in the mind of a young girl named Riley, who must learn to adjust to a new life when her family moves to San Francisco.
In March, Disney was also sued over 2016's "Zootopia." In that lawsuit, a screenwriter claimed that the studio stole his original idea and copied his designs for the movie's animal characters.
So, how would you advise your students to best take care of the interests of clients seeking advise in pitching ideas to major entertainment companies? “Get a contract in writing ahead of time” is easier said than done. If you really have a good idea for a movie or the like, how do you even get to talk to a studio about it without at least revealing something about your idea? - And if you do, might it then not already be too late? For example, it seems odd to seek to discuss potential ideas with an entertainment company simply saying “I have a good idea, but first, let’s talk legal details.” Wouldn’t the company just tell you to get lost, if you even got a response at all? On the other hand, so many of these suits seem to take place that at least some sort of preliminary writing seems to be a good idea for both parties.
In 2004, Disney lost a case over profits for ABC’s “Who Wants to be a Millionaire,” which resulted in a $320-million verdict against Disney in favor of a British licensing company.
Is Disney just too risk-willing in these types of cases, or are private individuals people egged on by the chance of winning some “big money”? It’s hard to tell. Asked why Daniels waited two years before filing her lawsuit against Disney, Daniels’ attorney says “you don’t file these cases lightly” and that such time gaps are not unusual in these types of cases.
Thus, the moral of this story might simply be: get something in writing and if anything goes wrong, take legal action as soon as possible to be on the safest side possible.
Thursday, June 29, 2017
Recent Top Papers (60 days) as of: 30 Apr 2017 - 29 Jun 2017
Recent Top Papers (60 days) as of: 30 Apr 2017 - 29 Jun 2017
Monday, June 26, 2017
"As Is" Clauses Don't Grant You Immunity If You Commit Fraud -- and Parol Evidence Can Help Prove It
A recent case out of South Dakota, Oxton v. Rudland, #28070 (behind paywall), is another case involving alleged fraud during the sale and purchase of a house, this one with an explicit parol evidence debate.
As in the previous case I blogged about on this topic, the contract for the house contained an "as is" clause. The Oxtons agreed that the contract with this "as is" clause was unambiguous and fully integrated. However, they argued that the parol evidence rule never applies when a party is alleging fraud. Because they were alleging fraud, they wanted to be able to bring in parol evidence regarding that fraud.
The court agreed that the parol evidence rule does not apply in cases of fraud, which cannot be avoided by disclaimers in the contract. Therefore, the court looked at the Oxtons' evidence of fraud, which consisted of the fact that the Rudlands who sold them the house had just bought it a few months before and in the course of buying it had been told about "major settling" of the house (the problem at issue). The Rudlands, however, did not disclose that "major settling" when they sold to the Oxtons months later. The Rudlands countered that the disclosure statement that did not contain any language about "major settling" was largely irrelevant, and that the Oxtons were well aware they were purchasing the home "as is" and had the opportunity to obtain an inspection before finalizing the contract.
The court found that it could not resolve these questions of fact but that there was enough evidence to possibly support the Oxtons' fraud claim, such that summary dismissal of that claim was inappropriate. The court allowed the parol evidence to support the claim, and also explicitly pointed out that "as is" clauses do not provide "general immunity from liability for fraud." Therefore, the Rudlands could not rely on the "as is" clause alone as blanket protection for all of their behavior and statement, and the litigation over the alleged fraudulent inducement should continue.
It's interesting to contrast this with the Texas case I just blogged. There, the court held that getting an inspection was enough to prove that you were not relying on the sellers' statements. The Oxtons did obtain an inspection in this case but little attention is given to that fact. I wonder if it will gain more prominence as the debate over the alleged fraud goes forward, as at the moment the case was pretty focused on the parol evidence rule and the operation of the "as is" clause, not on the effect of the inspection.
Friday, June 23, 2017
When I teach "usage of trade" (UCC § 1-303) in Contracts or in Sales, I inevitably bring up the example of "two-by-four" lumber. The example is a good one in that most students either already know first hand that a two-by-four board is smaller than two inches by four inches, or else they readily grasp the concept that terms in a contract can come from a widespread meaning that is at variance with its literal meaning. For years, I thought the point of the example was non-controversial--or at least less convoluted than more famous interpretive questions like, "What is 'chicken'?" or "Is a burrito a 'sandwich'?"
At least one litigant would disagree with my characterization of the lumber example as being obvious. This story in the Des Moines Register describes a lawsuit in which hardware chains Home Depot and Menards are accused of deceiving buyers by selling "four-by-four" lumber that is not four inches by four inches in dimension:
The retailers say the allegations are bogus. It is common knowledge and longstanding industry practice, they say, that names such as two-by-four or four-by-four do not describe the width and thickness of those pieces of lumber.
Rather, the retailers say, those are “nominal” designations accepted in government-approved industry standards, which also specify actual minimum dimensions — 1½ inches by 3½ inches for a two-by-four, for example, and 3½ inches by 3½ inches for a four-by-four.
“Anybody who’s in the trades or construction knows that,” said Tim Stich, a carpentry instructor at Milwaukee Area Technical College.
True enough, said Yevgeniy (Eugene) Turin of McGuire Law, the firm that represents the plaintiffs in both cases.
However, Turin and his clients dispute that the differences between nominal descriptions and actual dimensions are common knowledge.
“It’s difficult to say that for a reasonable consumer, when they walk into a store and they see a label that says four-by-four, that that’s simply — quote unquote — a trade name,” Turin said in an interview.
Turin said his clients don’t argue that the retailers’ four-by-fours (and, in the Menards’ case, a one-by-six board as well) are not the correct size under the standards published by the U.S. Department of Commerce. The product labels, however, should disclose that those are “nominal” designations and not actual sizes, Turin said.
With some of Menards’ lumber products, both the nominal and actual size are shown, a document Turin filed in the case against Menards says. But the lumber in question is labeled only with a nominal size — "4 x 4 — 10’," for example — that consists of numbers “arranged in a way to represent the dimensions of the products,” the document says. That leaves the “average consumer” to conclude that the pieces measure four inches by four inches, Turin said.
Some Menards customers aren’t buying it.
“They haven’t measured four inches by four inches since the ‘50s,” said Scott Sunila after loading purchases into his pickup.
“My God, that’s crazy,” the 60-year-old bulldozer operator said of the lawsuits. “Let me on the jury. They ain’t winning. And they’re gonna pay me extra for my time.”
But an unscientific survey of 18 Menards shoppers found that about a third were unaware that "four-by-four" doesn’t represent actual dimensions of that piece of lumber.
The problem with defining terms by usage of trade is that the term usage must have "such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question." UCC § 1-303(c). The existence of the trade usage is not a question of law, but a question of fact when (as here) it is not embodied in a trade code, such codes rarely being applicable to or ratified by consumers. If a party cannot establish the existence of trade usage terminology, then express terms will typically prevail over trade usage. UCC § 1-303(e).
My initial take was that this lawsuit was a clear loser, but the fact that the burden of proof lies with the hardware stores suggests that the plaintiffs at least have a chance. Now, would I take this case on a contingent fee basis? Er... no.
Thursday, June 22, 2017
An article on CNN Media posted on June 21 reads, in part: “A contract for the current season of ‘Bachelor in Paradise,’ which CNNMoney … has confirmed as authentic, provides a rare window behind the scenes of reality shows, in the ‘Bachelor’ franchise and beyond, revealing how they are able to manipulate ‘reality’ and create drama where none actually exists….” Shocker! More surprising, perhaps, is the extent to which the companies producing these types of TV shows seek to avoid liability in potential legal proceedings.
Whereas the “Bachelor in Paradise” contract requires participants to “refrain from unlawful behavior or harassment” and to acknowledge that the producers “do not encourage intimate or sexual contact with other contestants on the show,” the contract also tries to free the producers from any responsibility if a contestant is injured, even if that injury comes from “unwelcome/unwanted sexual contact or other interaction among participants.” Participants will also have to agree that the producers are not liable for almost anything that happens to them in the course of filming, whether they are injured, suffer emotional trauma, or catch a sexually transmitted disease.
Furthermore, the producers of the show can do nearly anything they want to the participants and their reputation, including filming them naked, airing the details of any part of the life they think is relevant, or flat out lying about them and things they have done. Nicole Page, a New York-based entertainment attorney with Reavis Parent, said that the contract means, from the producers' perspective, "I can basically take your image and do whatever I want with it and I own it and you have no recourse." Contracts like these are common in reality TV, she said. They "have been around since reality TV began," she added. Needless to say, should participants wish to pursue civil legal action, they will have to arbitrate.
Why would contestants want to agree to such far-reaching contracts? For their chance at 15 minutes of fame, of course. If a contestant tries to renegotiate the contract, plenty of other people are ready to take their place.
The contracts, however, may be so broad that they are not legally enforceable, according to one CNN/HLN legal analyst. Another commentator says that these contracts are “so one-sided it seems absurd, but this is the price people are willing to pay to be on television for whatever it is.” “It's not a two-sided contract," the CNN/HLN attorney says. "A contract is supposed to be what they call 'at arms length,' which means there is leverage on both sides and it's freely entered into and freely negotiated. But this is clearly a contract that is one-sided.”
With all due respect to the CNN/HLN attorney, the mere argument that the contract is “one-sided” is, of course, not very strong unless the contracting procedure reaches the level of unconscionability. Yes, this might be a “take-it-or-leave-it” type of contract, but those are, as we all know, also widely used in numerous other industries and companies where courts have upheld them. I think it highly unlikely that contestants on a famous TV show will prevail on an argument that their contracts were so one-sided as to reach the level of unconscionability under contract law. After all, the TV contestants really don’t need to be on these shows at all; they choose to do so on their own free volition, typically for a rather vain chance at fame and fortune (I know that that is not a legal argument, but we all know what this would look like in court…).
Much worse are the alleged attempts by the companies to have the participants sign away their rights under criminal law. That they might very well not be able to do. "If the contract requires you to release any claims you have that you were sexually assaulted, which is a crime, then the contract may or may not be enforceable under the public policy of the state of California [where this contract was drafted]," said entertainment litigator Josh Schiller of Boies Schiller Flexner. "Law enforcement could get involved and bring charges ... would we want to enforce a contract that no one would be liable if they were filmed being sexually assaulted? That would create a real problem." No kidding. In other cases, contestants should closely consider what this type of deal really involves.
For the rest of us, we live in times when lines between fact and fiction are blurred significantly. It seems that an increasing amount of people are comfortable dismissing facts as “fake” when the converse is true. I’ve encountered that numerous times after the most recent presidential election myself, both in South Dakota and even “liberal California.” In addition to the usual climate change denial in the Midwest, I encountered a “crazy cat lady” in Los Angeles the other day claiming that highly established Audobon studies and Smithsonian studies demonstrating how feral cats kill numerous birds and other small wildlife is “not true”! Sigh.
We should consider how we best teach our students to account for this new reality in contract and other law. I think we also need to increasingly point out to them that what they see in the media is not necessarily true. Granted, with reality TV shows, that is obvious, but I have had to undertake rather serious discussions with my own students recently about what “news” really is and what it is not! What we have taken as granted as law professors even in recent years may no longer be the case or may be changing.
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