ContractsProf Blog

Affirmative Defenses in Arkansas

NB: An earlier version of this post identified the case as coming from Alabama rather than Arkansas.  Many thanks to the attentive reader who caught the error.

The Eighth Circuit decided a contracts issue last week in All-Ways Logistics, Inc. v. USA Truck, Inc., No. 08-1054 (Oct. 1, 2009).   The District Court awarded All-Ways about $3 million in breach of contract damages on a commission agreement.  The interesting issue was USA Truck’s argument that the District Court erred in failing to instruct the jury properly on its affirmative defense that All-Ways had waived the breach by continuing to accept benefits from the contract after discovery of the breach.

In 1999 the parties entered into an agreement under which USA Truck was to pay All-Ways a five percent commission on all freight that All-Ways solicited and USA Truck transported.  In 2002, USA Truck informed All-Ways that it was terminating the agreement and that commissions would no longer be paid with respect to an account with Rheem Manufacturing, one of the largest accounts that USA Truck had gotten through All-Ways’ efforts.  All-Ways complained, but the parties continued their relationship with respect to other accounts.  In 2005, USA Truck began negotiating with the other large account it had gotten through All-Ways so that USA Truck could bypass All-Ways on that account as well.   In August of 2005, USA Truck gave notice that it was terminating its commission agreement with All-Ways, and that termination became effective in October.

In May 2006, All-Ways brought suit seeking recovery under the commission agreement for commissions earned but not paid on freight solicited by All-Ways and shipped by USA Truck through October 2005.  After a jury trial, All-Ways won a verdict in excess of $3 million, plus prejudgment interest and attorneys’ fees.

USA Truck contended that All-Ways had waived the breach by continuing to accept benefits under the agreement.  The district court refused to instruct the jury on that affirmative defense, finding that it did not apply to the facts of the case.  The Eighth Circuit found the question a close one, but found no abuse of discretion.  The district court reasoned that the agreement between the parties was structured to give rise “to a separate and unilateral contract between the parties [with respect to each account] and that All-Ways’[s] performance as to one account did not entitle it to a commission on another, nor did USA’s breach by nonpayment as to one account create a cause of action for breach as to the others.”

USA Truck contended that the question of whether the commission agreement at issue was severable in this manner should have been submitted to the jury.   However, the district court found – and the Court of Appeals agreed – that the severability of the agreement could in this case be established as a matter of law based on its clear and unambiguous terms.

In addition, the Eighth Circuit noted that there was no unambiguous waiver in this case because All-Ways had protested the termination of its commissions.  Here the Eighth Circuit reasoning seems a bit shaky to me.  The affirmative defense of acceptance of benefits exists because such acceptance is itself evidence of waiver.  The Eighth Circuit distinguished cases establishing that proposition on the ground that those cases did not apply to severable contracts.   Still, that leaves the court with one ground for its decision (the agreement was severable) and not two (severability and waiver).

Obsessive readers of the blog (and comments on the blog) might also note with interest that Arkansas law permits recovery of “reasonable attorneys fees” in contracts cases.  The horrors!  To make the Death of Contract theme even more apparent, in this case plaintiff’s attorneys sought recovery of a one-third contingency fee (which came to just over $1 million) when recovery by the lodestar method would have yielded just over $217,000.  The Eighth Circuit found no abuse of discretion in the district court’s award of fees under Arkansas law.

[Jeremy Telman]

 

One for the Contracts Profs – With a little Statute of Frauds and a little Varney v. Ditmars

Back in April 2007, the WSJ Law Blog declared Snyder v. Bronfman “the best tabloid suit” of that year.  The lawsuit may not have lived up to that superlative (didn’t Anna Nicole Smith die that year?), but it certainly should be on the radar of Contracts Profs.  It will be argued before the New York Court of Appeals next week (10/14) – and there is an added bonus, because the Court website now features webcasts of oral arguments.

In the lawsuit, Richard Snyder, the former Chairman and CEO of Simon & Schuster, sues Edgar Bronfman, the CEO of Warner Music Group.  In a nutshell, Snyder claims that, while vacationing in the Carribean, he and Bronfman agreed to work together to “acquire companies using funds principally from sources outside the Bronfman family.”  However, after Snyder assisted in negotiating Bronfman’s 2003 takeover of Warner Group, Snyder alleges that Bronfman failed to compensate Snyder accordingly.  Snyder’s claims sound in (1) breach of joint venture agreement; (2) breach of fiduciary duty; (3) joint venture accounting; (4) unjust enrichment; (5) promissory estoppel; and (6) quantum meruit.  Bronfman moved to dismiss all claims.

Here’s the rub (or part of it at least): after Snyder and Bronfman discussed their business venture (over daquiris?), they did not put their agreement in writing.  Indeed, Snyder alleges that Bronfman said they did not need a writing because they were both “honorable men.”

One issue that has been percolating in the courts is whether Snyder and Bronfman’s deal comes within the statute of frauds, NY GOL 5-701(a)(10).  That provision provides, in pertinent part, that the following agreements must be in writing to be enforceable:

[A]  contract  to  pay  compensation  for  services  rendered  in negotiating  a  loan, or  in  negotiating the purchase, sale, exchange, renting or leasing of any . . .  business  opportunity, business, its good will, inventory, fixtures or an interest therein, including a majority of the voting stock interest in a  corporation  and  including  the creating  of  a  partnership interest.  "Negotiating" includes procuring an introduction  to  a  party  to  the transaction  or  assisting  in  the  negotiation  or consummation of the transaction. This provision shall apply to a contract implied in fact or in law to pay reasonable compensation . . . .

Bronfman argues that, because the deal was not in writing, the statute prohibits Snyder from recovering a finder’s fee or other compensation based on services rendered in connection with a corporate acquisition.  Synder argues that this section of the statute does not apply in this case, because Snyder was a joint venturer with Bronfman, not a finder or broker.  The trial court sided with Snyder, and held that Snyder’s allegations, when taken as true, allege that he “functioned as more than just a broker assisting defendant in a limited and transitory manner to find a company the latter could acquire and run.”  Accordingly, the trial court refused to dismiss the complaint based on the statute of frauds.

 The Appellate Division reversed.  The Appellate Division read NY GOL 5-701(a) (1) with a wider lens: 

In relevant part, this enactment renders void any oral agreement “to pay compensation for services in . . .  negotiating the purchase . . . of any . . . business opportunity.”  As is evident, the statute broadly applies to “any” business opportunity. 

Issue two at the Court of Appeals could be: even if Snyder’s claims do not come within the statute of frauds, should the breach of a joint venture agreement, breach of fiduciary duty and a claim for an accounting be dismissed because Snyder alleges an agreement that is too inherently vague to support a joint venture claim and the complaint fails to allege any agreement between the parties as to the sharing of losses?  Relying heavily upon Varney v. Ditmars, the trial court held that the agreement was too vague to create an enforceable contract.  Here’s a taste of its reasoning:

[A]s a matter of basic contract law, "[i]f an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract." Cobble Hill Nursing Home, Inc. v. Henry & Warren Corp., 74 NY2d 475, 482, (1989), citing Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 NY2d 105, 109 (1981); Restatement [Second] of Contracts §33).

In Varney v. Ditmars (217 NY 223 [1916]), the Court of Appeals affirmed a directed verdict in favor of the defendant where the plaintiff alleged that his employer, in addition to paying him $40 per week to work as an architectural draftsman, promised to pay plaintiff a "fair share" of defendant's profits through the end of the calendar year. Id. at 225-26. The Court ruled that this promise was "vague, indefinite and uncertain and the amount cannot be computed from anything that was said by the parties or by reference to any document, paper or other transaction." Id. at 227.

The contract in question, so far as it relates to a share of the defendant's profits, is not only uncertain but it is necessarily affected by so many other facts that are in themselves indefinite and uncertain that the intention of the parties is pure conjecture. A fair share of the defendant's profits may be any amount from a nominal sum to a material part according to the particular views of the person whose guess is considered. Such an executory contract must rest for performance upon the honor and good faith of the parties making it. The courts cannot aid parties in such a case when they are unable or unwilling to agree upon the terms of their own proposed contract.

It is elementary in the law that, for the validity of a contract, the promise, or the agreement, of the parties to it must be certain and explicit and that their full intention may be ascertained to a reasonable degree of certainty. Their agreement must be neither vague nor indefinite, and, if thus defective, parol proof cannot be resorted to.

* * *

This is not a case involving a missing "price term" where the amount can be determined objectively without input from the parties or by reference to an extrinsic event, commercial practice or trade usage. Nor is this an employment contract that contains an open additional compensation clause, as in Guggennheimer v. Bernstein Litowitz Berger & Grossmann LLP (11 Misc 3d 926 [Sup Ct, NY County 2006]), where sufficient guidelines could exist from past practices by the defendant law firm to allow the court to supply a bonus figure. It is the plaintiff's job to articulate the terms of the joint venture agreement upon which he sues, and if he cannot do so in his own pleading with sufficient definiteness, than the action is ripe for dismissal at this stage. See Freedman v. Pearlman, 271 AD2d 301, supra (breach of contract claim premised on promises of "fair compensation" dismissed, pre-answer, for failure to state a cause of action).

Having dismissed based on the statute of frauds, the Appellate Division did not reach the certainty issue. 

The promissory estoppel claim was likewise dismissed as “too inherently vague.”  The unjust enrichment and quantum meruit claims were also dismissed. 

[Meredith R. Miller]

7 Crucial Words: "Except as otherwise specified in this Agreement...."

In sexier law subjects, you might discuss the 7 dirty words.  Here, at ContractsProf Blog, we talk about 7 crucial words: "Except as otherwise specified in this Agreement..."

On ocassion, we've mentioned Dan Rather's breach of contract suit against CBS.  Yesterday, a New York appellate court held that the trial court erred in declining to dismiss Rather's breach of contract claim against CBS.  It looked to the "pay or play" clause in Rather's contract and reasoned:

Rather alleges that he delivered his last broadcast as anchor of the CBS Evening News on March 9, 2005, and that, since he was only nominally assigned to 60 Minutes II and then 60 Minutes, he should have received the remainder of his compensation under the agreement in March 2005. Rather claims that, in effect, CBS "warehoused" him, and that, when he was finally terminated and paid in June 2006, CBS did not compensate him for the 15 months "when he could have worked elsewhere." This claim attempts to gloss over the fact that Rather continued to be compensated at his normal CBS salary of approximately $6 million a year until June 2006 when the compensation was accelerated upon termination, consistent with his contract.

Contractually, CBS was under no obligation to "use [Rather's] services or to broadcast any program" so long as it continued to pay him the applicable compensation. This "pay or play" provision of the original 1979 employment agreement was specifically reaffirmed in the 2002 Amendment to the employment agreement.

That Amendment also provided, in subparagraph 1(g), that if CBS removed Rather as anchor or co-anchor of the CBS Evening News and failed to assign him as a correspondent on 60 Minutes II or another mutually agreed upon position, the agreement would be terminated, Rather would be free to seek employment elsewhere, and CBS would pay him immediately the remainder of his weekly compensation through November 25, 2006.

We agree that subparagraph 1(g) must be read together with the subparagraph 1(f), which provided that if CBS removed Rather from the CBS Evening News, it would assign him to 60 Minutes II "as a full-time Correspondent," and if 60 Minutes II were canceled, it would assign him to 60 Minutes as a correspondent "to perform services on a regular basis." However, this construction does not render any language of the agreement inoperative, since, consistent with the "pay or play" clause, neither subparagraph 1(g) nor 1(f) requires that CBS actually use Rather's services or broadcast any programs on which he appears, but simply retains the option of accelerating the payment of his compensation under the agreement if he is not assigned to either program.

It is clear that subparagraph 1(g) applies only to a situation where CBS removed Rather as anchor of CBS Evening News and then failed to assign him "as a Correspondent on 60 Minutes II." The amended complaint alleges that when Rather no longer performed anchor duties at CBS, he was assigned to 60 Minutes II. Thus, Rather implicitly concedes that CBS fully complied with subparagraph 1(g).

Supreme Court erred in finding that subparagraph 1(g) modified the "pay or play" provision when it ignored the initial prefatory clause to the rest of that subparagraph, which states "[e]xcept as otherwise specified in this Agreement." As the defendants correctly assert, the seven words are crucial because they require subparagraph 1(g) to be read together with the "pay or play" provision, and thus, subparagraph 1(g) cannot modify the "pay or play" provision to mean that CBS must utilize Rather in accordance with some specific standard by featuring him in a sufficient number or types of broadcasts. As the defendants aptly observed, "the notion that a network would cede to a reporter editorial authority to decide what stories will be aired is absurd."

Rather v. CBS Corp., 2009 NY Slip Op 06738 (App Div 1st Dep't Sept. 29, 2009) (emphasis added).

[Meredith R. Miller]

NY Court of Appeals Hears Contract Damages Case

The 2009-2010 term of the New York Court of Appeals begins today, and scheduled for oral argument is St Lawrence Factory Stores v. Ogdensburg Bridge and Port Authority, a case about contract damages.

 

Here's the case summary prepared by Public Information Office of the Court:

St. Lawrence Factory Stores, a partnership of Frank Arvay and Richard Lepine, entered into an option contract with the Ogdensburg Bridge and Port Authority (OBPA) in February 1990 for an option to buy 12 acres of land to develop a retail factory outlet center. The contract also provided, "Since the objective of [OBPA] in offering this option is not merely the sale of land but rather to encourage the development of this specific project, [Factory Stores] shall erect a retail factory outlet and related facilities on said TRACT and said TRACT shall not be used by [Factory Stores] for any other purpose or purposes." Arvay, who eventually held an 85 percent interest in the partnership, sought financing and tenants for the project and exercised the option in July 1991. OBPA sent a letter to the partners in October 1991 expressing "concern about the viability of your project and your ability to perform" and threatening to void the contract if they did not provide proof of adequate financing by the end of the month. The partnership responded that, under the contract, securing financing was not a condition precedent to closing, which was scheduled for January 1992. At the closing, Arvay tendered his 85 percent share of the $298,000 purchase price, but Lepine refused to tender his share and walked out. Arvay then offered his personal check for the remaining 15 percent, but OBPA refused to accept it and declined to close.

 

The Factory Stores partnership sued for breach of contract seeking, among other things, reliance damages for recoupment of its investment costs. Supreme Court partially granted OBPA's summary judgment motion by dismissing the partnership's claims for reliance damages and lost profits. The Appellate Division, Third Department affirmed. Regarding reliance damages for costs incurred by Factory Stores in preparing to develop the site, the Appellate Division said, "The contract in question does not require plaintiff to engage in any of the preparatory tasks for which it seeks to be compensated. Simply put, this is a contract for the sale of land requiring plaintiff to tender defendant the sale price upon closing. Accordingly, plaintiff's reliance damages would encompass only those ordinarily incurred regarding such a contract, such as a title search, survey and attorney's closing fees."

 

After a bench trial, Supreme Court found that OBPA had breached the option contract in bad faith, but it awarded no damages. The Appellate Division affirmed.

 

Factory Stores argues that it should have been allowed to recover reliance damages because its expenses "were incurred in reliance upon the contract, they are ascertainable, and they arose naturally from defendant's breach in the ordinary course of things." It contends the Appellate Division mischaracterized the contract as one solely for the sale of land, saying the option contract "not only mandated the purchase and sale of the subject property, it also contractually obligated the plaintiff to develop/build, at its own cost, the very outlet center that plaintiff intended to develop/build anyway." Factory Stores also argues it is entitled to damages for lost profits and benefit of the bargain damages.

Here's the Appellate Division decision.

 

[Meredith R. Miller]

Alan White on Drafting Exercises

The Third in a Series of Posts by:

Guest Blogger, Alan White 

Thanks to Professor Miller’s post on this blog, I became aware of the Goldberg v. (Paris) Hilton case, which fit nicely into this week’s discussions of uncertain expectation damages, reliance and restitution.  In addition to discussing the case, I decided to use it as the basis for my first drafting exercise.  Last year I asked students to draft a liquidated damage clause based on the Lake River v. Carborundum case from the casebook, in which Judge Posner invalidates a contractual remedy as a penalty.  Because Judge Posner’s opinion steps through the math to show why the contractual remedy resulted in a windfall, the exercise did not allow for a great variety of solutions.  The Hilton case was a considerable improvement in giving free reign to students’ creativity, while still inviting the predictable errors.  The liquidated damages exercise requires not only an understanding of when such clauses are deemed unenforceable penalties, but also a grasp of the expectation, reliance or restitution damages of which the clause is supposed to be a reasonable estimate.

While students are quick to grasp the idea behind the liquidated damages clause, their substantive errors fall into three general categories:

1) writing a clause that does not actually liquidate damages.  If the proposed clause simply describes the producers’ damages in a qualitative way, such as “all promotional expenses incurred at the time of the breach”, it does not provide the certainty of a fixed sum or a sum calculated according to an easy formula, which is the purpose of liquidated damages clauses. 

2) choosing a very conservative amount to avoid unenforceability as a penalty – certainly one can make sure the LD clause is enforceable by using a fixed sum that will always be less than actual damages, but that isn’t very good advocacy for the client seeking the LD clause.

3)  unhelpful recitals – it can be helpful to recite facts that support the fixed sum of damages in the LD clause, but only if those facts support the enforceability of the clause, by establishing the uncertainty of potential damages and the reasonableness of the estimate.

How, fellow teachers, might ask, does one grade 50 to 100 drafting exercises without consuming unreasonable amounts of time that could otherwise be spent on blogging and other key professorial duties?  I have adopted several strategies to get students writing while preserving my own sanity.  First, I have the writing exercises done in groups, not only to economize grading time, but because real-life lawyers typically collaborate on much of their writing, and it is never too early to learn to work with others.  Second, I try to keep writing exercises extremely short, such as drafting a one- or two-paragraph contract clause rather than an entire agreement.  Third, I provide limited written feedback in lieu of a grade, or in some cases assign a grade on a very simplified scale intended only to differentiate those who took the exercise seriously from those who did not.  Reading and writing feedback for the 15 liquidated damage clauses in this instance took me about 3 hours total.  Time well worth investing in the worthy goal of writing across the curriculum, while also reinforcing much of the material in remedies.

Professor Telman and I are on different topics at the moment, but will shortly be back in synch, at which point perhaps we can liven up the dialogue a bit. 

[Posted, on Alan's behalf, by Jeremy Telman]

More Bad News For Seasons Ticket Holders

One issue in the dispute, discussed below, between Washington Redskins fans and the team is the team’s duty to mitigate damages when it resells tickets reclaimed from defaulting seasons ticket holders.  Some of the Redskins fanned interviewed for the Washington Post story decried as “double dipping” the Redskins’ practice of collecting full damages for unused tickets and then reselling the tickets and collecting again. 

Alas, as reported in Connecticut Sports Law, in NPS, LLC v. Minihane, 451 Mass. 417 (2008), the Massachusetts Supreme Judicial Court enforced a liquidated damages clause in a ten-year agreement for club-level seats at New England Patriots games.  The defendant in that case was ordered to pay damages for the full value of the ten-year contract, although he had only used the seats for one year.  The trial court had struck down the liquidated damages clause as “grossly disproportionate to a reasonable estimate of actual damages made at the time of contract formation.”

The Massachusetts Supreme Judicial Court reversed, based on a finding that the damages would have been difficult to ascertain at the time the parties entered into the contract and that the liquidated damages clause represented a “reasonable forecast of the damages expected to occur in the event of a breach.”  The court reasoned that the team could not predict in advance how long it would take them to resell the seats.  In light of the benefit defendant would have enjoyed of having guaranteed seats for ten years without the threat of a price increase, the court found that the damages clause was not “unconscionably excessive.”  Once the liquidated damages clause was found to be enforceable, mitigation evidence was deemed irrelevant. 

[Jeremy Telman – HT again! Zachary Calo]

On Paris, Zsa Zsa, 1988 and Alternative Measures of Damages

As summer wanes and 1L orientation draws to a close, it is part of the sweet rhythm of academia that a colleague inevitably says something like: "every year, they get younger."  I'll admit, this year, I was the one who said it.  And, in response, I was reminded that, of this incoming 1L class, there are some students who were born in 1988.  1988!  (Apparently, at Northwestern, there's an incoming 1-L who may have been born in the 90's).  (Image of Zsa Zsa, courtesy of Wikimedia Commons).

This has a lot to do with contracts, or at least the teaching of the subject.  

In a previous post, I had asked if anyone happened upon a copy of the Goldberg v. Hilton decision.  Ask on the glorious interwebs and ye shall receive.  (Thanks, Eric Talley (Berkeley)). 

Here's a copy of the decision: Download SLJQZ9-GoldbergvHilton.  I think you'll agree that the facts provide a good example of the certainty limitation on damages, as well as the reliance v. restitution measure of damages.  In the past, as an example on these points, I have used (and will continue to use) the Zsa Zsa Gabor case, Hollywood Fantasies.  (The one where the celebrity fantasy vacation business bombs and the promoters blame it all on Zsa Zsa canceling her gig - purportedly because she had to film her 30 second cameo in Naked Gun 2 1/2).  This year, I will try offering Goldberg v. Hilton as another example, given that involves an element of current (though similarly inexplicable) celebrity. My students born in 1988 might be interested.  

Try it.  If you just can't resist showing your relative age in pop-culture markers, you can mention that, for a time in the late 1940's, Zsa Zsa was married to Paris Hilton's great grandfather.

[Meredith R. Miller]

Judge Denies $8.3+ million sought from Paris Hilton for Movie Flop

Not too surprisingly, the film “Pledge This!,” a sorority comedy starring Paris Hilton, bombed.  The film’s investors sued Hilton for over $8.3 million, alleging that Hilton breached her contract by failing to promote the movie, and thereby causing it to bomb.  The $8.3+ million represented roughly what it cost to produce the film, and the investors argued that they could have made at least that much if Hilton had followed through on her end of the bargain.  (Image source: Wikimedia Commons).

The AP reports that Judge Moreno (SDNY SD Fla.) has decided that the damages requested by investors are too speculative.  According to the AP, Judge Moreno wrote:

"The court finds compelling evidence in the record that 'Pledge This!' lost money because the film's inexperienced producers hastily cobbled together a wholly inadequate marketing plan," the judge wrote. "They sent scattershot requests to their principal star in the hopes that she could find time to promote a sinking ship."

Even if Hilton breached by failing to promote the movie, the court held that investors failed to establish a causal link between the $8.3 million loss and her breach.  Hilton is not entirely off the hook, though.  As the AP reports, if she did breach, she may be liable for some of the $1 million she was paid under the contract.

[If you have located an online copy of the court's decision, please leave a link to it in the comments. Thanks!]

Here's the trailer, if you dare:

[Meredith R. Miller]

Another Benefit of Contract-Based Warranties: Class Certification?

This blog's illustrious editor, Prof. Snyder, recently pointed out that tort law provides much better remedies than contracts-based breach of warranty claims, but students nevertheless need to know about contracts-based remedies because of the longer statute of limitations.

It seems that there is another reason that students should learn about UCC and common law warranty claims: class certification.  At least, for those warranty claims that don't have a reliance element.  

This is evidenced by a recent Oklahoma Supreme Court ruling in a case against Ford, as summarized at law.com: 

Among Detroit's Big Three, Ford Motor Company looks to be in the best shape. But sometimes, even when you think you're in the clear, you're not. (At least in litigation.) That's what happened to Ford last week in Oklahoma, where the state's supreme court reinstated a nationwide class action against Ford and auto parts maker Williams Controls that had been tossed by an intermediate appellate court. The class, which includes an estimated 300,000-500,000 members, contends that certain models of Ford Super Duty pickup trucks and Expedition sport utility vehicles contain faulty accelerator pedals, causing the trucks to idle rather than accelerate when drivers step on the gas.

The case, which was first filed in 2004, alleges breach of warranty, negligence, and product liability. The trial court certified a nationwide class in 2007, but last year the Oklahoma Court of Civil Appeals reversed the lower court. In reinstating the case, the Oklahoma Supreme Court found that the trial court did not abuse its discretion in certifying a class on the breach of warranty claims. It declined to affirm class certification on negligence or product liability claims.

(emphasis added).  And, a class action, by the way, seems the only feasible way such small individual warranty claims would ever be litigated.  Attorneys for plaintiffs will seek between $60-100 million, depending on the size of the class.  This amount is based on a price tag of $185 per faulty accelerator pedal.

[Meredith R. Miller]

Contract law: the last resort of the tardy

Teaching contract remedies for breach of warranty, whether common law or UCC, often seems like a waste of time, since in many cirucmstances tort law provides superior remedies for defective products or services that cause injuries.  But, as we often explain to students, you need to know contract remedies if for not other reason that sometimes either you or (hopefully) your client will have blown the tort statute of limitations and will have to make out a claim under contract law.

That seems to e the situation in a recent professional malpractice case, Tower Investments Inc. v. Rawle & Henderson, where counts for negligence and breach of fiduciary duty against a law firm were barred by the statute of limitaitons, but breach  of contract claims were held to be timely.  The Legal Intelligencer, via Law.com, has a synopsis of the litigation here.

[Frank Snyder]

A brief detour into international civil procedure

In a case that could have major implications for U.S. civil actions against Mexican parties, a U.S. district court has held that the only way of lawfully serving a Mexican defendant is through the country's central authority in the Ministry of Foreign Affairs.  The case,OGM Inc v. Televisa, 08-cv-05742 (C.D. Calif.), is a breach of contract and copyright action against a leading Mexican broadcaster.

Apparently U.S. plaintiffs for the last decade or so have been serving Mexican defendants by mail or through a process server, but that practice, said the court, is based on an erroneous translation of Mexico's declarations under the Hague Convention.  The ruling could have a major impact on many decisions entered against Mexican defendants who did not appear to defend themselves.

[Frank Snyder]

Employee contract rights overridden by bankruptcy

A Canadian employee who was fired after his company sought bankruptcy protection found himself out of luck in his claim for wrongful termination.  In West Bay SonShip Yachts Ltd. v. Esau, Gerald Esau had been an employee of West Bay for nearly 15 years, when his insolvent employer filed an application for protection under Canada's Companies' Creditor Arrangement Act, seeking to reorganize.  A month later Esau was notified that he was terminated as VP of the company.  Esau subsequently brought a wrongful termination action against the bankruptcy plan.

The British Columbia Court of Appeals held that because Esau's contract with West Bay was executory at the time the petition was filed, the terms of the agreement were overridden by the CCAA plan, which allowed West Bay to rationalize its business and thus change his contract rights.  The court noted that "it has now become common [in CCAA proceedings] for courts to sanction the indefinite, or even permanent, affecting of contractual rights."

Lawyers David W. Mann and David LeGeyt of Calgary's Fraser Milner Casgrain LLP offer a synopsis of the case in this client memorandum.  (Free registration required.)

[Frank Snyder]
 

NY Appellate Court Holds that Dental Student's Claims Were Properly Fashioned as Breach of Contract

We previously noted a NY trial court decision holding that a former NYU dental student improperly fashioned an administrative challenge (Art. 78 proceeding) as sounding in breach of contract.  Well, an appellate court has unanimously reversed:

Plaintiff properly brought this action for breach of contract, rather than an article 78 proceeding, because, in the school's July 18, 2002 letter, he was promised that he would be billed per credit and would obtain a degree upon completion of the three courses; however, the school failed to bill plaintiff as promised, failed to correct the tuition bill in a timely manner, failed to notify plaintiff of his de-enrollment by e-mail in accordance with its handbook's announced preference for e-mail, and failed to grant plaintiff a degree when he paid the correct amount of tuition in full.

The appellate court directed the trial court to award plaintiff a degree and diploma and any authorizations he may need to take the dental boards.

Eidlisz v. NYU, (App. Div. 1st Dep't.  Apr. 14, 2009)

[Meredith R. Miller]

Breaching conditions of an open-source license

Last December the U.S. Court of Appeals for the Federal Circuit ruled in Jacobsen v. Katzer, 535 F.3d 1373 (Fed Cir. 2008), that a user who violated the conditions of a web-linked open-source software license was liable not only for breach of contract but for copyright violations.  That decision raises a lot of interesting issues, which are dealt with by lawyers Jonathan Moskin, Howard Wettan, and Adam Turkel from the New York office of White & Case LLP in Open Source After 'Jacobsen v. Katzer.'

[Frank Snyder]

Peevyhouse and John Wunder Down Under

This week I'm teaching those two student rabble-rousers, Peevyhouse v. Garland Coal Co. and Groves v. John Wunder Co.  The issue in both cases, of course, is whether the owner of property can get the cost of rectifying the defective performance if that cost exceeds the actual economic loss it suffered.  The Australian High Court has recently dealt with the same issue, and it comes down on the John Wonder side of the coin.

In the case, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the Court held that a building tenant had a right to have a building's lobby restored to its original condition at a cost of A$1.38 million, even though the actual loss in building value from the defective performance was only A$38,000.  Nick Christopoulos and Jack Fan of Clayton Utz offer a summary of the case here.  (Free registration required.)

[Frank Snyder]

Terminator IV: Attack of the Litigious Producer

Yeah, that's right, Arnold. While you're off governing California, your franchise is in the courts! According to this article in The Daily Express (which, according to its website, is "the World's Greatest Newspaper"), Moritz Bowman, one of the producers of the forthcoming "Terminator Salvation" (which looks awesome, by the way), is suing fellow producers, Derek Anderson and Victor Kubicek, alleging that they did not pay him his full producing fee and hijacked the production in July 2008. Although the New York Times reports that the producing fee in question was $5 million, the Daily Express reports that the law suit seeks $200 million in damages.

In my view, Mr. Bowman is barking up the wrong tree with his lawsuit. It's obvious to me that Anderson and Kubicek are really cyborgs disguised as humans and bent on the destruction of the human race by cornering the market in high-end sci-fi special effects movies. That leaves Mr. Bowman only two options.

1. Get in touch with John Connor. And do it quick. Contact Linda Hamilton's agent. She'll know where to find him.

2. Transport yourself back in time and make certain that the Bowman/Anderson/Kubicek alliance is void ab initio.

[Jeremy Telman]

Ambiguity and Trade Usage in Texas: XTO Energy v. Smith Production

Smith Production, Inc was the operator under two joint operating agreements (JOAs) governing exploration and production on and oil and gas lease. Chevron was one of the four non-operating owners. As required under the JOAs, Smith gave Chevron notice of its intent to drill four wells on the lease. The JOAs gave non-operating owners 30 days after receipt of notice to tell Smith whether or not they wanted to participate in the cost of proposed operations. If they chose not to participate, a "non-consent provision" in the JOAs, sometimes called a non-consent penalty, provided that non-consenting non-operating owners cede their rights to the proceeds from an operation up to certain caps provided for in the JOAs.

Chevron first told Smith that it did not wish to participate in the costs of the proposed wells. The other three non-operating owners informed Smith that they did. Then, a week after telling Smith it did not want to participate, Chevron stated that its earlier non-consent had been sent in error, but Smith would not change Chevron's status from non-consenting to consenting. XTO Energy succeeded to Chevron's interest in the lease and sued, arguing that the language in the JOAs was ambiguous with respect to a party's ability to change its election within the 30-day window parties have to respond to notice of new operations. The trial court ruled for Smith, finding the JOAs unambiguous. It also excluded XTO's expert testimony relating to trade custom and usage. In XTO Energy, Inc. v. Smith Production, Inc., 2009 WL 442003, No. 14-07-00069-CV (Tex. App. Hous., Feb. 24, 2009), Texas's Court of Appeals for the 14th District affirmed. The first footnote in the opinion indicates that the court here construes a standard form contract, so its holding may have significance for future litigants.

On ambiguity, the Court noted:

There is no language in the JOAs expressly allowing an electing party to change its election once it has notified the proposing party of the election. Nor is there language expressly disallowing such a change in election.

However, the Court found that permitting a change in election was inconsistent with other portions of the JOAs. The Court found reasonable Smith's proffered interpretation, according to which the JOAs provide that each party's Notice Period expires when it makes its election. The Court rejected as unreasonable XTO's reading of the JOAs, according to which a party is entitled to change its election so long as the other parties have not materially changed their positions in reliance on the original election.

The Court did not reach the issue of whether exclusion of expert testimony as to custom was erroneous, as it concluded that any error would have been harmless. The Court noted that the excluded testimony would not have satisfied the relevant standard in any case:

XTO's expert did not show that the alleged custom and usage to which he testified is so general and universal that the parties to the JOAs are charged with knowledge of its existence to such an extent to raise a presumption that they dealt with reference to it.

Justice Eva Guzman filed a dissenting opinon on the ambiguity issue. Among other things, Justice Guzman noted that the JOAs referred to the 30-day notice period as "fixed," suggesting at least a triable ambiguity regarding the ability of non-operating owners to change their election throughout the 30-day period.

[Jeremy Telman]

Would You Attempt to Hurdle Contract, Propery and Health Law to Become a Grandparent?

I have heard that the parental yearning for grandchildren is a strong one.  Based on the recent case of Speranza v. Repro Lab, it is evidently stronger than I initially realized.

In 1997, Mark Speranza deposited a number of semen specimens with Repro Lab.  Repro Lab is a tissue bank licensed by the State of New York.  The sperm was frozen and stored in Repro's nitrogen vaults. 

As part of his agreement with Repro Lab, on July 30, 1997, Mark filled in and signed a form document entitled, "Ultimate Disposition of Specimens," which contained several options for the disposition of the specimens by the tissue bank in the event of Mark's death.  Mark checked off the provision stating that in the event of his death: "I authorize and instruct Repro Lab to destroy all semen vials in its possession." The document concludes: "[t]his agreement shall be binding on the parties and their respective assigns, heirs, executors and administrators."

Just six months later, Mark died from cancer.  Thereafter, Mark's parents, in the administration of his estate, discovered that he had deposited sperm at Repro.  The parents sought a declaration that they were the legal owners of the sperm.  They sought to have a surrogate inseminated, with the hope of producing a grandchild for them.

The lab continued to store the sperm for a yearly fee, but refused to turn them over to the parents based upon the document Mark had signed.

A New York trial court dismissed the action.  The Appellate Division (Saxe, J.) affirmed on different grounds.  The court first reasoned that the parents faced regulatory impediments, namely because Mark fit the definition of a sperm "depositor" rather than a "donor."  Based upon this distinction, Repro had not examined and screened Mark's blood and semen and, therefore, could not release the sperm specimens for insemination of a surrogate.

Then, the court held that, even setting aside these regulatory hurdles, the parents' argument for reformation of the contract between the Mark and Repro law was without merit.  It reasoned:

Plaintiffs assert that Mark's purpose in storing the sperm was to assure his ability to have a child. The contract, however, is not that vague. It represents a determined choice that the sperm should be available to him so he could protect his ability to procreate if he survived. It does not protect any possibility that his genetic or biological issue could be created after his death; indeed, the directive that his semen be destroyed in the event of his death precludes such a possibility. Since the document conveys a clear intent that the specimens be destroyed upon Mark's death, which intent is not contrary to the asserted intent to assure his ability to have a child while he was alive, it cannot be said that the instrument contains an erroneous expression of the intention of the parties. Accordingly, nothing in plaintiffs' submissions would justify reforming the contract so as to permit them to fulfill their wish after his death, contrary to his express wishes.

Nor does defendant's alleged conduct, in accepting yearly storage fees without revealing the existence of the contract directing the destruction of the specimens in the event of Mark's death, and without initially informing plaintiffs that the specimens could not, under applicable law, be turned over to them, provide plaintiffs with a legal right to claim ownership of the specimens. Whatever remedies Mark's estate might be entitled to seek for the asserted contract breach created by defendant's failure to destroy the specimens, the breach would not engender in Mark's estate a right to an ownership interest. Simply put, under applicable regulations as well as the terms of the contract between Mark and defendant, the specimens are not assets of the estate over which the administrators have possessory rights.

Rather, the legal obligations with regard to the possession and handling of the semen specimens are dictated solely and completely by the applicable Department of Health regulations. At this point, the proposed use of Mark's semen would fundamentally violate 10 NYCRR 52-8.6(g), which requires that a semen donor be "fully evaluated and tested" prior to the use of his semen "by a specific recipient, other than his current or active regular sexual partner." Since the purpose of this statute is to protect the surrogate mother, and thereby the general public, from disease, we cannot countenance avoidance of the regulations' dictates, even though we recognize the joy that ignoring those regulations could bring to plaintiffs.

Speranza v. Repro Lab Inc., 2009 NY Slip Op 01543 (App. Div. 1st Dep't Mar. 3, 2009).

[Meredith R. Miller]

Arbitration Agreements Must Specify Kentucky to Be Enforceable in Kentucky Courts

Ally Cat, LLC v. Chauvin, 2009 WL 160581, No. 2008-SC-00377-MR (Kentucky, Jan 22, 2009) involves a Home Owners Limited Warranty (HOLW) that provided for arbitration of disputes relating to a condominium unit. Dr. Stephanie Russell, the sole member of Ally Cat, LLC purchased a condo unit for use as a medical clinic, and she signed the HOLW. Her unit leaked, so she sued for fraud, concealment, tortious misconduct, negligence, breach of contract and professional negligence against various entities identified in the opinion as the Real Parties in Interest. The latter moved to compel arbitration, and that motion was granted at the trial level and affirmed on appeal. Ally Cat appealed to the Supreme Court of Kentucky, contending among other things that the trial court had no subject-matter jurisdiction to order the parties to arbitrate because the HOLW did not specify that arbitration must occur in Kentucky.

Kentucky courts had previously held that a provision of the Kentucky Arbitration Act, KRS 417.200, requires that arbitration clauses include language stating that the arbitration is to be held in Kentucky before a Kentucky court can enforce an arbitral award. They had done so only when asked to enforce such awards that had already been granted after out-of-state arbitrations. In this case, the arbitration had not yet taken place. Nonetheless, the Supreme Court of Kentucky held that "[s]ubject matter jurisdiction to enforce an agreement to arbitrate is conferred upon a Kentucky court only if the agreement provides for arbitration in this state." This ruling was based on the language of 417.200 which specifically relates to agreements "providing for arbitration in this state." The Court found that the phrase would be rendered meaningless if limited to cases, like those decided earlier, in which parties sought to enforce out-of-state arbitral awards. The Court declined to address what it would have done if the parties, despite the faulty HOLW, had actually arbitrated in Kentucky.

The Court also found that the HOLW was faulty in other, less interesting ways. For example, it was not signed by any of the Real Parties in Interest, and Dr. Russell signed only in her individual capacity and not on behalf of Ally Cat, LLC. In addition, the HOLW is phrased merely as an acknowledgment of receipt of certain policies, not as an assent to their terms. In short, faulty drafting prevented the HOLW from qualifying as "the making of an agreement" under KRS 417.050.

[Jeremy Telman]

Is the Substantial Performance Doctrine Rendered Quaint by Statute?

I can't imagine not teaching Jacob & Youngs v. Kent, a Limerickworthy case if ever there was one. Still, I'm happy that the Supreme Court of Connecticut has rejected a lower court ruling that threatened to eliminate the doctrine of substantial performance in the context of a home renovation contract that was not completed to the homeowner's complete satisfaction -- at least in Connecticut. The case, Hees v. Burke Construction, 290 Conn. 1, 961 A.2d 373 (Conn. 2009), addresses the question of whether Connecticut's Home Improvement Act precludes a home improvement contractor from reducing breach of contract damages by the unpaid balance due under the contract. That Act provides in relevant part as follows:

No home improvement contract shall be valid or enforceable against an owner unless it: (1) Is in writing, (2) is signed by the owner and the contractor, (3) contains the entire agreement between the owner and the contractor, (4) contains the date of the transaction, (5) contains the name and address of the contractor and the contractor’s registration number, (6) contains a notice of the owner’s cancellation rights in accordance with the provisions of chapter 740, (7) contains a starting date and completion date, and (8) is entered into by a registered salesman or registered contractor. . . .

The Supreme Court of Connecticut held that the Act does not preclude recovery by the contractor, reversing the lower court's judgment for plaintiffs.

Plaintiffs engaged Burke Construction to undertake about $350,000 in home improvements. After about 30 change orders, the contract price rose closer to $400,000. Plaintiffs paid $330,531, but then refused to make a tenth payment. At that point, there was an unpaid balance of $16,472, and after giving plaintiffs notice that it considered them in breach, Burke terminated the contract. Plaintiffs sued alleging that Burke had breached by not completing all of the work. Burke counterclaimed alleging breach of contract, quantum meruit and foreclosure of its mechanic's lien. The case was referred to a referee, who found for plaintiffs and awarded them damages for costs incurred in completing work that defendant had left undone. The referee denied Burke's counterclaims because the contract included no right of rescission and was thus unenforceable against the plaintiffs under the Act. The trial court adopted the referee's report.

On appeal, Burke contended that it was entitled to offset plaintiffs' damages by the amount due under the contract and that the Act did nothing to change that standard rule of contracts damages. The Supreme Court agreed.

The Court determined that the statutory language was ambiguous on the subject of its intended scope. The Act prevents contractors from relying on a contract that is inconsistent with the statute in an action brought by the contractor, but it is not clear that contractors could not rely on such a contract in a case in which they are alleged to have breached the agreement. However, after a review of the legislative history behind the act and case law decided under it, the Court concluded that the referee's interpretation of the Act was untenable.

The Court observed that homeowners would be awarded "an unwarranted windfall" if it were to permit plaintiffs to recover damages for a breach of contract but then were not to permit defendants to recover amounts due under that same contract.

Justice Schaller provided a niftier solution in a concurring opinion. Preferring to avoid a distinction between "affirmative" and defensive uses of the Act, Justice Schaller argued that plaintiff conceded the validity of the contract by suing for its breach. There was thus no need to consider the Act at all.

[Jeremy Telman]