ContractsProf Blog

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]