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Valparaiso Univ. Law School

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Monday, June 30, 2014

Statute of Frauds to the Rescue in Deepwater Horizon Case

Oil_Spill_Containment_BoomAfter BP's oil drilling rig, the Deepwater Horizon (below, right) located off the Gulf Coast of Louisiana, caught fire and sank in April 2010, BP sought to purchases millions of feet of oil containment boom (pictured).  Plaintiff Packgen sought to capitalize on this demand by manufacturing boom, although it had never done so before.  Assuming the facts as alleged by Packgen, already by May 2010, Pathgen had secured an oral agreement from BP to purchase boom at $21.75/sq. ft., subject to inspection of Packgen's facilities and testing of Packgen's products to confirm that they met standards established by the American Society of Testing and Matierals (ASTM).  Such inspection occurred, and Packgen's products satisfied ASTM's standards.

Although the parties seemed committed to working together and Packgen geared up to produce 40,000 square feet of boom per day, the parties continued to exchange communications throughout May.  BP began to express concern about the connectors on Packgen's boom and demanded various modifications to Packgen's boom design.  A field test of Packgen's boom did not go well.  BP's needs changed.  It demanded further changes and Packgen scrambled to comply.  By the time Packgen was producing boom that met BP's needs, BP had capped the Deepwatern Horizon and its need for boom quickly dimishinished.  It never purchased any boom from Pathgen, and Pathgen was left with 60,000 feet of boom, which it eventually sold for $2/sq. ft. 

Packgen sued, alleging misrepresentation, breach of contract, and equitable claims.  The District Court dismissed all of Packgen's claims, and it appealed, drawing a panel that included retired Supreme Court Justice David Souter.

Deepwater HorizonThe First Circuit affirmed the District Court's dismissal of all claims in Packgen v. BP Exploration and Production, Inc.  The Court found that there was no misrpresentation because the BP personnel who indicated an intention to purchase Packgen's boom sincerely intended to do so at the time they made those representations.  

As this alleged contract was for the sale of goods with a value in excess of $500, it was within the Statute of Frauds (SoF) and thus had to be evidenced by a writing.  Packgen did not claim that the sale was evidenced by a writing but claimed that the transaction fell within two UCC exceptions to the SoF: the specially manufactured goods exception and the judicial admission exception.  

On the specially-manufactured-goods exception, the facts were interesting.  In short, Packgen could not avail itself of the exception because it re-sold the goods.  Packgen pointed out that it had repeatedly modified the product to meet BP's specifications and that BP was buying 90% of the boom produced in the U.S. markets at the time.  The Court pointed out that those circumstances are not relevant.  The only question is whether the goods could be re-sold to another purchaser, and they could.  The fact that the market for boom collapsed once BP stopped buying and that Packgen consequently could get only 10% of its original selling price does not change the fact that the product could be sold to another purchaser.  

On the judicial admission exception, Packgen cited to an e-mail from a BP employee who, in reference to Packgen, wrote: "I do not understand why we keep placing orders with suppliers like this[.]"  Seen in its context, the Court found that the e-mail was insufficient to overcome other evidence indicating that, at the time that e-mail was sent, both parties believed themselves to be negotiating a contract rather than as having a contract.

Packgen's equitable claims failed as well.  It could not show evidence that BP had benefitted from the information it had provided regarding boom speicifications nor that it had provided any services in connection with the parties' on-going negotiations for which it expected payment.  Packgen's promissory estoppel claim, like its breach of contract claim, fell because of the SoF.  While the SoF is not a complete bar of promissory estoppel claims relating to promises to sell goods in excess of $500, in order to overcome the SoF, plaintiff must allege conduct such that refusal to enforce the alleged promise would be tantamount to allowing the SoF itself to become an instrument of fraud.  But as Packgen's misrepresentation claims failed, it could show no actual intent to deceive. 

June 30, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, June 26, 2014

D-lightful Student Gets Litigious

Mcherry3Thanks to Miriam Cherry (left) for sharing this one:

I love this fact pattern: as reported in the National Law Journal, a student who received a D in contracts is suing the law school he attended, as well as his contracts professor, claiming that the professor deviated from the syllabus by counting quizzes towards the final grade.  He claims $100,000 in harm because the D in contracts resulted in his suspension from the law school.  He could not transfer to a different law school because he was ineligible for a certificate of good standing.  

The case is a cautionary tale.  It appears that the syllabus indicated that the quizzes would be optional.  The professor then announced in class that the quizzes would actually count.  The plaintiff claims to have been uanaware of the change or at least adversely affected by it.  I say it is a cautionary tale because I sometimes make changes to my syllabus, usually in response to student feedback.  I make sure to e-mail all students to make certain that everyone is aware of the changes and I obsessively remind students of the changes because I worry about precisely what happened here.  It may well be that the defendant contracts prof did the same, although the National Law Journal article states that the change was evidenced by the handwritten notes of another student.


There is an interesting exchange on the merits of the case in the comments to the ABA Journal article on this subject.  Apparently, there is some case law stating that a syllabus is a contract.  For the most part, I think such a rule would benefit instructors.  No student could complain about my attendance or no-technology policies because I could tell them (doing my best Comcast imitation) that by continuing to attend my course, they had agreed to my terms.  But many of the commentators think that written contracts can never be orally modified.  I don't think a syllabus is a contract because I don't think there are parties to a syllabus and I don't think there is intent to enter into legal relations.  Things might be different if the syllabus identified itself as a contract and informed students of the manner of acceptance of its terms.

PeterLinzerFriend of the blog, Peter Linzer (right), chimes in (comment #13) and succinctly dismisses this notion that a contract not within the Statute of Frauds cannot be orally modified.  In any case, he thinks the claim is best understood as sounding in promissory estoppel, and plaintiff's claim fails because, in short, he cannot claim to have reasonably relied on a promise just because he missed class or did not pay attention when that promise was retracted.  

June 26, 2014 in Commentary, Contract Profs, In the News, Recent Cases, Teaching | Permalink | Comments (1) | TrackBack (0)

Wednesday, June 25, 2014

Posner Sides with Donald Trump Upholding Dismissal of Suit by 87-Year-Old Woman

Trump Int'lIn 2006, Jacqueline Goldberg signed an agreement* to purchase two hotel condominium units in Trump Tower Chicago, a 92-story building in downtown Chicago that comprises residential condo units, hotel condo units and all of the amenities one expects to find in a hotel (pictured at left).  Some of these amenities are called "common elements" in which each individual purchaser of the condo units has rights.  But the agreement into which Ms. Goldberg entered included a "change clause" that permitted the Trump Organizations to modify those rights with either the notice to or approval by the purchasers.  Ms. Goldberg attempted to negotiate for a return of her deposit if she disapproved of the changes, but the Trump Organizations refused.  Three such changes took place before Ms. Goldberg signed the agreement.  

But then came the fourth change, to which Ms. Goldberg strenuously objected.  She refused to close on the deal and demanded a return of her $516,000 deposit.  The Trump Organizations placed her deposit in escrow, and she sued, alleging breach of contract and other causes of action.  Some of her claims were dismissed, some were tried before a jury, and some were tried before a judge.  Both the jury and the judge found for the Defendants.  Ms. Goldberg appealed to the Seventh Circuit, resulting in Judge Posner's opinion upholding the District Court in Goldberg v. 401 North Wabash Venture LLC.

Ms. Goldberg's common law allegations basically came down to a claim that the Trump Organizations had engaged in a bait and switch -- she had bought the condos as an investment and had been led to believe that they would have a certain value.  After the changes, that value was diminished.  Judge Posner rejected this characterization of the agreement, since Ms. Goldberg, "a wealthy and financially sophisticated Chicago businesswoman," was aware of the change clause and had even attempted to have it removed.  On the facts, there was no deception.  She took a risk when she entered into the agreement with the change clause included.

Of more interest to us, Judge Posner concluded that Ms. Goldberg's breach of contract claim collapsed once her "bait-and-switch" theory was eliminated.  While there is a duty of good faith, Judge Posner reminded Ms. Goldberg that it applies only in the performance of a contract, not in its formation.  There follows an interesting discussion of law and equity.  Ms. Goldberg challenged the trial judge's decision to decide on her breach of contract claim rather than submit the question to the jury.  Judge Posner noted that rescission is an equitable, not a legal, remedy, and under both Illinois and Federal law, there is no right to a jury trial on an equitable claim.

One could imagine that Ms. Goldberg might have argued that the Trump Organizations breached the duty of good faith and fair dealing in the performance of the contract.  After all, the bait might have occurred in the formation of the contract, but the switch occurred during performance.  Ms. Goldberg would then have to show that while some changes were to be expected under the change clause, the actual changes that the Trump Organizations engaged in were not in the contemplation of the parties at the time they entered into the contract and undermined the original agreement (or something like that).  It's not clear that Ms. Goldberg could have made such a showing.  It seems that the Trump Organizations had good reasons for the changes that were made.  In any case, if she were making that sort of argument, I think Ms. Goldberg would not have sought rescission of the agreement but enforcement of the original agreement without the changes.  

Finally, one might see this as another example of corporations getting to impose unreasonable terms on a consumer.  Here, Judge Posner has very little sympathy for the plaintiff, despite her advanced age, because of her sophistication.  But the facts make clear that even she, who bought two condos as an investment, had no bargaining power as to the terms at issue.  Posner undoubtedly applied the law correctly, but just think, if a person with Ms. Goldberg's means has no bargaining power as to one-sided and potentially unreasonable terms, what chance do the rest of us have?

For a different take on the same case, check out my law school's student law blog, the VALPOLAWBLOG, where you can find this post by student Faith Alvarez.

*Following Judge Posner's example, we simplify things by making it one agreement and ignore the complexities of the various Trump entities by referring to those entities collectively as the Trump Organizations.

June 25, 2014 in Commentary, Recent Cases, Weblogs | Permalink | Comments (0) | TrackBack (0)

Sunday, June 15, 2014

Minnesota Court of Appeals Finds E-Signature Did Not Apply to Attachment

TenementsPlaintiffs in SN4, LLC v. Anchor Bank wanted to buy two multi-unit apartment buildings for which Anchor Bank (the Bank) held title.  Through an exchange of e-mails, the parties seemed to have agreed to a purchase price of $1.7 million, but they continued to exchange drafts of a final agreement.  The opinion catalogues and summarizes 19 e-mails relevant to the transaction, but there was no e-mail and no hard copy in which the Bank signed any purchase agreement relating to the properties.  When the Bank refused to sell the properties, plaintiffs sued alleging breach of an agreement that they had signed.  

The trial court granted summary judgment in favor of the Bank on the ground that that the statute of frauds was not satisfied.  On appeal before the Minnesota Court of Appeals, the plaintiffs argued that the Bank had electronically subscribed to the agreement.  The matter of first impression for the court was plaintiffs' claim that the Bank had subscribed to the agreement that plaintiffs later signed because the Bank electronically signed the e-mail to which the agreement was attached.  This claim required the court to address the Minnesota's version of the Uniform Electronic Transactions Act (UETA).  

The court noted that, although the parties conducted their negotiations electronically, UETA does not require them to also subscribe to their transaction electronically unless the parties so intended to limit the means by which they would enter into agreement.  Here, the parties repeatedly made it clear that they expected to sign hard copies of their final agreement.  The court also rejected plaintiffs' contention that the Bank had signed the agreement in two e-mails which included the typed-in name of one of the Bank's principals and a signature block.  The court found that a reasonable factfinder could conclude that the Bank had provided electronic signatures, but under UETA, such signatures must be attached to or associated with the electronic record at issue.  An electronic signature in an e-mail does not automatically apply to a document attached to that e-mail.  In this case, the Bank did not electronically sign the attached document, nor does it seem that the parties considered the attached document the final version of their agreement, as they referred to it as a draft.

Based on these findings, the Court of Appeals upheld the trial court's conclusion that UETA did not apply to the alleged agreement and that no reasonable finder of fact could conclude that the Bank had electronically signed the agreement.  The Court of Appeals therefore upheld the grant of summary judgment to the Bank.  The Court of Appeals also upheld the trial court's rejection of the plaintiffs' equitable estoppel claim.

June 15, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 10, 2014

Your Kids as a Free Facebook Marketing Tool Against Your Will

By Myanna Dellinger

What would you say if you found out that Facebook used your kids’ names and profile pictures to promote various third-party products and services to other kids?  Appalling and legally impossible as minors cannot contract?  That’s just what a group of plaintiffs (all minors) attempting to bring a class action lawsuit against Facebook argued recently, but to no avail. Here’s what happened:

Kids sign up on Facebook, “friend” their friends and add other information as well as their profile pictures.  Facebook takes that information and display it to your kids’ friends, but alongside advertisements.  The company  insists that they do “nothing more than take information its users have voluntarily shared with their Facebook friends, and republish it to those same friends, sometimes alongside a related advertisement.” How does this happen?  A program called “Social Ads” allows third parties to add their own content to the user material that is displayed when kids click on each other’s information. 

The court dismissed the complaint, finding no viable theory on which it could find the user agreements between the kids and Facebook viable.  In California, where the case was heard, Family Code § 6700 sets out the general rule for minors’ ability to contract: “… a minor may make a contract in the same manner as an adult, subject to the power of disaffirmance.”  The plaintiffs had argued that as a general rule, minors cannot contract.  That, said the court, is turning the rule on its head: minors can, as a starting point, contract, but they can affirmatively disaffirm the contracts if they wish to do so.  In this case, they had not sought to do so before bringing suit. 

Plaintiffs also argued that under § 6701, minors cannot delegate their power to, in effect, appoint Facebook as their agent who could then use their images and information.  Wrong, said the court.  Kids signing up on Facebook is “no different from the garden-variety rights a contracting party may obtain in a wide variety of contractual settings.  Facebook users have, in effect, simply granted Facebook the right to use their names in pictures in certain specified situations in exchange for whatever benefits they may realize from using the Facebook site.” 

In its never-ending quest to increase profits, Corporate America once again prevailed.  Even children are not free from being used for this purpose.  The only option they seemed to have had in this situation would have been to disaffirm the “contract;” in other words, to stop using Facebook.  To me, that does not seem like a difficult choice, but I imagine the vehement protests instantly launched against parents asking their kids to stop using the popular website.  Of course, kids are a highly attractive target audience.  Some already have quite a bit of disposable income.  They are all potential long-time customers for products/services not directed only at kids.  Corporate name recognition is important in connection with this relatively impressionable audience.  But is this acceptable?  After all, there is an obvious reason why minors can disaffirm contracts.  This option, however, would often require intense and perhaps undesirable parent supervision.  In 2014, it is probably unreasonable to ask one’s kids not to be on social media (although the actual benefits of it are also highly debatable). 

Although the legal outcome of this case is arguably correct, its impacts and the taste it leaves in one’s mouth are bad for unwary minors and their parents.

June 10, 2014 in Commentary, Current Affairs, E-commerce, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, June 9, 2014

Teaching Third Party Beneficiaries, Assignment & Delegation & a New Third Party Beneficiaries Case out of the First Circuit

Last year, my big teaching innovation was to get rid of casebooks and rely instead on cases and ancillary materials that my fellow contracts prof, Mark Adams, and I edited and compiled on a LibGuide.  This coming year, my big innovation will be to add a unit on Third Party Beneficiaries, Assignment and Delegation.  I can do so because we now have a two-credit course on Damages and Equity at the end of our first-year curriculum, and so I do not need to cover remedies in my contracts course.  I will continue to emphasize remedies throughout the course, but we will not end the semester with a unit consisting of cases that focus primarily on remedies issues.  Fare thee well, Peevyhouse, Jacob & Youngs, Hadley, et al.!  I really will miss you.  

I can do so without regrets, as my students will study these cases (or at least the subject matter for which they are the vehicle of presentation) in their Damages and Equity course.  The reason I feel I need to jettison this material in favor of third parties, etc. is that I have recently learned that those subject matters are heavily tested on the multi-state bar exam.  They also are important in practice, and I don't know where they would be covered if not in first-year contracts.

1st CirSo, with that in mind, the recent First Circuit case, Feingold v. John Hancock Life Ins. Co. caught my eye.  The case related to Feingold's mother's insurance policy, which she took out in 1945.  The policy named Mrs. Feingold's late husband as the sole beneficiary.  He apparently pre-decesased her, and she died in 2006.  Feingold had no knowledge of his mother's policy and did not inform John Hancock of her death until 2012.  At that point, he sought information about her policy.  John Hancock issued Feingold a death benefit check of $1,349.71 but provided no further information about his mother's policy.  That policy, it seems, required a named beneficiary to notify the insurer of the policy-holder's death.  Because such a provision was permissible under state law, the trial court found that John Hancock had no duty to notify Feingold of the policy or to independently seek out potential beneficiaries.  

But Feingold also relied on a 2011 Global Resolution Agreement (GRA) entered into by John Hancock and several states.  Under the GRA, John Hancock agreed to alter some of its practices relating to unclaimed property.   Feingold filed a putative class action claiming that he and other members of the class were harmed as third-party beneficiaries of the GRA when John Hancock breached its obligations under the GRA.  

The First Circuit affirmed the District Court's grant of John Hancock's motion to dismiss Feingold's claims.  The First Circuit found that Feingold and the putative class members are not third-party beneficiaries to the GRA.  The GRA contains no language sufficient to overcome the "strong presumption" against third party beneficiaries.   While Feingold alleged that both John Hancock and the states entered into the GRA in order to protect insurance policy beneficiaries, the First Circuit reasoned that Feingold and others like him are at most incidental rather than direct beneficiaries of the GRA.  Under applicable state law, the fact that states were parties to the agreement strengthens the assumption in favor of the third parties' incidental status.

June 9, 2014 in Recent Cases, Teaching | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 3, 2014

Texas Supreme Court Finds Settlement Agreement Was Formed Although Mirror Image Rule Not Satisfied

Texas SealAfter two employees of Amedisys, Inc. (Amedisys) went to work for its competitor, Kingwood Home Health Care, LLC (Kingwood), Amedisys sued Kingwood for tortious interference.  The two parties then engaged in a game of legal chicken.  Amedisys threatened that it would not settle below six figures.  Kingwood responded with a settlement offer of $90,000, expecting that Amedisys would reject the offer and trigger Rule 167 of the Texas Civil Practice and Remedies Code, which would allow Kingwood to recover litigation costs if the case went to trial and resulted in a judgment considerably less favorable to Amedisys than the settlement offer.

Amedisys accepted the settlement offer.  This apparently was not what Kingwood wanted or expected, and Kingwood refused to treat Amedisys's response as an acceptance.  Kingwood proceeded with some pre-trial motions, and Amedisys filed an emergency motion for the enforcement of the settlement agreement.  Kingwood claimed that the settlement agreement lacked consideration and that it was fraudulently induced by Amedisys's statement that it would not settle for less than six figures.  Note that Kingwood is thus effectively admitting that it made its settlement offer only in order to avail itself of Rule 167.  After a few more procedural complexities, the trial court granted Amedysis's motion to have the settlement agreement enforced.

On appeal, in addition to its allegations that the settlement agreement lacked consideration and was fraudulently induced, Kingwood claimed that Amedisys's purported acceptance was a counteroffer because it did not match the terms of Kingwood's offer.  While Kingwood offered $90,000 "to settle all claims asserted or which could have been asserted by Amedisys,” Amedisys agreed to accept $90,000 "to settle all monetary claims asserted."  Despite the fact that this argument was first raised on appeal, the Texas Court of Appeals agreed with Kingwood and reversed the trial court's judgment in favor of Amedisys.

Texas FlagThe Supreme Court found that the Court of Appeals acted correctly in considering Kingwood's argument, raised for the first time on appeal, that no contract existed.  Amedisys, as the moving party, bore the burden of proving each element of its claim that Kingwood had breached a contract, including proof of the existence of a contract.  

[Editorializing here: This seems more than a bit off to me.  Amedisys likely thought it had proved the existence of a contract when it presented evidence of offer and acceptance.  At the trial court, Kingwood did not raise any claims that the acceptance was invalid based on the difference in wording between offer and acceptance.  Why should Kingwood be permitted to sit on its legal arguments and save them for appeal?  By not raising them in opposition to Amedisys's motion, Kingwood should have been treated as having waived those arguments.  Otherwise, Amedisys would have to attempt to guess every possible legal challenge that Kingwood might raise to its claims and put them in its motion papers.  In the process, Amedisys would be required to aniticipate every conceivable counterargument to its position, raise and refute each argument.  This places an intolerable burden on the movant.]

While the common law does provide that an acceptance may not qualify or change the material terms of an offer, the Texas Supreme Court found that the differences between offer and acceptance in this case were not material given the full context of the exchanges between the parties.  Amedisys made clear its intention to accept Kingwood's offer on the terms Kingwood presented.  Moreover, there were no additional claims that Amedisys might potentially bring, as the doctrine of res judicata would bar Amedisys for bringing additional, related claims once the suit had been settled.  

Because the Court of Appeals declined to rule on Kingwood's additional defenses, the Supreme Court remanded the case back to the Court of Appeals for resolution of those issues.

For those who would like to explore the Mirror Image Rule with students, this is a pretty interesting case, and the Texas Supreme Court provides a video recording of the oral arguments, so that would be pretty cool to share with students as well.

June 3, 2014 in Commentary, Recent Cases, Teaching | Permalink | Comments (0) | TrackBack (0)

Monday, June 2, 2014

Divided Mississippi Supreme Court Strikes One-Sided Arbitration Clause as Unconscionable

Mississippi SealPlaintiffs in Caplan Enterprises, Inc. v. Ainsworth signed two versions of a delayed-deposit agreement with a business called Zippy Check.  The agreements included two versions of arbitration clauses that applied to all of plaintiffs' potential claims, but Zippy Check remained free to pursue all judicial remedies.  In addition, plaintiffs' potential damages were limited to the price paid by plaintiffs for services rendered.

In 2010, plaintiffs brought actions against Zippy Check, alleging fraudulent misrepresentation and predatory lending.  Zippy Check moved to compel arbitration.  The trial court found the aribtration clauses in both versions of the agreement to be unconscionable and unenforceable.  The appellate court found only one version to be unenforceable.  The Mississippi Supreme Court agreed with the trial court.  Its analysis focused on the substantive unconconscionability of the arbitration clauses.  Apparently, a showing of substantive unconscionability alone is enough in Mississippi, at least in connection with adhesion contracts.  The Supreme Court concluded that while arbitration agreements need not impose identifical obligations on each side, "under the particular facts of this case, the arbitration agreements were unreasonably favorable to Zippy Check, oppressive, unconscionable, and unenforceable."

Two dissenting Justices found that plaintiffs had not demonstrated procedural unconscionability because "plaintiffs presented no evidence that they were 'prevented by market factors, timing[,] or other pressures from being able to contract with another party on more favorable terms or to refrain from contracting at all.'"  The dissenting Justices also noted that Mississippi does not require mutuality of obligation in arbitration clauses and thus found no substantive unconscionability in the arbitration agreements at issue in the case.

June 2, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, May 30, 2014

SDNY Enforces Hyperlinked Arbitration Clause and Class Action Waiver

BambooLast month, the District Court for the Southern District of New York granted a motion to dismiss brought by defendant Gilt Groupe, Inc. (Gilt) in Starke v. Gilt Groupe, Inc.  Adam Starke (Starke) sought to bring a class action claim against Gilt for allegedly misrepresenting on its website that its textiles were made from bamboo fibers when they are in fact made from bamboo derivatives (rayon).  

Gilt is an online shopping website that specializes in "flash sales" of short duration.  In order to purchase items on the website, one must become a Gilt member.  One does so by clicking on a "sign-up" box that states that the consumer agrees to be bound by Gilt's Terms of Membership.  Once click on the mouse brings the consumer to Gilt's "Terms and Conditions," which are governed by Gilt's Terms of Use.  A second click brings one to those terms which include, in paragraph 16, an arbitration agreement and a class action waiver.  

Starke claimed both that he never effectively agreed to the arbitration agreement and class action waiver and that they are unconscionable.  Relying on a 2012 case invovling similar challenges to Facebooks click-through terms and conditions, the District Court quickly concluded: 

Regardless of whether he actually read the contract's terms, Starke was directed exactly where to click in order to review those terms, and his decision to click the "Shop Now" button represents his assent to  them.

Yes, this is indeed how mass-market boilerplate rights-deletion scheme works.  Clicking twice, and carefully reading  both documents would have increased the time involved in Starke's transaction substantially.  Neither Starke nor Gilt, which specializes in "flash sales," wants that.   The terms are not intended to be read.  Nor do we know that Starke could have understood the significance of the arbitration clause and class action waiver had he read them.  In addition, what is Starke's alternative?  The District Court blithely directs Starke to Amazon.com.  What do you know?  Amazon also has an arbitration clause and a class-action waiver!  [In fairness, I've always found Amazon's customer service to be excellent -- they take returns and cover shipping on returns, so Starke probably would have been better off with them -- Amazon also accurately described the product at issue in Starke's case.]  SDNY, you're part of the problem.

Starke did not seem to raise any serious grounds for finding the arbitration agreement unconscionable.  

[This post has been edited to fix errors that a reader called to the author's attention.]

May 30, 2014 in Commentary, Recent Cases | Permalink | Comments (1) | TrackBack (0)

Tuesday, May 27, 2014

Third Circuit Rejects Insurer's Motion to Compel Arbitration of Medical Device Suppliers' Claims

3rd cirPlaintiffs in Cardionet, Inc. v. CIGNA Health Corp supply medical devices that permit patients to monitor heart function while away form a hospital.  CIGNA insured these businesses beginning in 2007, but in 2012, CIGNA announced that it would no longer do so because the services the plaintiffs  provide are "considered experimental, investigational or unproven."  CIGNA sent out a "Physician Update" informing them that it would no longer insure the plaintiffs' businesses.  The plaintiffs allege that CIGNA was in possession of no information relating to their services in 2012 that CIGNA did not already possess in 2007.  Tehy were miffed that services that were insureable in 2007 had become uninsureable in 2012.  They sued on their own behalf and on behalf of their patients, seeking damages and injunctive relief and alleging causes of action sounding in breach of contract, tortious interference and trade libel.  

CIGNA moved to compel arbitration pursuant to the original 2007 agreement which included a clause requiring arbitration of all disputes "regarding the performance or interpretation of the Agreement."  The District Court found that the arbitration provision applied and granted CIGNA's motion to compel  arbitration.  The Third Circuit reversed.

As to the plaintiffs' claims brought on their own behalf, the court noted that they all arose out of the following common set of factual allegations: 

CIGNA made false and misleading statements in the Physician Update about the nature and quality of OCT; CIGNA conveyed the false impression that OCT would never be covered under any health plans CIGNA administers; and the Physician Update injured them by decreasing the number of physicians willing to use OCT services.

The Third Circuit determined that the plaintiffs' claims related to the Physician Update and not to the plaintiffs' agreements with CIGNA.  If the Physician Update indeed contained material misstatements as plaintiffs allege, it would harm them whether or not they were insured by CIGNA because it informs doctors that, in CIGNA's view, the services plaintiffs provide are unproven.

The Third Circuit also determined that the claims brought on behalf of patients were not subject to arbitration, even if they would have been arbitrable if brought by the plaintiffs on their own behalf.  First, the patients were not signatories to the arbitration agreement and thus could not be brought within its ambit.  Second, the fact that plaintiffs took on their patients' claims as assignees did not bring the assigned claims within the scope of the arbitration provision, because that provision does not require arbitration of assigned claims.  

May 27, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Friday, May 23, 2014

A Small Fish in a Big Game

By Myanna Dellinger

In California, the Bureau of Reclamation is in charge of divvying up water contracts in the California River Delta between the general public and senior local water rights owners.  Years ago, it signed off on long-term contracts that determined “the quantities of water and the allocation thereof” between the parties.  About a decade ago, it renewed these contracts without undertaking a consultation with the Fish and Wildlife Service (“FWS”) to find out whether the contract renewals negatively affected the delta smelt, a small, but threatened, fish species.  The thinking behind not doing so was that since the water contracts “substantially constrained” the Bureau’s discretion to negotiate new terms, no consultation was required.

Not correct, concluded an en banc Ninth Circuit Court of Appeals panel Ninth Circuit Court of Appeals panel recently.  By way of brief background, Section 7 of the Endangered Species Act (“ESA”) requires federal agencies to ensure that none of their actions jeopardizes threatened or endangered species or their habitat.  16 U.S.C. § 1536(a).  Among other things, federal agencies must consult with the FWS if they have “some discretion”"some discretion" to take action on behalf of a protected species.  In this case, since the contractual provision did not strip the Bureau of all discretion to benefit the species, consultation should have taken place.  For example, the Bureau could have renegotiated the pricing or timing terms and thus benefitted the species, said the court.

In 1993, the delta smelt had declined by 90% over the previous 20 years and was thus listed as a threatened species under the ESA.  Of course, fish is not the only species vying for increasingly scarce California water.  Man is another.  The current and ongoing drought in California – one of the worst in history – raises questions about future allocations of water.  Who should be prioritized?  Private water right holders?  People in Southern California continually thirsty and eager to water their often overly water-demanding garden plants?  Industry?  Farmers?  Not to mention the wild animals and plants depending on sufficient levels of water?  There are no easy answers here.

The California drought is estimated to cost Central Valley farmers $1.7 billion and 14,500 jobs.  While that seems drastic, the drought is still not expected to have any significant effect on the state economy as California is no longer an agricultural state.  In fact, agriculture only accounts for 5% of jobs in California.  Still, that is no consolation to people losing their jobs in California agriculture or consumers having to pay higher prices for produce in an increasingly warming and drying California climate. 

The 1974 movie Chinatown focused on the Los Angeles water supply system.  40 years later, the problem is just as bad, if not worse.  The game as to who gets water contracts and for how much water is still on.

May 23, 2014 in Commentary, Current Affairs, Food and Drink, Government Contracting, Recent Cases, True Contracts | Permalink | Comments (0) | TrackBack (0)

Thursday, May 22, 2014

Fourth Circuit: Dodd-Frank Does Not Invalidate Arbitration Agreement

4th CircuitDr. Armand Santoro (Dr. Santoro) was employed as a Senior Manager by Accenture Federal Services (Accenture) from 1999-2011.  He was dismissed at age 66 and replaced by a younger man.  In 2005, he signed an employment agreement that was subsequently renewed annually.  The agreement included a broad arbitration provision.  He filed a claim alleging age discrimination in violation of the District of Columbia Human Rights Act.  He later added claims alleging violations of the Age Discrimination in Employment Act (ADEA), the Family and Medical Leave Act (FMLA), and the Employee Retirement Income Security Act (ERISA).

Accenture moved to compel arbitration.  Dr. Santoro opposed this motion, arguing that three whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 preempted the arbitration agreement.  The District Court granted Accenture's motion to compel arbitration, finding that Dr. Santoro's claims were not whistleblower claims.  In Santoro v. Accenture Federal Services, LLC, the Fourth Circuit affirmed.  

On appeal, Dr. Santoro contended that the Dodd-Frank provisions at issue were intended to invalidate all pre-dispute arbitration agreements that did not include a carve-out for Dodd-Frank whistleblower claims.  Dr. Santoro claimed that such arbitration agreements were invalid whether or not the particular claim at issue was a whistleblower claim.  Echoing in the U.S. Supreme Court, the Fourth Circuit noted that Dodd-Frank's language is a model a statutory clarity and it clearly prohibits only the arbitration of whistleblower claims.

May 22, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 21, 2014

Weak Language Skills No Bar to Enforcement of Arbtiration Agreement

Nicolas Molina (Molina), a warehouse workder for Sandinavian Designs, Inc. (Scandinavian) sought to sue after his employment was terminated.  Scandinavian sought to compel arbiration.  Molina opposed the motion, contending that he speaks very little English and thus had no idea that he had signed an arbitration agreement.  Last month, in Molina v. Scandinavian Designs, Inc., the Northern District of California rejected the argument.  

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In part, Mr. Molina's problem is evidentiary.  Scandinavian claims that an administrative assistant met with Mr. Molina on the day he was hired and presented him with two forms to sign: a one-page employment agreement and a two-page arbitration agreement.  Scandinavian claims that the administrative assistant spoke with Mr. Molina in both English and Spanish, gave him time to read the forms and told him to ask questions is he had any.  

Molina tells a very different version of events, but it doesn't matter.  As the court explains, 

[U]nder established California law, even if Molina could read very little English, Molina's signature on the Arbitration Agreement manifests his assent to its terms, binding him to the contract.

The court then proceeds to explain that contracts are based on mutual consent of the party.  But we are not talking about actual subjective assent, the proof of which may be beyond the court's reach.  Instead, mutual consent is proved when there is a manifestation of consent such as, in this case, a signature on a document clearly titled "Arbitration Agreement."  Molina has a "duty" to learn the contents of the document before he signed.

For good measure, the court also found that there was no problem under California law relating to the authority of the administrative assistant to sign the arbitration agreement on behal of Scandinavian.  Nor could Molina persuade the court that the arbitration agreement was unconscionable.  

The court granted Scandinavian's motion to compel arbitration and dismissed the case without prejudice.

May 21, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Sunday, May 18, 2014

More on the Structure of Cable Contracts

By Myanna Dellinger

Recently, Jeremy Telman blogged here about the insanity of having to pay for hundreds of TV stations when one really only wants to, or has time to, watch a few. 

Luckily, change may finally be on its way.  The company Aereo is offering about 30 channels of network programming on, so far, computers or mobile devices using cloud technology.  The price?  About $10 a month, surely a dream for “cable cutters” in the areas which Aereo currently serves. 

How does this work?  Each customer gets their own tiny Aereo antenna instead of having to either have a large, unsightly antenna on their roofs or buying expensive cable services just to get broadcast stations.  In other words, Aereo enables its subscribers to watch broadcast TV on modern, mobile devices at low cost and with relative technological ease.  In other words, Aereo records show for its subscribers so that they don’t have to. 

That sounds great, right?  Not if you are the big broadcast companies in fear of losing millions or billions of dollars (from the revenue they get via cable companies that carry their shows).  They claim that this is a loophole in the law that allows private users to record shows for their own private use, but not for companies to do so for commercial gain and copyright infringement.

Of course, the great American tradition of filing suit was followed.  Most judges have sided with Aero so far, the networks have filed petition for review with the United States Supreme Court, which granted the petition in January.

Stay tuned for the outcome in this case…

May 18, 2014 in About this Blog, Commentary, Current Affairs, E-commerce, Famous Cases, In the News, Recent Cases, Television, True Contracts, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, May 12, 2014

No Frequent Complaining Allowed about Frequent Flyer Programs

By Myanna Dellinger

The United States Supreme Court recently held that airlines are allowed to revoke the membership of those of their frequent flyers who complain “too much” about the airline’s services (see Northwest v. Ginsberg).  Contracts ProfBlog first wrote about the case on April 3.

In the case, Northwest Airlines claimed that it removed one of its Platinum Elite customers from the program because the customer had complained 24 times over a span of approximately half a year about such alleged problems as luggage arriving “late” at the carousel.  The company also stated that the customer had asked for and received compensation “over and above” the company guidelines such as almost $2,000 in travel vouchers, $500 in cash reimbursements, and additional miles.  According to the company, this was an “abuse” of the frequent flyer agreement, thus giving the company the sole discretion to exclude the customer.  The customer said that the real reason for his removal from the program was that the airline wanted to cut costs ahead of the then-upcoming merger with Delta Airlines.  He filed suit claiming breach of the implied covenant of good faith and fair dealing in his contract with Northwest Airlines.

The Court found that state law claims for breaches of the implied duty of good faith and fair dealing are pre-empted by the Airline Deregulation Act of 1978 if the claims seek to enlarge the contractual relations between airlines and their frequent flyers rather than simply seeking to hold parties to their actual agreement.  The covenant is thus pre-empted whenever it seeks to implement “community standards of decency, fairness, or reasonableness” which, apparently, go above and beyond what airlines promise to their customers.

Really?  Does this mean that airlines can repeatedly behave in indecent ways towards frequent flyer programs members (and others), but if the members repeatedly complain, they – the customers – “abuse” the contractual relationship?!..  The opinion may at first blush read as such and have that somewhat chilling effect.  However, the Court also pointed out that passengers may still seek relief from the Department of Transportation, which has the authority to investigate contracts between airlines and passengers.

The unanimous opinion authored by J. Alito also stated that passengers can simply “avoid an airline with a poor reputation and possibly enroll in a more favorable rival program.”  These days, that may be hard to do.  First, most airlines appear to have more or less similar frequent flyer programs.  Second, what airline these days has a  truly “good” reputation?  Granted, some are better than others, but when picking one’s air carrier, it sometimes seems like choosing between pest and cholera.   

One example is the airlines’ highly restrictive change-of-ticket rules in relation to economy airfare, which seem almost unconscionable.  I have flown Delta Airlines almost exclusively for almost two decades on numerous trips to Europe for family and business purposes.  A few times, I have had the good fortune to fly first or business class, but most times, I fly economy.  Until recently, it was possible to change one’s economy fare in return for a relatively hefty “change fee” of around $200 and “the increase, if any, in the fare.”  - Guess what, the fares always had increased the times I asked for a change.  Recently, I sought to change a ticket that I had bought for my elderly mother, also using KLM (which codeshares with Delta) as my mother is also frequent flyer with Delta.  I was told that it was impossible to change the ticket as it was “deeply discounted.”   I had shopped extensively online for the ticket, which was within very close range (actually slightly more expensive than that of Delta’s competitors.  I asked the company what my mother could do in this situation, but was told that all she could do was to “throw out the ticket (worth around $900) and buy another one.”  Remember that these days, airfare often has to be bought months ahead of time to get the best prices.  In the meantime, life happens.  Unexpected, yet important events come about.  Changes to airline tickets should be realistically feasible, but are currently not on these conditions.

What airlines and regulators seem to forget in times of “freedom of contracting and market forces” is that some of us do not have large business budgets or fly only to go on a (rare, in this country) vacation.  My mother is elderly and lives in Europe.  I need to perform elder care on another continent and need flights for that purpose just as much as others need bus or train services.  Such is life in a globalized world for many of us.  In some nations, airlines feature at least quasi-governmental aspects and are much more heavily regulated than in the United States.  Here, airfare seems to be increasing rapidly while the middle (and lower) incomes are more or less stagnant currently.  I understand and appreciate the benefits of a free marketplace, but a few more regulations seem warranted in today’s economy.  It should be possible to, for example, do something as simple as to change a date on a ticket (if, of course, seats are still available at the same price and by paying a realistic change fee) without having to buy extravagantly expensive first class or other types of “changeable” tickets.   

Other “abuses” also seem to be conducted by airlines towards their passengers and not vice versa.  For example, if one faces a death in the family, forget about the “grievance” airfares that you may think exist.  Two years ago, my father was passing and I was called to his deathbed.  Not having had the exact date at hand months earlier, I had to buy a ticket last minute (that’s usually how it goes in situations like that, I think…).  The airline – a large American carrier - charged a very large amount for the ticket, but attempted to justify this with the fact that that ticket was “changeable” when, ironically, I did not need it to be as I needed to leave within a few hours.

In the United States, “market forces” are said to dictate the pricing of airfare.  In Europe, some discount airlines fly for much lower prices than in the United States (think round-trip from northern to southern Europe for around $20 plus tax, albeit to smaller airports at off hours).  Strange, since both markets are capitalist and offer freedom of contracting.  Of course, these discount airlines also feature various fees driving up their prices somewhat, although not nearly as much as in the United States.  A few years back, one discount European airline even announced that it planned to charge a few dollars for its passengers to use … the in-flight restrooms.  Under heavy criticism, that plan was soon given up.  In the United States, some airlines seem to be asking for legal trouble because of their lopsided business strategies.  Sure, companies of course have to remain profitable, but when many of them claim in their marketing materials to be “family-oriented” and “focused on the needs of their passengers,” it would be nice if they would more thoroughly consider what that means.

 

May 12, 2014 in Commentary, Current Affairs, Famous Cases, In the News, Recent Cases, Travel, True Contracts | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 6, 2014

Suit Over Old Wine in Somewhat Less Old Bottles: In Vino Sales Veritas?

 

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Chateau Lafite Rothschild

This just in from University of Minnesota Contracts Prof. Carol Chomsky:

The Antique Wine Company (AWC), a London-based wine dealer, is being sued for $25 million by Julian LeCraw Jr., an Atlanta real estate investor and wine collector, for allegedly selling 15 bottles of counterfeit rare old Bordeaux wine.  The suit claims fraud and breach of contract based on sales of a bottle of Château d’Yquem 1787, a Yquem 1847, a 6-liter bottle of Château Margaux 1908, and 12 bottles of Château Lafite Rothschild ranging in vintage from 1784 to 1906. 

Stephen Williams, founder and managing director of AWC, says “it duly researched the provenance of the wines it supplied and fully disclosed that information” to the buyer at the time of the purchases, but some of those claims are contested by statements made the château merchants themselves. 

Wine grapesAn “authenticity ticket” relied upon by AWC for the 1787 Yquem  (purchased for $91,400, including insurance) was not an endorsement of the wine’s authenticity, according to those statements.  “I signed it the way people sometimes sign a menu or a post card,” said Count Alexandre de Lur Salces; “I simply put a signature on it.  It is out of the question that I could identify it as authentic.”   There is also dispute over whether the logo on some of the buyer’s bottles was registered after the date on which the wine was allegedly rebottled and whether two bottles of Yquem 1847 allegedly identical to those sold to LeCraw still exist in the cellars of the Cruse family in Bordaux. 

AWC’s lawyer suggests the issue is not whether the bottles are counterfeit, but whether the seller used a standard of care in keeping with the then-current industry practices in researching the provenance of the bottles.  For more information, see the article in The Wine Spectator here.  Makes me wonder if proving authenticity will include drinking one bottle of each!

May 6, 2014 in Food and Drink, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, May 5, 2014

Ninth Circuit Rejects Contract-Based Challenge to eBay's Automatic Bidding System

9th CircuitIn Block v. eBay, Inc., Marshall Block contended that eBay's automatic bidding system violates two provisions of its User Agreement as well as California's Unfair Competition Law.  The District Court dismissed the case and the Ninth Circuit affirmed.

eBay conducts online auctions through its automatic bidding system.  A bidder enters into the system the maximum amount she is willing to bid.  This amount is kept confidential, but the system automatically and at pre-determined increments enters the bidder's bids until the bid price exceeds the maximum that the bidder is willing to pay.  Block, an eBay seller, claimed that the system violates provisions of the User Agreement in which eBay represents that: 1) it is not  involved in the actual transaction between buyers and sellers; and 2) the Agreement creates no agency, partnership, joint-venture, employer/employee or franchisor/franchisee relationship.

The District Court found that neither of these provisions constituted enforceable promises, and the Ninth Circuit agreed.  The Court discerned no promissory language in the relevant provisions.  Rather, the Court opined that the language in the User Agreement served as a general introductin to eBay's marketplace.  While some of the language of the User Agreement are explicitly promissory; the language at issue here is informal and conversational in style.

While I agree with the Court's analysis here, I am a bit wary of its emphasis on the informal language used in the User Agreement.  I noticed recently that Google changed the tone (but not the substance) of its Terms of Service by adding contractions and generally making the corporation sound more like an unthreatening hipster.  Notwithstanding the verbal skinny jeans, companies engaged in e-commerce use these agreements to limit consumer rights and  their own exposure to legal action, often to the verge of rendering these documents illusory agreements.  I wish the Ninth Circuit had limited its opinion to a finding that there was no promise and had not equated informal language with a lack of intent to be bound.

May 5, 2014 in Commentary, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 30, 2014

New York Times Report on Litigation Challenging an Allstate Waiver Agreement

Allstate_storeAccording to this article in today's New York Times, 6,200 Allstate employees, who joined its Neighborhood Agents Program in the 1980s and 1990s, were called into meetings in 1999 at which they were told that they would now proceed as independent contractors, forfeiting health insurance, their retirement accounts or profit-sharing, and terminating the accrual of their pension benefits.   If they wanted to continue to sell Allstate insurance, they had to sign waivers in which they agreed not to sue the insurer.  Thirty-one agents signed but have now sued nonetheless, alleging age discrimination and breach of contract.

They sued thirteen years ago, but the case is still far from over.  They are still seeking class certification.  The Times article indicates that cases such as this one are hard to win, but the judge in this case has already stated that those that signed the waivers were made substantially worse off, that Allstate's claimed corporate reorganization was actually a disguised staff reduction, and that Allstate's conduct was "self-serving and, from most perspectives, underhanded."  In addition, Allstate seems to have misrepresented to the agents the consequences of not signing the waiver, having told the agents that they would be barred for life from soliciting business from their former customers.  Allstate has already paid $4.5 million to settle an age-discrimination claim brought by the EEOC on behalf of 90 of the agents.

April 30, 2014 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Monday, April 28, 2014

No Retroactive Application to Arbitration Agreement Says Sixth Circuit

6th CirThe Sixth Circuit held that an employee does not have to arbitrate a claim that was already pending in court when he entered into an arbitration agreement with his employer.  The facts of the case, Russell v. Citigroup, Inc.,  are as follows:

Keith Russell was employed at a Citicorp call center from 2004 to 2009.  In 2012, he brought a class action lawsuit against the bank, alleging that he and other employees were not paid for time spent logging in and out of the Citicorp computer system.  While there was an arbitration agreement in place covering this first period of employment, it did not reach class action claims, and so Russell was permitted to proceed in court.

Then, rather bizarrely, Russell applied to be rehired at the same call center and, more bizarrely still, Citicorp rehired him.  He began work again in 2013.  He signed a new arbitration agreement that does cover class claims.  Citicorp thus sought to compel arbitration in the suit, which had by then proceeded to discovery.

The District Court denied Citicorp's motion to compel.  The Sixth Circuit reviewed the language of the new arbitration agreement and found that it clearly applied only prospectively.  Russell clearly did not intend for the new arbitration agreement to apply to his old claim, and Citicorp also seemed to have no such intention.  If its legal department did intend to bind Russell through the second arbitration agreement to drop his class action claim, then it would have violated ethical rules by sending the second agreement to Russell rather than to his attorney.  The Sixth Circuit found that Citicorp had no such intention, and so neither party intended for the second arbitration agreement to apply to Russell's class action claim.  As the Federal Arbitration Act requires courts to enforce the intent of the parties, the Sixth Circuit affirmed the District Court's denial of Citicorp's motion to compel arbitration. 

April 28, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 23, 2014

Interesting Australian High Court Damages Decision

150px-Australian_Coat_of_ArmsI just stumbled upon an interesting damages decision from the Australian High Court in December. In a thouroughly modern context (sale of frozen sperm), it raises the age-old question of how to measure expectation damages when the buyer is able to recoup the costs of replacement in a forward contract.

Plaintiff and Defendant are doctors specializing in “assisted reproductive technology services.” For just over $380,000 (AUD), Plaintiff agreed to buy the assets of a company operating a fertility clinic, a company controlled by Defendant. The asset sale included a stock of frozen sperm. The company warranted that the identification of the donors of that sperm complied with specified regulatory guidelines. (Defendant guaranteed the company’s obligations under the contract).

The stock of sperm delivered contained 1,996 straws that were in breach of warranty. Specifically, it did not comply with regulatory requirements concerning consents, screening tests and identification of donors. For this reason, the sperm was unusable by Plaintiff. Plaintiff was unable to find suitable replacement sperm in Australia and eventually found only one alternative source of sperm from a U.S. supplier for over $1.2million (AUD). Plaintiff “accepted that ethically she could not charge, and in fact had not charged, any patient a fee for using donated sperm greater than the amount [she] had outlaid to acquire it.”

The question before the High Court: how should Plaintiff’s damages for breach of warranty be calculated? The primary judge assessed the damages as the amount that the Plaintiff would have had to pay the U.S. company (at the time the contract was breached) to buy 1,996 straws of sperm. On appeal, the Court of Appeal held that the Plaintiff should have no damages because the Plaintiff was able to pass on the increased costs to her patients. The Court of Appeal held that the Plaintiff had thus avoided any loss she would otherwise have sustained.

The parties did not dispute damages should be "that sum of money which will put the party who has been injured ... in the same position as he [or she] would have been in if he [or she] had not sustained the wrong for which he [or she] is now getting his [or her] compensation or reparation.” Nor did they dispute that the Plaintiff was entitled to be put in the position she would have been in had the contract been performed. The parties disputed how these principles should be applied to this particular case.

JusthayJustice Hanye of the High Court identified the difficulty as stemming from a failure to identify what “loss” was being compensated. He identified three different forms of “loss”:

First, there might be a loss constituted by the amount by which the promisee is worse off because the promisor did not perform the contract. That amount would include the value of whatever the promisee outlaid in reliance on the promise being fulfilled. Second, the loss might be assessed by looking not at the promisee's position but at what the defaulting promisor gained by making the promise but not performing it. Third, there is the loss of the value of what the promisee would have received if the promise had been performed. Subject to some limitations, none of which was said to be engaged in this case, damages for breach of contract must be measured by reference to the third kind of loss: the loss of the value of what the promisee would have received if the promise had been performed.

After a nod to Fuller and Purdue, Justice Hayne explained how to value what Plaintiff should have received:

Under the contract which the [Plaintiff] made, she should have received 1,996 more straws of sperm having the warranted qualities than she did receive. The relevant question in the litigation was: what was the value of what the [Plaintiff] did not receive? The answer she proffered in this Court was that it was the amount it would have cost (at the date of the breach of warranty) to acquire 1,996 straws of sperm from [the U.S. company]. That answer should be accepted.

The answer depends upon determining the content of the unperformed promise. The answer does not depend upon whether the contract can be described as one for the sale of goods or for the sale of a business. How much the [Plaintiff] paid for the benefit of the promise is not relevant. It does not matter whether the value of what she did not receive was more than the price she had agreed to pay under the contract or (if it could have been determined) the price she had agreed to pay for the stock of sperm. The extent to which the [Plaintiff] could have turned the performance of the promise to profit would be relevant only if the [Plaintiff] had claimed for loss of profit. She did not. She sought, and was rightly allowed by the primary judge, the value of what should have been, but was not, delivered under the contract.

As for mitigation, the Justice wrote:

As already noted, however, the Court of Appeal concluded that the [Plaintiff] had mitigated her loss by buying replacement sperm from [the US. Company]. In respect of "the loss of each straw of replacement sperm actually sourced from [the U.S. company]" before the date of assessment of damages, Tobias AJA concluded that the chief component of the [Plaintiff’s] "loss" would be "the sum (if any) representing that part of the overall cost of acquisition of that straw not recouped from a patient". And in respect of "the residue of the 'lost' 1996 straws over and above those in fact replaced by [U.S.] sperm up to the date of trial", Tobias AJA concluded that "the appropriate course would have been to assume that [the Plaintiff] would continue to source straws of donor sperm from [the U.S. company] at a cost consistent with that which had prevailed since August 2005, and that she would continue to recoup from patients the same proportion of that cost as she had done in the past". On this footing, Tobias AJA concluded that the [Plaintiff’s] damages in respect of straws not "replaced" would be "the aggregate of the discounted present value of the un recouped balances (if any) of that cost as at the date of their assessment" (emphasis added).

Two points must be made about this analysis. First, the calculations described would reveal whether, and to what extent, the [Plaintiff] was, or would be, worse off as a result of the breach of warranty. That is, the calculations of the net amount which the [Plaintiff] had outlaid, and would thereafter have to outlay, would reveal the amount needed to put the [Plaintiff] in the position she would have been in if the contract had not been made. The calculations would not, and did not, identify the value of what the [Plaintiff] would have received if the contract had been performed. Second, the reference to mitigation of damage was apt to mislead. In order to explain why, it is necessary to say something about what is meant by "mitigation" of damage.

For present purposes, "mitigation" can be seen as embracing two separate ideas. First, a plaintiff cannot recover damages for a loss which he or she ought to have avoided, and second, a plaintiff cannot recover damages for a loss which he or she did avoid. * * *

The [Plaintiff’s] subsequent purchases and use of replacement sperm left her neither better nor worse off than she was before she undertook those transactions. In particular, * * * the [Plaintiff] obtained no relevant benefit from her subsequent purchases of sperm. The purchases replaced what the vendor had agreed to supply.

The purchase price paid for the replacement sperm revealed the value of what was lost when the vendor did not perform the contract. But the commercial consequences flowing from the [Plaintiff’s] subsequent use of those replacements would have been relevant to assessing the value of what should have been supplied under the contract only if she had obtained some advantage from their use, or if she had alleged that the replacement transactions had left her even worse off than she already was as a result of the vendor's breach. If she had obtained some advantage, the value of the advantage would have mitigated the loss she otherwise suffered. If she had been left even worse off (for example by losing profit that otherwise would have been made), that additional loss may have aggravated her primary loss. But the [Plaintiff] was not shown to have obtained any advantage from the later transactions and she did not claim that they had left her any worse off. Those transactions neither mitigated nor aggravated the loss she suffered from the vendor not supplying what it had agreed to supply. The value of that loss was revealed by what the [Plaintiff] paid to buy replacement sperm from [the U.S. company].

Showing that the [Plaintiff] had charged, or could charge, third parties (her patients) the amount she had paid to acquire replacement sperm from [the U.S. company] was irrelevant to deciding what was the value of what the vendor should have, but had not, supplied. If the contract had been performed according to its terms, the [Plaintiff] would have had a stock of sperm having the warranted qualities which she could use as she chose. She could have stored it, given it away or used it in her practice. In particular, she could have used it in her practice and charged her patients nothing for its supply. But because the vendor breached the contract, the [Plaintiff] could put herself in the position she should have been in (if the contract had been performed) only by buying replacement sperm from [the U.S. company]. Whatever transactions she then chose to make with her patients are irrelevant to determining the value of what should have been, but was not, provided under the contract.

Thus, Justice Hayne, joined by Justices Crennan and Bell, allowed Plaintiff’s appeal and ordered the she receive damages on the terms she sought. Justice Keane agreed with the result. Justice Gageler did not.

Stephen-gagelerJustice Gageler would have dismissed the appeal. He wrote:

The appropriate measure of [the Plaintiff’s] loss is so much of the cost to [the Plaintiff] of sourcing 1,996 straws of replacement sperm for the treatment of her patients as she had been, and would be, unable to recoup from those patients. That measure, adopted by the Court of Appeal, is appropriate because it yields an amount which places [the Plaintiff] in the same position as if the contract had been performed so as to provide her with the expected use in the normal course of her practice of 1,996 straws of the frozen sperm delivered to her by the company.

To [the Plaintiff’s] protest that adoption of that measure leaves her without an award of damages in circumstances where the company has been found to have breached its warranty, the answer lies in the way she has chosen to put her case. She has made a forensic choice to eschew the measure which, together with the Court of Appeal, I would hold to be the appropriate measure. 

Clark v. Macourt, [2013] HCA 56 (Dec. 18, 2013).

April 23, 2014 in In the News, Recent Cases | Permalink | Comments (0) | TrackBack (0)