Monday, February 24, 2014
We had an all-star afternoon panel on Contract Law and Social Justice. The panel was moderated by Robin West, who gave a killer Keynote Speech over lunch. That speech will be forthcoming in the St. Thomas Law Review, as will Amy Schmitz paper, discussed below, so look out for that.
Danielle Hart started off the panel with a paper on Contracts and Inequality. Her talk took issue with the claim that the state is absent in contract law. In fact, she regards contract law as public law because the state is neither netural nor minimal, and contract law in action helps to create and perpectuate inequality. She illustrated her point with a case of a fairly typical subprime mortgage loan to an African-American women in a predominantly minority neighborhood. The state helped manufacture the desire for homeowneship; the state created the residential housing market through regulation and deregulation of the housing market; and the state decides on enforcement and enforces judgment.
The result is that law promotes inequality. Parties to contracts are not equal, but contract law ignores structural inequality in bargaining power and applies rules "neutrally" without adjusting for structural inequality. Thus the stronger party gets the better end of the bargain. And getting into contracts is much easier than getting out of them, especially with the new hurdles to litigation including the Twombly/Iqbal line of cases, as well as standard contract terms such as binding arbitration clasues and class action waivers. The result is an endless cycle in which those with more power continually can use contracts to extract favorable terms in each successive contractual relationship and those without bargaining power are made worse off through unfavorable bargains.
Returning to her illustration involving the African-American borrower, Professor Hart noted that the banks that made subprime loans before the mortgage meltdown are mostly doing fine, but there is now a remarkable racial disparity in wealth in American households (over $113,000 for White households; about $5-6000 for African American and Hispanic households). The numbers are very low for African-American and Hispanic households because so much of their wealth was tied up in their homes, which they lost in the subprime crisis. This illustrates Professor Hart's cycle of contracts law serving the interests the better off at the expense of the poor.
Hila Keren next presented her paper on Contract Law and the Responsive State, in which she addressed what can be done in light of the very depressing state of things as described in Professor Hart's paper. Professor Keren regards contracts as a mode of social regulation and offered ways in which we can use contracts law to further socially desireable ends. She does so in the context of two patterns of market exploitation. The first is "predatory prenups;" that is, prenups in which a woman is coerced into a marriage relationship because of particular vulnerabilities. Second, in predatory loan agreements, people enter into unfavorable loans because they were vulnreable, low-income, unsophisticated, first-time buyers.
Inequalities are increased if judges refuse to intervene to protect exploited parties. Professor Heren agrees with Professor Hart that judges are increasingly refusing to intervene. Her proposal is to replace our neo-liberal theory with a revamped vulnerability theory to underpin contracts doctrine. Neo-liberal theory associates equality with non-discrimination; vulnerability theory focuses on the right of individuals to participate in society and to have their human dignity recognized and protected. Neo-liberal theory regards the subject as the private, autonomous individual; under vulnerability theory we are all vulnerable and interconnected. Finally, neo-liberal theory regards the state as a threat to individual freedom, while vulnerability theory desires a responsive state that will address human vulnerabilities. In the contractual context, the responsive state simply refuses to enforce exploitative contracts.
Vulnerability theory eanbles us to appreciate that vulnerability is a normal part of life that arises as a product of state policies and politics. Permitting exploitation of such vulnerabilities harms human dignities, and the responsive state ought not to permit such exploitation. Professor Keren supports the recognition of a right not to be exploited through contractual means, and she notes that European law recognizes a norm against contractual exploitation. In the U.S., where that norm is not legislatively enacted (and the prospects are dim), we might be able to make due with a beefed-up version of the doctrine of unconscionability.
Amy Schmitz gave a talk on Acccess to Consumer Remedies in the Squeaky Wheel System. Her talk built on this paper from the Pepperdine Law Review. By "squeaky wheel," Professor Schmitz refers to the fact that only 1/3 of consumers do anything when dissatisfied with a product and few go beyond just calling and complaining. Very wealthy consumers are the most likely to complain about non-conforming consumer goods. Those "squeaky wheels" often get the remedy they wanted and they end up being loyal customers because they are satisfied with customer service.
The same goes with sales. White men are more likely to bargain than women or minority groups. An Ian Ayres study indicated that women paid a 40% mark-up over men in car sales and African Americans and Hispanics paid a 100% mark up over white male consumers. Most people do not bargain or seek to change terms when they enter into contracts, and most people do not read or pay attention to most contractual terms.
So, how do we bring back remedies? How do we compel sellers to stand by their goods? Professor Schmitz suggests that we need a new "handshake" to ignite justice in business-to-consumer contracting. She thinks online dispute resolution (ODR) might be a way to do so in a low-cost, flexible, user-friendly and non-intimidating manner.
Charles Knapp delivered a paper called Unconscionability: Once More Unto the Breach. He has been tracing the progress of unconscionability doctrine in the U.S. in a series of law review articles, including this one and this one. His main argument at this point is that courts have developed a comprehensive body of law on unconscionability. The doctrine comes up a lot in all sorts of contexts, and the courts know how to deal with unconscionability. The doctrine is more pervasive than one might think. Unconscionable behavior also comes up frequently in the interpretation of state and federal statutes. Courts have also recognized unconscionability as a sword as well as a shield, permitting recovery of large claims based on court findings that certain agreements are unconscionable. Judges with conscience should not enforce unconscionable agreements because lots of people and corporations do not have consciences.
Peter Linzer commented on the papers. He noted Chuck Knapp's important contribution in helping us to recognize that unsconscionability is not a doctrine that we embraced in the 60s and 70s and then it ran its course. It is alive and well and continues to permit court to invalidate contracts when "something smells bad." He noted that consumer contracts are far more complex today than they were in the age of face-to-face transactions, because we work through intermediaries (Amazon, Google, credit card companies) each of which has its own terms that we agree to by clicking or using the product.
Professor Linzer expressed some skepticism that merchants will embrace Professor Schmitz's online dispute resolution mechanisms. Doctrinal solutions to the problems of form contracts also fail because consumers don't want to litigate, and if they do, the odds are stacked against them. He therefore prefers the European route of banning certain contractual provisions through blacklists and greylists. So, we could simply ban pre-dispute binding arbitration in consumer contracts or choice of forum clauses that force the world to come to (e.g.) Microsoft when Microsoft already operates globally. The new Consumer Financial Protection Bureau may be the entity that can actually do these things.
Finally, Professor Linzer noted that consumer spending accounted for 71% of the GDP last year. That makes contracts law an issue of public law.
Saturday, February 22, 2014
Our own Meredith Miller started the panel with a paper on Getting Paid: Contracting in the Naked Economy. Professor Miller's paper is in part a reflection on her experience with freelancers who have been doing work in the new economy and have been experiencing a hard time getting paid. The amount due often does not rise to a level that would justify litigation. Professor Miller began by discussing "the rise in independent work," which is a lose category encompassing the "jobless but not workless." These people are often highly skilled, and big companies prefer to have consultants rather than employees because of liabilities and costs attendant to employees that are not associated with contractual relations with constultants.
On the other side, there is a literature promoting the benefits to workers in being independent workers. There are advantages to not having a boss, to not having to commute, not having face-time at work, etc. Why deal with people when you can stay home in the company of your cats? But there are significant problems associated with being an independent worker, including significantly, not getting paid. Professor Miller presented staggering statistics indicating that a very high percentage of independent workers have a hard time getting paid, and a very small percentage of them hire an attorney or actually proceed to court. She illustrated the problem with this video.
Professor Miller suggested simple solutions for independent workers such as clear definitions and expectations in contracts, payments schedules, process payments or payments in advance, terminations fees and attorneys fees in cases of non-payment. She recommended the Shake App as a means for quickly throwing together useable contracts. She also discussed legislative reforms, such as New York's proposed Freelancer Payment Protection Act, and potential private solutions.
Rachel Arnow-Richman next gave her paper on Modifying Employment Contracts. Professor Arnow-Richman began by discussing the abysmal case law on employment law, and by suggesting that modification is just another area in which the law is bad for workers and largely incoherent. Employment is generally at will these days, and so the notion of modification is difficult because it is not entirely clear that there is a contract to modify. The agreements are relational and the obligations are indefinite. Still, where the employer regards the modification as legally binding (e.g., the creation of non-competes, arbitration provisions, or retraction or modification of a previously promulgated employer policy), the doctrine of modification is applicable.
Professor Arnow-Richman noted two general approaches that have been applied to modification. The unilateral approach focuses on the employee's at-will status with the employee's continued employment constituting the consideration for the modifcation. For example, a Colorado case recently upheld the imposition of a non-compete clause on an at-will employmee because the employer can terminate the contract at any point. If the employer can terminate, it can also introduce a new contract with new terms that the employee accepts by continuing employment. This approach is troubling, because the worker obviously derives no benefit, and the notion that the benefit was continued employment is a sort of fiction, since that employment is still terminable at will. Some courts enforce such unilateral modifications only in the case of some additional consideration, such as a raise. In the at-will context, this is not all that helpful, since the additional consideration will not be relevant to the employee if she is sacked the following day.
The second approach, which Professor Arnow-Richman prefers, is to require advance notice as the consideration. This approach relates to a paper she gave at the AALS Section on Contracts meeting in 2013, which is now forthcoming in the Florida Law Review. There have been cases in which courts have upheld modifications based on reasonable notice. Unfortunately, the courts do not seem to know why they are doing so. Still, Professor Arnow-Richman thinks that there is way to make sense of this approach, and it turns on treating even at-will employment as a bilateral contract. If we so understand at-will employment, and we should, since employment begins with a promissory acceptance and the parties generally anticipate a long-term relationship, then reasonable notice is a standard term for modification.
I had the pleasure of chairing a panel populated by four young scholars all writing on Behavior, Bargaining, Incentives and Contract.
Kenneth Ching went first with his paper on Justice and Harsh Results: Beyond Individualism and Collectivism in Contracts. His paper focused on Cardozo's celebrated opinion in Jacob & Youngs v. Kent in which Cardozo held that, although Jacob & Youngs had not installed Reading pipes as called for in the contract, it had nonetheless substantially performed the contract by installing pipes of similar quality. Professor Ching maintains that Cardozo was wrong on both the facts and the law in the case. The contract in the case made clear that complete performance was a condition of payment, and the law was clear (then and now) that there can be no substantial performance of a condition. Moreover, even if it were possible to substantially perform conditions, Jacob & Youngs did not do so, as Cardozo would have noted had he actually applied the test to the facts of the case.
The case is but a gateway to Professor Ching's larger point about collectivist and individualist approaches to contracts law. Judge Cardozo's opinion seems to take a collectivist (or parternalist) approach to the doctrinal problems that the case raises. That is, Cardozo thinks we are all better off if people aren't held to unreasonable terms that would require the destruction of a home to replace pipes with virtually identical pipes. Judge McLaughlin's dissent seems to be more individualist, focusing on Kent's perspective and his right to insist on the contracts rights for which he had bargained. Professor Ching's approach rejects both collectivist and individualist approaches. He favors a Thomist approach that tries to resolve conflict in line with reason and with the goal of promoting human flourishing. Cardozo's opinion might be attractive from a Thomist perspective. Responding to a question, Professor Ching acknowledged that James Gordely, whose approach informs Professor Ching's, would find for Jacob & Youngs based on unconscionability. Still, Professor Ching maintains, Judge Cardozo reached the wrong result because of his mischaracterization of the facts and the law.
Next up was Andrew Verstein who gave a (his first ever) Prezi presentation (which was super cool) on Ex Tempore Contracting. His paper takes on a tradition that distinguishes between ex ante and ex post approaches to contracts interpretation. In the former, the parties specify how the contract is to be interpreted ("use Reading pipes"), and in the latter, the parties delegate interpretation to an adjudicator ("use merchantable pipes"). In the ex ante approach, the parties determine the meaning of the terms; in the ex post approach, some neutral third party (court or arbitrator) determines the meaning. Ideally, parties decide between precise (ex ante) terms and vague (ex post) terms based on the costs and benefits of choosing specific terms in particular contexts. Parties should draft to minimize the sum of ex ante and ex post costs.
But Professor Verstein contends that there is middle ground between before performance and after (alleged) breach. Some contracts disputes can be resolved during performance. The parties can specify that a particular third party will resolve disputes that arise during performance (ex tempore), and they can be resolved whether the terms are superficially vague or superficially precise. The aim remains to reduce the costs of dispute resolution, and there are many situations in which it is most efficient for the parties to agree to ex tempore dispute resolution, especially in construction agreements. Professor Verstein illustrates this point with the case of the Chinese Ertan Dam, a huge construction project. All disputes relating to that dam were resolved within six months of the dam's completion. This fact is attributable to the existence of netural expert panels (dipute boards) that addressed disputes as they arose and were able to sort out most disputes before the parties became too aggrieved. Reviewing Florida dispute boards, Professor Verstein finds that 98% of disputes are resolved without further conflict and the cost is 10-50% of arbitration. This is not really dispute resolution, Professor Verstein contends; it is ex tempore contracting. And, it turns out, this happens a lot more often than we realize.
Professor Verstein's paper is forthcoming in the William & Mary Law Review and can be downloaded here.
Wendy Netter Epstein next presented her paper on Public Private Contracting and the Reciprocity Norm. Professor Epstein's thesis is that in some public private contracts it is very difficult for the government to reduce agency costs by writing more detailed contracts. Picking up on Professor Verstein's theme, Professor Epstein contends that in certain circumstances it is better to have less detailed contracts with mechanisms for ongoing dispute resolution during contract performance. This approach is most appropriate where there is a shallow market (i.e., very few private contractors bid), a narrow application (e.g., private prisons) or a disempowered group of third-party beneficiaries (e.g., welfare recipients).
While a lot of scholarship has focused on the need for more detailed contracts in this context so as to provide for strong oversight of private actors working in the public interest. Professor Epstein suggests that the result has been to increase the size and complexity of government contracts. However, this solution does not work well because, where there is no well-functioning market, the government cannot effectively moitor and discipline private contractors. Moreover, one point of outsourcing is to promote innovation and creativity, and excessive government monitoring of private contractors undermines that aim. Professor Epstein drawns on research in the behavioral sciences and contends that reciprocity norm, which rewards people for kind actions, constrains actors more powerfully than models based on rational actors would predict. She thus thinks that strict enforcement mechanisms and sanctions regimes often undermine cooperation in the public private contracting context. Governments might be better served by communicating their positive intentions towards private contractors by entering into looser contracts that would permit the parties to chart the course of the collaboration on an on-going basis as the project proceeds.
Finally, Eric Zacks presented a paper on The Moral Hazard of Contract Drafting. One party to a contract can act opportunistically as an economic agent of the other party. The agency relationship arises when one party asks the other party to draft the agreement. That is a delegation of authority that would then be ratified upon acceptance. The danger of agency costs arises in that there may be a disparity between the contract as conceived and the contact as written.
There may be economic value in having one party be the contract preparer. For example, that party might have greater experience and expertise in contract preparation. But the drafter may write the contract is such a way as to enable it to take advantage of the other party after performance has begun. Then the question arises whether the principal (the non-drafting party) is able to monitor the agent (the drafting party). For example, in consumer contracts, it seems unlikely that non-drafting consumers would be capable of both foreseeing and monitoring the agency costs involved in allowing sellers to draft consumer contracts. One solution is for the principal to hire an agent (e.g., a lawyer) to monitor the contract. Or there might be outside monitoring services to prevent opportunistic behavior, such as regulatory agencies or courts, or statutory requirements that certain transactions be written in plain language.
Courts are less likely to intervene when they think the principal (non-drafting party) is sophisticated and has the means to protect itself against opportunistic behavior by the agent (drafting party). In the contractual context, we have more limited ways to discourage opportunistic behavior through incentives for good behavior.
Those not satisfied with this summary of Professor Zacks' argument can download the entire thing here.
Friday, February 21, 2014
Shawn Bayern presented his work in progress on Meta-contextualist Contract Interpretation. Although Professor Bayern began by suggesting that, non-withstanding his previous presentations at this conference in which he denounced formalism and defended contextualist approaches, he really thinks that if asked in any given context, which interpretive regime should apply to a particular transaction, his answer is, "it depends." In short, the answer to the question of textualism vs. contextualism is contextual. Thus, Professor Bayern is a meta-contextualist. Parties should be able to determine what interpretive regime will apply to them. It might well be textualist, but (ah ha!), the text of the parties' agreement should not be dispositive in determining that issue. Rather, courts should look to the context informing that agreement. Happily, this seems to be what courts do. If the parties make clear that they intend to be bound by their text, then courts should take a textual approach. Otherwise, they should not just rely on the text, regardless how clear it is, but should review the text in the context of the negotiations. After all, a contract negotiated at gunpoint should not be binding regardless of its clarity.
Peter Gerhart then presented his paper co-authored with Juliet Kostritsky, Efficient Contextualism. The main point of the paper, like Professor Bayern's, is that the distinction between contextual and textual approaches is not particularly useful. Our real goal is to get at the parties' obligations, and whether we do that with text or context does not really matter. Both approaches, if pursued one-sidedly, have significant drawbacks. Textualism can lead to literalism and absurd results. Contextualism, if unconstrained, can be terribly inefficient and capricious.
Instead Professor Gerhart proposes "efficient contextualism" through determinate reasoning, which requires each party to identify the facts that must be true in order for their interpretation to succeed. While Professor Bayern thinks that the methodology appropriate to each contract must be determined with specific reference to the context in which that contract was negotiated, Professor Gerhard suggests that there can be a uniform approach to interpretation that would in fact be what unites the law of contracts. He used the facts of Jacob & Youngs v. Kent to illustrate. What does "use Reading Pipe" mean in the context of that agreement and what result is surplus maximizing? The answer depends on what the parties knew or reasonably should have known and intended at the time of the agreement. Determinate reasoning should promote efficiency by narrowing the issues in dispute which can then be settled either through motion practice or by a quick trial to resolve the few factual disputes on which the parties' differing contractual interpretations hinge.
Finally, Amir Pichhadze (pictured left in an image from the Yazigallery), an SJD candidate at the University of Michigan whose recent successes have garnered a lot of attention, presented his paper on Transfer Pricing & Contractual Interpretation. The subject matter of his paper is complex, so I will post an abstract that he has shared with me:
As the OECD’s Transfer Pricing Guidelines (“TPG”) and US Regulations recognize, the contractual terms of a controlled transaction are a ‘relevant circumstance’ (i.e. ‘comparability factor’) that ought to be taken into account when conducting the transfer pricing comparability analysis.
The purpose of this paper is to identify that domestic contractual interpretation law has a critical role in this comparability analysis. Firstly, it makes it possible to ascertain the substance of the terms, as they were intended by the parties. This is essential in order to properly recognized and give effect to the transaction as it was structured by the parties. Second, the parties’ contractual intentions make it possible to determine whether the controlled transaction’s surrounding circumstances are linked to the transfer price, which would make them a ‘relevant circumstance’ in the comparability analysis.
In Canada v. GlaxoSmithKline Inc. (“Glaxo case”), for example, if Glaxo Canada intended in the controlled transaction [which was a Supply Agreement with Adechsa, an associated foreign company] to bundle payments for goods received under the expressed terms of the controlled transaction as well as for services received from its parent company [Glaxo Group, which is located in the UK] under a separate Licence Agreement, then that Licence Agreement would have to be taken into account as a ‘relevant circumstance’ because it is linked to (i.e. it has an impact on) the transfer price.
Part 1 of this paper identifies that in order to properly ascertain Glaxo Canada’s contractual intentions, in the Supply Agreement, the courts had to interpret that agreement by applying the relevant principles from Canada’s contractual interpretation law. By failing to do so, the courts have risked making an error of law in their analysis. The extent of their error will be explored in part 2 of this paper. The analysis of the courts’ approach in this case ought to serve an important function. It ought to alert courts in other countries to recognize the role that their domestic contractual interpretation law has in the transfer pricing comparability analysis, so that they avoid making the same errors as those made by the Canadian courts.
Jennifer Martin (picutured at left), who did a simply incredible job putting together this conference, welcomed us this morning to sunny Florida.
We then got under way with a plenary session on the work of Linda Rusch (pictured below at right), the conference's honoree. Candace Zierdt chaired the session and introduced Louis Higgins from West Academic. He spoke of how great it has been for him to work with Linda as an author. He claimed that in working with Linda on about 20 books(!), she has never once missed a deadline.
Amy Boss, whom Stephen Sepinuck recognized as the reigning "Queen of the UCC," then spoke of Linda's career as both an academic and as a law reformer. Linda read a number of comments from an impressive array of judges and practitioners who have worked with Linda on law reform projects. Linda is the type of person whose work often goes unnoticed, because it takes place outside of the spotlight among small groups of extremely well-informed experts on commercial law but often comes to shape both complex federal regulations and state statutes. People uniformly compliment Linda for her creativity and organization and for her sense of humor. People are willing to work with Linda on all manner of projects because she is extremely competetent, organized, efficient, approachable and enjoyable to work with. She clearly understands the theoretical underpinnings of commercial law but she never loses sight of the practical.
Next, Neil Cohen spoke of Linda's constant presence in the firmament of commercial law. Her work has not been flashy and evanscent. Rather, she is a steady reminder that there are ways to improve on our work and our understanding of commercial law while also working at improving the law itself. He commended her for her successful revision of Article 7 and for the "unbuilt architecture" of the revised Article 2 that the ALI approved but then fell at the Uniform Law Commission. Professor Cohen made the excellent point that the remedies sections in the original Article 2, which are extremely well-conceived, are not especially well drafted. Linda was significantly involved in reconceptualizing, re-organization and re-writing the Article 2 remedies sections. The failure of state legislatures to adopt the revised Article 2 is a loss to all of us who teach the subject matter, because the legal principles are far more clearly laid out in the revised version (thanks to Linda's work) than they were in the original.
Larry Garvin spoke of having met Linda early in the process of UCC revision in 1996 and watched her move from back-bencher to leader in undertaking elegant revisions, especially to the Article 2 damages sections. Professor Garvin basically added his "I agree" to Professor Cohen's comments and then moved on to an appreciation of Linda's scholarly work since the UCC revisions, focusing especially on her article in the SMU Law Review on the ongoing struggle for balance in Article 2 and on Linda's 2003 Temple Law Review article on products liability. In sum, Professor Garvin noted that Linda's scholarship and law reform efforts generally are characterized by clarity and balance.
Finally, Stephen Sepinuck spoke on behalf of the younger scholars who have benefited from Linda's support and mentoring. Professor Sepinuck highlighted as his favorite of Linda's articles her 2008 article in the Chicago-Kent Law Review on payment systems. When the time comes to revisit the laws of payment systems, Professor Sepinuck suggested that this article will provide the basis for that work. He also noted that the reason very few people know anything about the UCC's Article 7 is that Linda's draft made that section so clear that Article 7 issues almost never need to be litigated. He also noted her important contributions to the Restatement (3d) of Restitution and Unjust Enrichment so as to make certain that nothing in the Restatement is inconsistent with anything in the UCC.
Linda said a few quick words of thanks to the panelists, whom she had gotten to know at many meetings at mediocre hotels in medium-sized cities close to major airports. Professor Zierdt announced that the entire panel will be available on YouTube, so that's somethign to look for soon.
Tuesday, February 18, 2014
Monday, February 17, 2014
Genuine, rigorous empirical analysis is always welcome in Contracts scholarship. It not only gives context to abstract principles, but also reminds us what is at stake. One of my favorite examples of empirical analysis in Contracts is Peter L. Fitzgerald’s 2008 article The International Contracting Practices Survey Project: An Empirical Study of the Value and Utility of the United Nations Convention on the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the United States. This is where many of us learned – or had our suspicions confirmed – that many practitioners and most judges were ignorant of the UN Convention on Contracts for the International Sale of Goods. In a broad 2006-2007 survey sampling practitioners, law professors, and state and federal judges in California, Florida, Hawaii, Montana, and New York, Professor Fitzgerald noted that U.S. practitioners reported relatively low levels of familiarity with the CISG (30 percent of reporting practitioners). Even more alarming was his finding that 82 percent of reporting judges indicated that they were “not at all familiar” with the CISG.
A fresh and thought-provoking example of empirical analysis has recently appeared, and every Contracts scholar and practitioner should be aware of it. Dysfunctional Contracts and the Laws and Practices That Enable Them: An Empirical Analysis features two empirical studies and an experiment that seem to have significant policy implications for contract law and consumer protection policy as applied to real estate transactions. These were designed and conducted by Professor Debra Pogrund Stark of John Marshall Law School, Dr. Jessica M. Choplin, a psychology professor at DePaul University, and Eileen Linnabery, a graduate student in industrial/organizational psychology at DePaul University.
The authors reviewed form purchase agreements used by condominium developers in Chicago, Illinois from 2003-2008, and found that 79 percent of the agreements contained what the authors considered “highly unfair, one-sided remedies clauses.” The form agreements provided that in the event of seller's breach, buyer's sole remedy was the return of the earnest money deposit., which did not cover any of the losses that would normally be the basis for relief in a breach of contract action, whether expectation damages, consequential damages, or reliance damages, or specific performance where that might have otherwise been warranted. In contrast, the contracts provided that in the event of buyer's breach, seller could retain buyer's deposit, typically between 5 and 10 percent of the purchase price. A survey of over one hundred attorneys in Illinois conducted by Professor Stark appears to corroborate the view that there were “serious problems with remedies clauses” in agreements like those in the Condo Contracts Study. The authors argue that these “dysfunctional contracts,” where the relatively more sophisticated party could deliberately default and terminate the contract with virtually no harm to itself, rendered the contracts “no true binding agreement from that party,” in effect unconscionable or illusory. It appears, however, that only a few Florida cases like Blue Lakes Apts., Ltd. v. George Gowing, Inc. and Port Largo Club, Inc. v. Warren have ruled such contracts to be illusory, whereas most state courts looking at the issue have so far rejected that argument.
One might wonder about the extent to which courts are influenced by the assumption that these were bargained-for terms, and to that extent should escape such attacks. The authors have something to say about this. They ran a “Remedies Experiment” to gauge non-lawyer awareness of the imbalance of such remedy clauses. They found what they considered “a widespread failure of the participants to understand the impact of this type of clause on their rights after a breach.” This empirical insight might put into question the assumption in many unconscionability cases that buyer understands the clear wording of such clauses and in fact bargained for the result. If this is simply not true – and if the contrary assumption is being relied upon strategically by professional sellers – then perhaps the traditional unconscionability test needs to be rebooted in the real estate development context.
The authors conclude that buyers need greater protection, and they advocate four legal reforms in this regard. First, they recommend revision of unauthorized practice of law rules to require attorney review and approval of home purchase contracts, specifically by attorneys specially trained and licensed for this type of representation. Second, they recommend legislation to prohibit remedies clauses that limit buyer remedies to return of deposit and that create safe harbor rules based on mutuality of remedy and true bargaining in the home purchase contract. Third, they argue for the replacement of the substantive unconscionability test for limitation-of-remedies clauses with a “reasonable limitation of remedy” test in the home purchase context. Finally, they recommend legislation mandating award of attorneys’ fees to the prevailing party in litigation involving enforcement of rights in the context of home purchase agreements.
Regardless of one’s assessment of the desirability of these suggested reforms – or of their practical and political possibility – the analysis in Dysfunctional Contracts is rigorous, provocative, and compelling. This is a “must read” piece of Contracts scholarship.
Wednesday, February 12, 2014
Fabrizio Cafaggi, The Regulatory Functions of Transnational Commercial Contracts: New Architectures, 36 Fordham Int'l L.J. 1557 (2013)
Jianlin Chen, Challenges in Designing Public Procurement Linkages: A Case Study of SMEs Preference in China's Government Procurement, 30 UCLA Pac. Basin L.J. 149 (2013)
Maksymilian Del Mar, Exemplarity and Narrativity in the Common Law Tradition, 25 Law & Lit. 390 (2013)
Steven L. Schooner, Reflections on Comparative Public Procurement Law, 43 Pub. Cont. L.J. 1 (2013)
Pedro Telles, The Good, the Bad, and the Ugly: The EU's Internal Market, Public Procurement Thresholds, and Cross-Border Interests, 43 Pub. Cont. L.J. 3 (2013)
Tuesday, February 11, 2014
Tuesday, February 4, 2014
RECENT HITS (for all papers announced in the last 60 days)
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal
December 6, 2013 to February 4, 2014
Tuesday, January 28, 2014
Monday, January 27, 2014
Last week, we noted Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana. This week, we will be summarizing some of the important cases discussed in that article.
East Porter County School Corporation v. Gough, Inc. is a pretty typical bid case. Gough, Inc. (Gough) submitted a bid of around $3 million to the East Porter County School Coporation (the County) on some additions, presumably to school buildings. Just after the deadline for the submission of bids, but likely before the bids were unsealed, Gough tried to withdraw its bid, claiming that its bid was the result of an inadvertent clerical error. One month later, the County awarded the contract to Gough. Gough's president notified the County that the bid was incorrect and stated that Gough would not accept the contract. Gough returned the contract to the County unsigned.
When the County tried to enforce the contract, Gough brought suit, seeking a declaration that its bid be rescinded and its bid bond released. The County counterclaimed, alleging breach of contract by both Gough and its bid bonding agency, Travelers Casualty and Surety Company of America (Travelers). The trial court granted the Gough and Travelers summary judgment, citing a 1904 case that permitted excuse of a contractor's bid based on mistake.
The law in Indiana excuses bids based on mistakes in calculation or clerical errors but not based on errors in judgment. Gough's presidnet submitted an affidavit in which he stated that on the day that Gough submitted its bid, its total of the bids of its subcontractors and its own cost estimates came to just over $3.3 million. "For psychological reasons," Gough wanted to get the bid below $3.3 million, but they spoke of trying to get to 299 or 2998. They thus mistakenly wrote down a bid of $2.998 million, which they then arbitrarily cut down to $2,997,900, when they apparently intended $3,299,700. Gough then quickly realized that the error would result in a $200,000 loss on the project, so Gough attempted to pull the bid.
The Court of Appeals found that, as a result of the error, the minds of the parties never met and the County "would obtain an unconscionable advantage" as a result of Gough's mistake. Because Gough timely notified the County of the mistake, the County was not in any way harmed by its withdrawal of its bid. As a result, the Court ruled that the County had no right to enforce Gough's erroneous bid, nor did Traveler's have any obligation to pay its bid bond.
I have no problem with this result, but the "meeting of the minds" language strikes me as misplaced in this context. Many contracts professors dislike the phrase "meeting of the minds" because it suggests that subjective agreement on terms is what is required when the test for whether or not a contract formation is objective. Twenty bishops could attest to Gough's president's veracity and still he would be bound if a contract had actually been formed. But here no contract was formed because the bid was withdrawn before it was accepted. In this circumstance, courts should really only ask two questions. First, was the bid irrevocable? If so, Gough should bear the burden of its own mistake -- and the existence of the bond suggests that the parties have allocated the burden. If not, the second question is whether the bid was relied upon, and it was not. So really the case should turn on whether or not the bid was irrevocable and not on whether the parties "minds" met or on how the court categorizes Gough's mistake.
This is not to find fault with the Court in this case, which simply followed Indiana precedent. But the case nicely illustrates the difficulties in distinguishing between clerical or calculation errors and errors of judgment. Sure, Gough's principals made a clerical mistake reducing their bid by $330,000 when they meant to reduce it by only $30,000, but one could also argue that the decision to reduce the bid is a judgment, especially when one does so for "psychological reasons." Once they made the decision to reduce their bid, the fact that they committed a clerical error in carrying out that judgment is epiphenomenal.
Wednesday, January 22, 2014
Michael A. Dorelli & Kimberly L. Cohen, Recent Developments in Indiana Business and Contract Law, 46 Ind. L. Rev. 943 (2013) [we'll be mining this for blog fodder in the weeks to come]
Robert Downey, Edward K. Gross & Stephen T. Whelan, Leases, 68 Bus. Law. 1191 (2013)
Jennifer S. Martin, Sales, 68 Bus. Law. 1173 (2013) [more mining to do here]
And new in books
Most legal casebooks generally focus on the theoretical. Contract Law, however, covers legal and statutory theories as well as civil procedures, and the practice of law in everyday life. Therefore, the casebook gives first-year students valuable skills that they can use throughout their legal careers.
Contract Law is literally two textbooks in one and can be used for a full year of instruction. Therefore, it is ideal for law school courses in contracts. And, to re-emphasize, the text teaches students how to construct plaintiffs’ complaints, and defendants’ answers using common-law and UCC-related theories of recovery and affirmative defenses.
This Exam Pro consists of essay questions actually given by Contracts professors throughout the United States. Every question contains a detailed explanation, along with analytical steps explained in easy-to-understand, basic language, and a step-by-step guide on how to analyze each major issue. Both Professor “model” answers and student “actual” answers are provided to allow students to get a feel for all the issues that could have been discussed on some questions, and what is realistic for a student to actually answer under timed conditions. The Preface includes tips on how to take essay exams. A general “List of Issues” covered on each question is provided, so the student can decide whether or not to use a particular question given the course coverage in the student’s Contracts class. Similarly, an “Index of Issues” is provided so the student can easily find all the questions that deal with a particular substantive issue which allows for repetitive testing on a troublesome issue. Each answer includes cross-references to the applicable sections of the Restatement (Second) Contracts and the Uniform Commercial Code, and citations to the more important cases in Contracts law, allowing the student to easily match the subject matter of the question to his or her outline and class discussion. Cross-references are included in every answer to relevant portions of Sum & Substance: Quick Review of Contracts, allowing for easy reference if more substantive knowledge is either needed or desired.
Tuesday, January 21, 2014
Tuesday, January 14, 2014
Thursday, January 9, 2014
Only one article this week:
But also a new book:
Contract Law and Contract Practice: Bridging the Gap Between Legal Reasoning and Commercial Expectation
By Catherine Mitchell
An oft-repeated assertion within contract law scholarship and cases is that a good contract law (or a good commercial contract law) will meet the needs and expectations of commercial contractors. Despite the prevalence of this statement, relatively little attention has been paid to why this should be the aim of contract law, how these 'commercial expectations' are identified and given substance, and what precise legal techniques might be adopted by courts to support the practices and expectations of business people. This book explores these neglected issues within contract law. It examines the idea of commercial expectation, identifying what expectations commercial contractors may have about the law and their business relationships (using empirical studies of contracting behaviour), and assesses the extent to which current contract law reflects these expectations. It considers whether supporting commercial expectations is a justifiable aim of the law according to three well-established theoretical approaches to contractual obligations: rights-based explanations, efficiency-based (or economic) explanations and the relational contract critique of the classical law. It explores the specific challenges presented to contract law by modern commercial relationships and the ways in which the general rules of contract law could be designed and applied in order to meet these challenges. Ultimately the book seeks to move contract law beyond a simple dichotomy between contextualist and formalist legal reasoning, to a more nuanced and responsive legal approach to the regulation of commercial agreements.
Catherine Mitchell is a Reader in Law at the University of Hull.
December 2013 308pp Hbk 9781849461214 RSP: £50 / €65
Discount Price: £40 / €52
Hart Publishing is delighted to offer you 20% discount.
Order Online in the US
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please mention ref: ‘CONTRACTSPROFBLOG’ in the special instructions field. Please note that the discount will not be shown on your order but will be applied when your order is processed.
Order Online in the UK, EU and ROW
If you would like to place an order you can do so through the Hart Publishing website (link below). To receive the discount please type the reference ‘CONTRACTSPROFBLOG’ in the voucher code field and click ‘apply’.
UK, EU and ROW website: http://www.hartpub.co.uk/BookDetails.aspx?ISBN=9781849461214
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Telephone Number: 01865 517 530 Fax Number: 01865 510 710
Tuesday, January 7, 2014
Tuesday, December 31, 2013
Thursday, December 26, 2013
Friend of the blog, Steven Feldman (pictured), has recently published his critique of Richard R.W. Brooks and Alexander Stremitzer's Remedies on and off Contract, which appeared in the Yale Law Journal in 2011. Feldman's piece, Rescission, Restitution, and the Principle of Fair Redress: A Response to Professors Brooks and Stremitzer, appeared in the Valparaiso Law Review earlier this year. Feldman characterizes Brooks and Stremitzer as arguing that current legal doctrine does not allow for rescission often enough and is too liberal in granting restitution. They believe that these approaches to damages are based on an exaggerated estimate of the threat to contract stabilitiy posed by rescission. They contend that parties would often bargain for broad rescission rights even if damages for breach were fully enforceable and costless to enforce. Greater rights of rescission, they contend, would result in more efficient outcomes because rational parties would negotiate price to avoid breach.
According to Feldman, Brooks and Stremitzer's argument is not based on a comprehensive survey of case law and relevant statutes. Rather, Feldman contends, "[t]heir legal analysis consists mainly of isolated references to the U.C.C.," the CISG the Restatement (Third) of Restitution and Unjust Enrichment and the Restatement (Second) of Contracts. By contrast, Feldman surveys case law and finds that courts follow a principle of "fair redress" that permits equitable remedies rather than rigid formulas for calculating damages. Moreover, Brooks and Stremitzer's economic model ignores situational and relational considerations that often influence buyers' decisions to seek rescission or to breach.
Feldman's article sets out to show that existing precedent supports a status quo that adequately protects both buyers and sellers. Based on his review of the case law and statutory authority, Feldman argues:
- Courts are far more liberal in granting rescission than Brooks and Stremitzer suggest;
- case law interpreting UCC Sections 2-601 and 2-608 is "decidedly "pro-buyer, allowing buyers to reject goods and to revoke acceptance, both of which are species of rescission that Brooks and Stremitzer overlook;
- Brooks and Stremitzer ignore both federal statutes and regulations and state consumer protection laws that promote a broad right of consumer rescission;
- the doctrine of material breach has always been a porous barrier against buyer's rescission rights;
- merchants often allow customers to rescind in order to maintain good customer relations;
- courts often allow buyers to rescind as an equitable remedy that accords with the principle of fair redress;
- while Brooks and Stremitzer contend that allowing buyers to recover in restitution overcompensates them, the election of remedies doctrine generally prevents duplicate recovery for the promisee;
- allowing both rescission and damages do not create a windfall but simply make the injured party whole; and
- allowing redress in excess of the contract price in cases such as Boomer v. Muir, 24 P.2d 570 (Cal. Dst. Ct. App. 1933), has a sound legal, normative and economic basis.
In the concluding sections of the article, Feldman contends that Brooks and Stremitzer's approach neglects what Feldman terms "the moral imperative " that would permit recovery in excess of losses on the contract in order to protect the innocent victims of legal wrongs. He then proceeds to attack their rational choice model by reminding readers of numerous criticisms of rational choice theory, especially of those sounding in relational contracts theory.
Feldman has undertaken a fundamental and multi-pronged critique of a very prominent article on contracts remedies that ought to be be considered by any scholar interested in Brooks and Stremitzer's model.
Wednesday, December 25, 2013
This week's installment includes a new publication by one of our own. Jeffrey Harrison provides an introduction to his article in a recent post.
Shawn J. Bayern & Melvin A. Eisenberg, The Expectation Measure and Its Discontents, 2013 Mich. St. L. Rev. 1
M. Neil Browne & Lauren Biksacky, Unconscionability and the Contingent Assumptions of Contract Theory, 2013 Mich. St. L. Rev. 211-255
Benjamin P. Cooper, Taking Rules Seriously: The Rise of Lawyer Rules as Substantive Law and the Public Policy Exception in Contract Law, 35 Cardozo L. Rev. 267 (2013)
Jeffrey L. Harrison, A Nihilistic View of the Efficient Breach, 2013 Mich. St. L. Rev. 167
Manuel Willington, Hold up under Costly Litigation and Imperfect Courts of Law, 29 J.L. Econ. & Org. 1023 (2013)