ContractsProf Blog

Social Impact Bonds: “The most interesting government contract written anywhere in the world this year”….

…. And the award goes to… Goldman Sachs and New York City. According to the ABA Journal, Goldman Sachs has loaned $9.6M to New York City to fund a new social services program with the aim of “reducing recidivism among young men at Rikers Island.” Details are to be provided later today (Thursday). The loans are being described as “social impact bonds” and they carry a nice return ($2.1 million) if there is a “significant reduction” in recidivism. If not, Goldman could lose up to $2.4 million (though, we know, Goldman won’t lose the money because, as a “market maker,” it will just turn around and sell the “shitty” bonds to an unwary client).

About the contracts that lie at the heart of the deal, the ABA Journal provides:

“This will get attention as perhaps the most interesting government contract written anywhere in the world this year,” said Jeffrey B. Liebman, a public policy professor at Harvard University. “People will study the contract terms, and the New York City deal will become a model for other jurisdictions.”

Similar programs have been tried in Great Britain and Australia and currently are being considered in Massachusetts.

But the New York Times reports that this program is different because Mayor Bloomberg’s foundation is a guarantor on the loan:

In a twist that differentiates New York’s plan from other governments’ experiments with social impact bonds, Mr. Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC. If the jail program does not succeed, MDRC can use the Bloomberg money to repay Goldman a portion of its loan; if the program does succeed, Goldman will be paid by the city’s Department of Correction, and MDRC may use the Bloomberg money for other social impact bonds, said James Anderson, director of the foundation’s government innovation program.

The social impact bonds are not without critics:

But social impact bonds have also worried some people in the nonprofit and philanthropy field, who say monetary incentives could distort the programs or their evaluations. “I’m not saying that the market is evil,” said Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati, “but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”

The proponents argue that this financing model is a transformative way to fund social programs, with benefits to both taxpayers and private investors.  They argue that it is a way for government to pay to achieve outcomes.

[Meredith R. Miller] 

DirecTV and Viacom Settle After Jon Stewart Makes Fun of Them

As reported in the New York Times, DirecTV and Viacom ended their nine-day blackout of cable channels after Jon Stewart, whose Daily Show is broadcast on Comedy Central, one of the channels at issue, asked rhetorically, "Viacom, what are you China?"  The remark related to Viacom's attempt to prevent viewers from watching its programming commercial free on the Internet.  As Stewart noted, young people know all sorts of ways to watch pirated programming commercial free on the Internet.  Stewart informed his corporate overlords, "[Y]ou're only blocking the old people from watching the show."

The dispute between the DirectTV and Viacom started out as the usual squabbling between service providers and programming providers over how much consumers should be charged for a bundle of two channels that they watch and seven that they don't.  And as often happens in such cases, in order to increase pressure on DirecTV, Viacom blocked DirecTV from airing its programming, leaving viewers unable to quench their insatiable desire to know, inter alia, who had hooked up with whom in Jersey Shore and why anybody would watch any show on Comedy Central other than The Daily Show and The Colbert Report.  

But DirecTV upped the ante by encouraging viewers who could not watch Viacom programing via satellite to just watch episodes on Internet sites such as Hulu.    Now order has been restored, as the two parties have worked out a deal that will provie free Internet access to Viacom-owned shows but only for DirecTV subscribers.  Ultimately though, it seems that time is running out for the conventional models on which companies like Viacom and DirecTV rely.  Viewers increasingly find their content on the Internet, and the companies can only keep their fingers in the dam for so long.

[JT]

Kevin Costner, Usual Suspect of ContractsProf Blog, Beats Actual Usual Suspect, Stephen Baldwin, in Contract Suit

A dispute involving actors Kevin Costner, Stephen Baldwin and the BP Oil Spill?  I couldn't resist.

Earlier this month, a federal district court rejected Stephen Baldwin's request for a new trial in his dispute with Kevin Costner.  In the suit (amended complaint here), Baldwin and another party claimed that agreements they entered into with Costner and others were invalid due to fraud, misrepresentation, and/or mistake.  It appears that Baldwin, Costner, et al. once held varying levels of interest in a closely-held company, Ocean Therapy Solutions, that had developed a special oil cleanup technology.  As part of some internal restructuring, cash infusions, and other maneuvering, Baldwin sold his interest in the company to Costner's group for a mere half million in a Transfer Agreement.  Shortly thereafter, Ocean Therapy Solutions announced a $52 million dollar deal with BP.  Baldwin sought to have the Transfer Agreement-as well as the associated release--declared uneforceable due to fraud.  

In an order rejecting an earlier motion for summary judgment by Costner, the district court stated as follows:

"The plaintiffs assert that the defendants' alleged misrepresentations in the days leading up to the sale of their shares in OTS constitute the kind of fraud that, if proved, is sufficient to vitiate the release agreements.  The Court agrees. The plaintiffs have maintained since the beginning of this lawsuit, that had they known about the completed deal with BP...they would not have sold their interests.  This is not to say, of course, that plaintiffs have met their burden on these questions, but, rather, to suggest that summary relief is not appropriate on this record."

That opinion also contains a nice discussion of how a release agreement may be innvalidated due to fraud under Louisiana law, the civil law system oft-neglected by law professors outside of Louisiana (see pages 11-15).  Athough Baldwin survived summary judgment, his side later lost at trial, and, as noted above, also lost a bid for a new trial.  

This is Costner's 2nd major contract-related victory recently, after this one and related updates.  Perhaps someone at ContractsProf blog needs to seek an interview with his counsel.

[Heidi R. Anderson]

 

 

Ashton Kutcher and Reliance Damages

In his first appearance on ContractsProf blog, Ashton Kutcher was noted for his replacement of Charlie Sheen, famous for violating an alleged morals clause in his contract with the producers of the CBS television series, Two-and-a-Half Men.  In this appearance, his company possibly provides a good example of a party seeking reliance damages.  

Kutcher's company, Katalyst Media, reportedly had a contract with the California DMV (yes, that DMV) to provide access and content for a reality show about "the variously humorous, emotional, dramatic, moving, humanizing and entertaining situations that arise [at the DMV] on a daily basis."  According to the complaint, the DMV later attempted to cancel the arrangement.  In addition to other claims, Kutcher claims that the attempted contract cancellation came after his company had spent money in reliance.  Specifically, the complaintstates:

"In direct reliance upon DMV's promises and commitments...Plaintiffs entered into an agreement with cable television station TruTV....Also in reliance on DMV's promises and commitments...Plaintiffs spent literally hundreds of thousands of dollars in pre-production for the Series, including with respect to casting, hiring of personnel, preparing budgets, negotiating contracts, and other pre-production activities."

The case is particularly interesting because the facts somewhat parallel those in the case I use to teach reliance, Hollywood Fantasy Corp. v. Gabor.  In Gabor, the organizer of fantasy acting camps sued Zsa Zsa Gabor for backing out of one of the camps and allegedly causing all sorts of damages (including, perhaps, the bankrupting of the entire company).  The plaintiff, Leonard Saffir, also alleged that he lost anticipated profits from a "bloopers" show he was planning to sell to a television network based on outtakes from the fantasy camps.  Although Saffir's damages were too uncertain to recover under a traditional expectation-based lost profits theory, he was able to recoup his expenses (such as brochures, advertisting, etc.) incurred in reliance on Ms. Gabor's promise to appear.

I suppose the modern day equivalent to a bloopers show would be some current reality TV shows, including Kutcher's own prior series, Punk'd.  So, from now on, whenever I run across an Ashton Kutcher re-run, I'll automatically think of Leonard Saffir--and reliance.  

[Heidi R. Anderson]

Moshe Gelbard: An Illustration of Price Reduction in a Service Contract

The remedy of price reduction derives from the action quanti minoris of Roman law. It allows the purchaser to reduce the contract price to what the parties supposedly would have agreed upon had the contract originally been for the purchase of the nonconforming goods.  The remedy can be found in most European legal systems today; e.g., Section 1664 of the French Code Civil or Section 441 of the German B.G.B. The remedy is also mentioned in Section 50 of the Convention on the International Sale of Goods.  Originally, price reduction was limited to sales contracts, but Section 9.401 of the Principles of European Contract Law proposed extending the remedy to any “tender of performance not conforming to the contract.”

Professor Moshe Gelbard

A footnote in my forthcoming article, co-authored with David Elkins, (The Remedy of Price Reduction in Mixed Legal Systems, Stetson L. Rev., forthcoming 2012) recounts the following hypothetical case (derived from Common Frame of Reference and Existing EC Contract Law (Reiner Schulze ed., 2008) 322-323) to illustrate how price reduction might be used in a service contract:

 

A flies with a ticket for business class. Unfortunately, an economy class passenger dies during the flight. As the economy class is fully booked, the crew decide to transfer the corpse to business class and to tie it to the seat next to the one occupied by A. A may ask for a reduction of price which he or she paid for the flight, because having to sit next to a corpse in business does not conform with the passenger’s legitimate expectations, even if the air operator had no alternative option to solve the problem. In such a case it is difficult to determine a value of the reduction, since there is no market for flights with a corpse placed next to your seat. Possibly the price should at least be reduced to the level of the price for economy class…

Although the case appears to be one of those detached-from-reality hypotheticals that only a law professor could come up with, here’s an excerpt from a recent news story:

Lena Pettersson had just boarded her Tanzania-bound flight at Amsterdam Airport Schiphol when she noticed a man in his 30s looking unwell, the Expressen daily reported. Ms Pettersson, a journalist with Sveriges Radio, told the broadcaster that the man "was sweating and had cramps [seizures]." After the Kenya Airways plane took off, the man died, the Expressen reported. Cabin crew laid out the dead man across three seats and covered him with a blanket - but left his legs and feet sticking out, Ms Pettersson said. For the remainder of the overnight flight, Ms Pettersson was forced to sit near the dead man, with just an aisle separating her and the corpse. "Of course it was unpleasant, but I am not a person who makes a fuss," Ms Pettersson said. After her holiday in Tanzania, Ms Pettersson lodged a complaint with Kenya Airways, eventually receiving a 5000-kronor ($700) refund, half the price of her plane ticket.

Indeed, truth is stranger than (or at least as strange as) fiction.

[Posted on behalf of Moshe Gelbard by JT]

Update on Golden Globes Contract Dispute

I previously blogged about the parol evidence rule and interpretation issues at the heart of a dispute between Dick Clark Productions ("DCP") and the Hollywood Foreign Press Association ("HFPA") over broadcast rights for the Golden Globes.  I now have two updates.  

First, the District Court has ruled in favor of DCP in a 89-page opinion posted here by the Hollywood Reporter. Pages 65-78 contain the arguments and holdings regarding the "plain meaning" of the modified contract and the use of extrinsic evidence (citing the commonly-used PG&E case).  Pages 79-81 review HFPA's argument that there was no consideration for the modified contract.  The opinion even contains a helpful discussion of mistake at pages 81-83.   

The second update is that Dick Clark Productions reportedly is up for sale (less than two months after Dick Clark's passing).  It would be interesting to see the DCP-HFPA contract provisions regarding assignment and change of control.  Perhaps there will be a post-sale lawsuit as well.  

Ultimately, I predict that this case appears in Contracts casebooks very soon.  The combination of issues, the high profile nature of the dispute, and the short contractual provision itself, all make it a great candidate. As one lawyer said to the LA Times,"So much litigation over 12 words...."  

Stay tuned (pun intended).

[Heidi R. Anderson]

Guest Post: How Do Surety Bond Costs Affect Small Contracting Firms?

Here is the first guest post by guest blogger Danielle Rodabaugh

It's no secret that the economy plays a huge role when it comes to competition in the construction industry. When the economy is down, competition goes up, and small contracting firms typically have trouble competing with larger ones. When construction professionals are unprepared to pay for the surety bonds required for large projects, the opportunity for small firms to gain access to business becomes even more limited.

Before I go much further, I'd like to review the use of surety bonds in the construction industry, as the surety market remains relatively mysterious to those who work outside of it.  As explained in more detail here, the financial guarantees provided by contractor bonding keep project owners from losing their investments.

Each surety bond that's issued functions as a legally binding contract among three entities. The obligee is the project owner that requires the bond as a way to ensure project completion. When it comes to contract surety, the obligee is typically a government agency that's funding a project. The principal is the contractor or contracting firm that purchases the bond as a way to guarantee future work performance on a project. The surety is the insurance company that underwrites the bond with a financial guarantee that the principal will do the job appropriately.

Government agencies require construction professionals to purchase surety bonds for a number of reasons that vary depending on the nature of a project. For example, bid bonds keep contractors from increasing their project bids after being awarded a contract. Payment bonds ensure that contractors pay for all subcontractors and materials used on a project. Performance bonds ensure that contractors complete projects according to contract. When contractors break these terms, project owners can make claims on the bonds to gain reparation.

The federally enforced Miller Act requires contractors in every state to file payment and performance bonds on any publicly funded project that costs $100,000 or more. However, state, county, city and even subdivisions might require contractors to provide additional contract bonds, such as license bonds or bid bonds, before they can be approved to work on certain projects. Or, sometimes local regulations require payment and performance bonds on publicly funded projects that cost much less than $100,000. Contractors should always verify that they're in compliance with all local bonding regulations before they begin planning their work on a project.

Although the purpose of contractor bonding is to limit the amount of financial loss project owners might have to incur on projects-gone-wrong, the associated costs can limit the projects that smaller contracting firms have access to.

Surety bonds do not function as do traditional insurance policies. When insurance companies underwrite surety bond contracts, they do so under the assumption that claims will never be made against the bonds. As such, underwriters closely scrutinize every principal before agreeing to issue a contract bond.

Furthermore, the premiums construction professionals have to pay to get bonded might come as a surprise to those who know little about contractor bonding. Contractors often get tripped up with how much surety bonds will cost and how they'll pay for them — especially when it comes to independent contractors who operate small firms. Surety bond premiums are calculated as a percentage of the bond amount. The higher the required bond amount, the higher the premium. Thus, purchasing bonds for large projects obviously costs contractors more than purchasing bonds for small projects.

The percentage rate used to calculate the premium depends on a number of factors, including the contractor's credit score, years of professional experience and record of past work performance. The stronger these variables are, the lower the surety bond rate. The weaker these variables are, the higher the surety bond rate.

As such, small firms often find it hard to compete for large projects because they struggle to either qualify for the required bonds or pay the hefty premiums. When contractors are unable to secure contractor bonding as required by law, they are not permitted to work on projects. This, consequently, typically limits large public projects to large contracting firms that can both qualify for and afford to purchase large bonds. Fortunately, when small contracting firms fail to qualify for the commercial bonding market, the Small Business Administration does offer a special bonding program to help them secure the necessary bonding.

Smaller contractors can improve their situation by reading up on the surety bond regulations that are applicable to their area. Those who understand the surety process and how various factors affect their bond premiums should find themselves better prepared to apply for the bonds they need.

[Posted by JT on behalf of Danielle Rodabaugh]

Binding Consent for Rough Sex?

Over at the Koncision blog, Ken Adams has a post about a novel called "Fifty Shades of Grey" in which bondage is a theme.  He analyzes the language of the fictional contract for a bondage relationship.  He does quite a number on it.  But we don't see the need to get all tied up in knots about a fictional agreement when there one could be bound and gagged by a real world contract that covers the same ground.  It is the notorious Antioch College Sexual Offense Protection Policy.

We do not have access to the actual policy, but according to the Foundation for Individual Rights in Education's website (the FIRE), the policy defines consent as follows:

Consent:

 

Consent is defined as the act of willingly and verbally agreeing to engage in specific sexual conduct. The following are clarifying points:

• Consent is required each and every time there is sexual activity.
• All parties must have a clear and accurate understanding of the sexual activity.
• The person(s) who initiate(s) the sexual activity is responsible for asking for consent.
• The person(s) who are asked are responsible for verbally responding.
• Each new level of sexual activity requires consent.
• Use of agreed upon forms of communication such as gestures or safe words is acceptable, but must be discussed and verbally agreed to by all parties before sexual activity occurs.
• Consent is required regardless of the parties’ relationship, prior sexual history, or current activity (e.g. grinding on the dance floor is not consent for further sexual activity).
• At any and all times when consent is withdrawn or not verbally agreed to, the sexual activity must stop immediately.
• Silence is not consent.
• Body movements and non-verbal responses such as moans are not consent.
• A person can not give consent while sleeping.
• All parties must have unimpaired judgement (examples that may cause impairment include but are not limited to alcohol, drugs, mental health conditions, physical health conditions).
• All parties must use safer sex practices.
• All parties must disclose personal risk factors and any known STIs. Individuals are responsible for maintaining awareness of their sexual health.

These requirements for consent do not restrict with whom the sexual activity may occur, the type of sexual activity that occurs, the props/toys/tools that are used, the number of persons involved, the gender(s) or gender expressions of persons involved.

The FIRE hates this stuff, but it seems a perfectly reasonable way to educate college students about the perils of date rape, which may be why Gettysburg College has adopted a simlar policy.  But that is not to say the definition of consent could not use Ken Adams's touch.  Ken, give it your best shot!

In the meantime, while the FIRE celebrates Antioch's demise, Wikipedia reports that it reopened in October 2011.

[JT]

Coaching Contracts in Texas

The Austin American Statesman recently ran a report on the contracts the University of Texas enters into with the coaches of the school's sports teams.  The report is unusual in breaking down the incentives paid to coaches.  For example, the report notes that Texas's men's basketball coach earned a $125,000 bonus because the team won a spot in the NCAA tournament, despite the fact that the team lost its first game in that tournament.  The bonus comes on top of a $3.48 million contract.  The women's team also made the tournament and also lost in the first round.  Its placement earned the team's coach $10,000 on top of her annual contract of $1.09 million.

UT's senior associate athletic director noted that all coaches' salaries, including bonuses, are paid out of athletic department revenues.  He stresses that "no taxpayerr money of other university funding" is used for such purposes.  If one is inclined in such a direction, one might object that regardless of the source, the expenditure of that kind of money on sports -- the very fact that the University of Texas feels the need to have a senior associate athletic director -- makes one wonder about the priorities of our educational institutions and allocation of resources.

[JT]

Law and Social Norms: The Jumbotron Kiss

It is common at sporting events to have a segment during time-outs at which the camera focuses on couples (always heterosexual, natch) and, as the crowd looks at their images on the Jumbotron, the couples almost invariably kiss.  This practice is known as the Kiss-Cam.

This week's installment of This American Life includes a short introductory segment in which tv producer Bill Langworthy recounts how he was induced by the Kiss-Cam to kiss his ex-girlfriend's best friend, a woman whom, according to Bill, he would not otherwise kiss for any amount of money. 

This American Life's host, Ira Glass, points out that Bill "did not have to kiss her; there would be no penalty; there was no contract; no money had changed hands. . . . "  Bill explains that he felt that, with everyone watching, and with a producer looking at him, expecting him to act, he felt compelled to kiss his ex-girlfriend's best friend.  This is a nice little gloss on the view that we often comply with our obligations (or even our perceived obligations) whether or not we are legally obligated to do so for reasons apart from contractual obligation.  And so, a surprisingly high percentage of commercial obligations -- even among sophisticated parties who could lawyer the relationship to death if they so choose -- arise informally. 

But we offer a different perspective on what is going on here.  Bill explains that he attended the ball game with two friends, a married couple.  Someone who coordinates the Kiss-Cam segment came around and asked the married couple if they would mind kissing for the Jumbotron.  They agreed.  This was already a revelation, since the parties often look as though they are taken by surprise when the Kiss-Cam seizes upon them.  Who knew it was all a set-up?  In any case, according to Bill, a few beer runs later, the parties had switched seats, so when the Kiss-Cam alighted, it hit him and his ex-girlfriend's best friend, instead of their married neighbors. 

Since Bill is himself a producer, it seems reasonable to assume that he understood how things like the Kiss-Cam operate.  Having identified its prey, the Kiss-Cam was going to focus on a particular seat, rather than on, for example, the tall guy wearing a baseball cap and the home team's jersey., since that latter description lacks specificity in the context of a sporting event. 

Come on Bill, maybe you really wanted to kiss her and were just waiting for the Jumbotron to permit you to break the taboo?

[JT]

Almost Live Blog of the Simkin v. Blank Oral Argument [Madoff Mutual Mistake Case]

What better way to spend Valentine's Day than to (almost live) blog the Simkin v. Blank oral argument before the New York Court of Appeals?  The argument includes a shout out to Rose of Aberlone. 

It does not appear that Judge Smith partook.  Video should be posted to the web in the next week.

Richard D. Emery (for Blank, appellant):

[Reserves 3 minutes for rebuttal]

Theme: this case is about finality and valuation.

There is a policy of finality and repose, especially in domestic relations context.  Walsh and Centro cases control on releases – if a release trumps fraud, should also trump mutual mistake.

Judge Pigott: Suppose shoe was on other foot and the non-moneyed spouse was rendered destitute -- finality rules?  It depends.  Here, parties got the benefit of the bargain.  

Judge Jones: Wasn't the agreemet based and founded on certain assumptions that turned out not to be so?  All agreements are founded on assumptions that turn out not to be true, that is the risk of making an agreement.

Judge Lippman: Is the defining difference between this and other mutual mistake cases that, here, the mistake was about valuation? Yes, mistaken valuation doesn't give rise to mutual mistake case.  In fact, account was cashed in at the time.

Judge Graffeo: Is this about value of account at time of agreement? Wasn’t there some withdrawal at the time in order to pay Blank; money was there at time? Yes, shout out to Prof. Siegel’s treatise; don’t fall for pleading ploys. These are conclusory allegations that mean nothing in the context of the actual case.

Judge Graffeo: Was it agreed that there would be a 50-50 split of this account? If so, does that matter? That was not mentioned in agreement all.  Many separation agreements will say 50-50 split per account; different situation here - he could have chosen to do whatever he wanted to pay her here (e.g. take loan from Paul Weiss) and he chose to withdraw from account.

Judge Pigott: Isn’t the existence of the account an issue of fact?  Court does not have to rollover and counterfactually accept what is obviously not the case.  And, account existed.  Just not worth what they thought.  There was money in it and money paid out of it.  At time, Madoff accounts were paying -- so, counterfactual allegation that court need not accept.

Judge Lippman: What happens now with Madoff accounts?  There will be no clawbacks; he did get insurance money and  tax write offs.  Has value now, had value then.  Pure valuation case.

Judge Read: So no mutual mistake here? Right - each side got the benefit of the bargain here. Just a mistake in valuation.

Judge Ciparick: Did the parties contemplate as a 5-50 split?  No, my client wanted $6 mill plus house, etc and he got the rest.

Judge Graffeo: How is this different than a case where we set aside the agreement for fraud?  This is an asset that is not worth what it was thought to be worth -- your decision in Walsh makes plain that the public policy of repose trumps innocent fraud. 

Judge Jones: Different if wife knew of the wrongful valuation?  Yes, then she would be knowingly getting fruits of fraud - would be a different case. 

Judge Ciparick: Is this different than asset valued at a certain sum that later tanks?  No different from every single deal where stocks are exchanged.

 Judge Ciparick: Should we go with value of account as of date of agreement? Yes.

Judge Graffeo: What about the unjust enrichment claim?  We have a valid contract, unjust enrichment claim is superfluous.  Window dressing contract claim to attack a valid agreement.

Allan J. Arffa (for Simkin, respondent):

Judge Lippman: How is this different than a valuation case?  Why is this not the same as a stock that turns out the be worth less than thought?  The thing they thought they had never existed.

Judge Lippman: But isn’t it in essence the same thing – because, here, there was a Ponzi scheme?  No.  The account didn’t exist; it wasn't the thing they thought it was.

Judge Lippman: Didn’t Simkin draw on the account at the time? Yes, but they didn't know he was actually drawing on other people's money.

Judge Lippman: How could the account not exist? He withdrew the money?  It didn't exist in the way he thought it did.

Judge Lippman: What if had stock and turns out fraud relating to business that stock represents.  Why different?  There you have stock; known thing was stock, it existed. 

Judge Read: What if it was Enron stock?  Still had stock in a corporation; it had attributes of stock.  Here, interest was fictitious.

Judge Ciparick: What if the asset was a house but it turns out the title was bad?  That is mutual mistake - if you don't own what you think you own, there is a mutual mistake.

Judge Lippman: How do we draw the line here – why isn’t this just a valuation case? How do we distinguish between the subject matter existing and it not being worth as much as thought?  We are on a motion to dismiss.  At the time they contracted, they didn’t own an account; they didn’t have securities; the account was a total fiction.

Judge Graffeo: Did they try to cash out in June 2006? Would they have been paid?  Paid from proceeds of other investors.  Would not have been redeeming account as they thought = stealing.

Judge Pigott:  You argue for reformation of this part of the agreement, not the entire agreement? Issue for down the road; what to reform is a remedy issue. 

Judge Graffeo: Where is it in agreement that you agreed to split the asset 50-50?  It is our allegation that this is what the parties intended. The parol evidence rule and statute of frauds do not apply.  Shout out to Rose of Aberlone: in the pregnant cow case, the contract did not say we are selling you a barren cow.

Judge Graffeo: I’m trying to understand, do you want us to set aside the entire agreement? That is a matter of relief; we can discuss whether to reform or rescind later. 

Judge Lippman: What about finality? When does a matrimonial case end? Isn’t there a policy argument for finality?  Here's the problem: if you say finality trumps, then there is no mutual mistake -- writes doctrine out of the law. 

Judge Lippman: But the divorce was 6 years ago, doesn't amount of time matter?  It matters regarding relief.

Judge Lippman: What is rule? 10 or 6 or 20 years?  Not one mutual mistake case that raises finality.  Depends on circumstances.

Judge Pigott: You win the appeal.  They answer. Then what? Jury decides?  Yes, jury hears testimony; finality gets played into standards for materiality of mistake.

Judge Lippman: Answer Judge Piggott’s question.  What exactly does the jury decide here?

Judge Pigott : Does the jury decide whether there was an ccount or not?  Existence v. value of account: question of fact or law?  Question of fact; these are question of intent.

Judge Pigott: Can you get there if there was no account?  If no account existed, aren’t you entitled to summary judgment?  If the account did exist, aren’t they entitled to summary judgment?  This was a ponzi scheme.

Judge Lippman: With all the attention on Madoff, etc., a jury is going to determine whether this ponzi scheme made account nonexistent?  Yes, for jury to decide.

Judge Lippman: What is the significance of time passing here since divorce?  This factors into relief but to say we are going to ignore that there was this massive fraud and half assets of this family turned out not to exist -- not fair.  On marital cases, equitable principles may trump finality.  And, again, we are just at motion to dismiss stage.

Rebuttal:

Judge Pigott: Say the asset was gold bars in a safe deposit box and it turns out that Uncle Bernie took them; no longer there? Here, did know account was liquid at time of agreement and even took money out of it.  And account has value now; Simkin has recovered some money and has tax write offs.  Not so worthless he'd give away now.

Closing point: talking about domestic relations.  6 years since divorce; let spouses go off and live their lives.  Human thing; not about finality words; about a woman entangled with a husband she wants to get away from.

Judge Pigott: What if we turn the tables?  You'd be arguing the opposite for her?  No, my client would not have gone after him; she wants nothing to do with him.

[Meredith R. Miller]

Contracts Issues in the Costa Concordia Wreck

When I was a teenager, I used to read Mad Magazine (when I wasn't reading Dostoevsky, Kafka or Sartre, of course).  I retain very few memories of my childhood, but one Mad feature stuck with me, although only vaguely.  The idea was to take a story and present it as it would be presented in magazines with very different perspectives on the world.  The story that Mad worked with was a football game, so of course one version was just to report on the game.  Another version was a medical journal featuring an image of some bone that had been broken during the game.  Another version that I remember distinctly featured a photograph of a football taken at very close range.  The image was supposed to represent how the football game would be featured in a photography magazine.  It described all of the particulars of the way the photograph was taken -- film speed, lens type, etc., and then mentioned that the photograph was of the ball as it soared through the uprights for the winning field goal, just before it smashed the photographer's camera.  A nice touch, in the estimation of my 13-year-old mind.  

I've often thought that this blog plays out Mad Magazine's idea, as do many other blogs and even the lamestream media.  And so, we pick over the carcass of a human and environmental catastrophe for a tidbit of contracts doctrine.  But we are not alone.  As the New York Times reported yesterday, it will be very difficult for any victims of the Costa Concordia wreck to go after the ship's corporate parent, Carnival Cruise Lines, for reasons that will strike a chord with fans of the civil procedure chestnut, Carninval Cruise Lines, Inc. v. Shute.

According to the Times, at least 70 passengers of the ill-fated cruise ship have signed on to a class-action lawsuit, but their ability to get at the corporate defendant will be greatly hindered by the Convention on Limitation of Liability for Maritime Claims, characterized on the International Maritime Organization Website as “a virtually unbreakable system of limiting liability," and by the terms contained in the 6,400-word contracts attached to their cruise tickets. 

The contract could provide great fodder for a few sessions on contractual remedies.

[JT]

A Puzzler from Ken Adams

Over at the Koncision Blog, Ken Adams poses the following question:

In this post I refer to “bills of sale, instruments of assignment, releases, deeds, powers of attorney, stock powers, and the like, in other words short documents, usually signed by one party, that consist largely or entirely of language of performance, with the signatory giving something to someone.”

But in the same post I quote from two documents that served analogous functions but were structured as unilateral contracts, with both sides signing. (Black’s Law Dictionary defines a unilateral contract as “A contract in which only one party makes a promise or undertakes a performance; a contract in which no promisor receives a promise as consideration from the promise given.”)

Anyone care to propose when you should use a one-signatory document and when you should use a unilateral contract?

Any takers?

[JT]

More about those gas well leases

Jeremy Telman recently posted about this front page article in the NYT about oil and gas well leases, and the contractual traps for the unwary. This article mentions and explains some common terms in such leases.

There are additional contract issues that were raised by the article having to do with the bargaining process. There's a bargaining imbalance where you have one party with greater financial resources than the other or one with greater financial need. Another bargaining disparity involves knowledge - the oil and gas companies are much more familiar with these types of transactions and more knowledgeable about what could go wrong. It's their business. The landowners, on the other hand, presumably don't enter into these transactions often.

Unfortunately, contract law doesn't usually recognize these kinds of bargaining disparities, especially outside of the consumer context -- at least not to invalidate the contracts. A court might consider them in interpreting ambiguous contractual clauses. In addition, the landowners might be able to raise a lack of good faith argument that might affect the interpretation or construction of some of the contractual clauses or the parties' performance under the contract. For example, one lease cited in the article contained language that said that "preparation" to drill would allow the gas company to extend the duration of the lease. The landowners had negotiated what they considered a bad deal and planned to renegotiate it after it expired. A day before the expiration date, the gas company "parked a bulldozer nearby and started to survey an access road. A company official informed them that by moving equipment to the site, Chief Oil and Gas was preparing to drill and was therefore allowed to extend the lease indefinitely." I don't know about you, but that strikes me as performance that's not in good faith. I hope a judge would agree.

Something else that struck me in reading about these leases was how they highlight the overconfidence and optimism bias in these types of deals. Landowners are likely to focus on the potential upside of these deals - which can be pretty sky high. But things can and do go wrong in any type of transaction. The long term nature of these contracts makes it even more important to think carefully about the risks and not just the upside -- but a long time horizon also makes it harder to evaluate those risks.

And of course, as Jeremy mentioned in his post, there's the Peevyhouse issue. Even if you carefully draft a "clean up" or similar clause, a court may find performance to be economically wasteful and not enforce it. To safeguard against that, the parties might consider putting clean up costs in an escrow account and including a liquidated damages provision.

While this article was about gas well leases, I can see similar issues arising with other long term contracts, particularly those between landowners and energy companies. I predict we'll see a slew of innovative solutions around alternative energy (such as windfarms on private land) which is great - but again, it's important to take a large dose of caution with that optimism, especially if you are representing the "little guy/gal."

[Nancy Kim]

More fallout from the nasty McCourt divorce

Frank McCourt may be in the process of suing his former lawyers, Bingham McCutchen, LLP, according to this article in the Wall Street Journal. As you've probably heard, Frank McCourt had a nasty divorce from his wife, Jamie, not too long ago - although it seems like this morning. I tried not to pay too much attention to it (not easy to do when you live in SoCal) until I realized that a major issue in the divorce concerned the marital agreement between the couple which would determine who owned the Dodgers. Apparently there was some confusion about attachments to the original marital agreement, with only some naming Frank McCourt as the sole owner. A drafting error - or was it? Jamie McCourt's attorneys argued that the various copies indicated there was no meeting of the minds. The judge agreed and threw out the agreement. Frank McCourt wasn't happy about that and has filed claims against Bingham that could be worth "hundreds of millions of dollars."

[Nancy Kim]

Bargaining in the News

Maybe it’s because my Contracts class is discussing unconscionability and I’ve got bargaining on my mind, but it seems that bargaining was everywhere in the news this week. Jesse Jackson, for example, seems to be calling out Capital’s One’s bargaining naughtiness when he criticizes its marketing practices aimed at vulnerable borrowers. In a different context altogether, Ohio’s governor John Kasich has waded into the collective bargaining fray. Finally, there’s this article about the increase in debit fee charges to consumers. Consumers, of course, don’t like these increases but are in a take ‘em- or- leave ‘em position given the difficulties of mobilizing disparate individuals to bargain collectively. [This article advocates the leaving 'em -- and joining a credit union-- alternative, whereas this article touches upon the problems of mobilizing disparate individuals to bargain collectively]. Super star executives are in a much different bargaining position. As this article and Jeremy's recent post points out, they can negotiate highly lucrative compensation packages , where they receive millions in severance pay even when they are essentially fired for poor performance.

[NK]

A non-compete benches a CEO

The WSJ reports an unusual situation created by a non-compete agreement. Johnson & Johnson is apparently preventing a former senior executive, Michael Mahoney, from joining its rival, Boston Scientific, Corp., as its chief executive. Because of a non-compete that Mahoney signed with Johnson & Johnson, Boston Scientific has to wait an entire year before Mahoney can become CEO. During his waiting period, Mahoney will be president but can't work with those businesses that compete with Johnson & Johnson. As the article notes, this situation is markedly different from the one faced by Mark Hurd when he left Hewlett Packard for Oracle. The issue with Hurd was framed as one involving trade secrets, because non-competes are typically unenforceable as such in California. Johnson & Johnson is based in New Jersey, and while the article doesn't expressly state the governing law in the contract between J & J and Mahoney, it was probably New Jersey (or a state other than California....)

 

[NK]

 

Insurer's Data Shows that Breach of Contract is Top Risk for Tech Companies

The culprit?  Shoddy drafting.  Here's the story from a British site smeweb.com:

The top risk faced by technology companies is a client suing them for breach of contract, according to data from Hiscox. The business insurer analysed data from over five years to establish that 49% of all technology professional indemnity claims handled have stemmed from contract breach.

Some of the most common causes that tech companies’ clients use as the basis to sue include project delay and the supplied service being regarded as not fit for purpose. However, Hiscox has also seen disagreements over fees and material defects such as loss of client data.

Alan Thomas, technology risks and insurance expert at Hiscox, said: "Breach of contract is the most common cause of professional indemnity claims we see when it comes to the technology sector. Very often this is down to poorly worded contracts which can lead to misunderstandings between suppliers and their clients.

"Smaller businesses can also often feel pressured into signing customers’ contracts or terms and conditions without feeling able to challenge or even review specific clauses.

"One of the most effective ways to reduce the chance of a claim being made, which in turn reduces the chance of expensive litigation and, as importantly, a breakdown in relationships, is to ensure that contracts drafted at the outset lay out clear responsibilities and that there is an agreed process if mediation is required ."

Other risks that technology companies face include intellectual property claims, for example accidentally breaching someone else’s copyright, and theft of high value equipment from offices or data centres.

[Meredith R. Miller]

Purposefully Plumper Pesci Professes Promissory Estoppel in Pursuit of Producer

For anyone in need of a current case/hypo to help illustrate promissory estoppel (and perhaps the statute of frauds along with unjust enrichment), consider the latest suit filed by famous actor, Joe Pesci.  In his breach of oral contract complaint,* Pesci claims that he was promised the role of round-faced Angelo Ruggiero in a new film about famed gangster, John Gotti, to be played by John Travolta.  In reliance on that promised role, Pesci abandoned his usual diet and exercise routine and gained thirty pounds to look more like Ruggiero.  After the weight gain, producers advised Pesci that he no longer would be playing Ruggiero in exchange for the initially-promised $3 million; instead, he would be offered a lesser role (playing the man who allegedly killed Gotti) for $1 million.  Pesci alleges that the film producers were enriched because they used his established mobster-playing cache to help promote the movie and obtain funding.  The film's current producer claims that Pesci was the one who backed out of the deal after Pesci's preferred director, Nick Cassavetes, quit.  Pesci acknowledges that there was no written contract but a signed writing likely would not be required in this case.   If Pesci can't show an otherwise valid oral contract, promissory estoppel issues to ponder include...Was there an actual promise?  (Pesci points to a press conference and a website announcement as possible sources of the promise.)  Was Pesci's reliance reasonable?  Is there injustice absent enforcement of the promise?  And what exactly are his damages? 

[H.R. Anderson]

* Pages missing

Dances with Ambiguity

It's hard to believe that Kevin Costner never has appeared on this esteeemed blog...until now.  The contract that brings him here was between Costner and an artist involving the sale of...you can't make this stuff up...bison sculpture replicas.  Several years ago, Costner planned to build a luxury resort in South Dakota, the entrance to which would feature a field of dreams bronze bison being hunted by Native Americans (inspired, of course, by his experiences in the film Dances with Wolves).  Although the resort,The Dunbar, never materialized, the sculptures were completed and later featured by Costner as a standalone tourist site aptly named Tatanka. 

In the original agreement between Costner and the artist, Peggy Detmers, Costner was to pay Detmers $250,000 for the sculptures plus a share of the proceeds from future sales of sculpture replicas to wealthy resort visitors.  Detmers claims that she charged Costner far less than the sculptures' actual value, which she estimated to be $4 to $6 million, in anticipation of a significant number of replica sales (because, as any wealthy resort visitor knows, who wants a snow globe when you can have bison...14 of them...you know, for your yard).  Years later, when resort construction was delayed, Costner agreed to pay Detmers an additional $60,000.  The amended letter contract also stated as follows: "[I]f The Dunbar is not built within ten (10) years or the sculptures are not agreeably displayed elsewhere, I will give you 50% of the profits from the sale of the [sculputures] after I have recouped my costs...."  

In 2009, Detmers filed suit to enforce that quoted provision, i.e., to make Costner sell the sculptures and split the proceeds 50/50 with her.  Costner claimed that no sale was required because displaying the sculptures at Tatanka qualified as them being "agreeably displayed elsewhere."  Detmers claimed that she never agreed to that display location.  The court thus had to decide how to interpret the arguably ambiguous term of "agreeably displayed elsewhere."  Earlier this summer, Circuit Judge Randall Macy decided that the forced sale provision had not been triggered because Detmers had agreed, albeit passively, to have the sculptures displayed at Tatanka.  Specifically, Judge Macy stated: "[Detmers's] significant involvement in the Tatanka project and her failure to tell Costner or anyone else that she did not agree with placement at Tatanka indicate she was agreeable to the sculptures' placement at Tatanka for the long term." 

I suppose that the lesson for contract drafters is to specify what "agreeably" means or to avoid that kind of ambiguity altogether.  Drafters at least should specify how the "agreeableness" is to be recorded in order to be effective, such as "upon written consent," with or without the typical "not to be unreasonably withheld" modifier.  The other lesson is to never trust a man who thought that this movie and this movie were 'sure things."

[H.R. Anderson]