ContractsProf Blog

Virtual Symposium on Contracts and COVID: Links to All the Posts

We planned a two-week symposium, but it was held over for a third week.  Thanks to all of our contributors for sharing their work with us and our readers.  Thanks to Nancy Kim, who came up with the idea and helped recruit the participants.  

Here are links to all of the posts:

Virtual Symposium I: Jeff Sovern on Liability Waivers

Virtual Symposium Part II: Andrew A. Schwartz on Impossible Contracts and Force Majeure

Virtual Symposium Part III: Stephen Wilks on Supply-Chain Contracts

Virtual Symposium Part IV: Mark Weidemaier and Mitu Gulati on Covid and Sovereign Defaults

Virtual Symposium Part V: Rachel Arnow-Richman on Employee Rights, Part I

Virtual Symposium Part V: Rachel Arnow-Richman on Employee Rights, Part II

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part I

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part II

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part III

Virtual Symposium Part VII: Ben Davis on the Wisdom of Wisdom-Tooth-Extraction During a Pandemic

Virtual Symposium Part VIII: Jonathan Lipson, Part I on COVID and Health Safety

Virtual Symposium, Part VIII: Jonathan Lipson, Part II: Standstill Agreements

Virtual Symposium Part IX: Hanoch Dagan and Ohad Somech Part I, Failures of Basic Assumptions

Virtual Symposium Part IX: Ohad Somech and Hanoch Dagan, Part II: What Follows When Basic Assumptions Fail

Special Bonus post from Nancy Kim! UCLA, Under Armour and contract defenses

UCLA, Under Armour and contract defenses

In yet another pandemic-induced contract dispute, UCLA is suing Under Armour to enforce a sponsorship agreement.  Pursuant to their contract, Under Armour was supposed to provide at least $280 million in monetary payments and products over a fifteen-year term.  In return, UCLA promised to have its student-athletes and personnel wear exclusively Under Armour’s products.  Now Under Armour wants out and UCLA is calling foul. And here we are – another pandemic-related lawsuit to discuss on this blog.

Under the sponsorship agreement, Under Armour could terminate if UCLA breached any material term of the Agreement,  failed to participate in a complete regular season, or a head coach or senior administrator pleaded guilty or no contest to a “severe felony” and UCLA failed to take “reasonably appropriate actions.” There was a force majeure clause that required the party seeking excuse to promptly notify and take “all reasonable steps” to mitigate the effects of the force majeure.  It further stated that delays from force majeure would not change Under Armour’s obligation to supply the delayed items.  Force majeure was defined as an event that was (1) “beyond the commercially reasonable control” of the parties and (2) “render the performance…impossible or impracticable.”  Examples included “acts of any regulatory, governmental body and/or agency.”

(IMO I think at this point, we should all agree that this pandemic was an unforeseen circumstance and qualifies as a force majeure event, unless it was expressly excluded.  Everyone refers to it as “unprecedented” and whether it’s the governmental order that prevented the performance or the pandemic itself, i.e. someone fell ill from COVID-19, it qualifies.  Of course, if the contract was entered into after say December that would be a different story since by that time, the pandemic was arguably foreseeable).

Under Armour gave several grounds for its termination but I want to focus on its force majeure argument.  Under Armour claimed the pause of athletic events was force majeure, excusing its performance.  UCLA disputed this, claiming that the clause applies only when an event “renders the performance….by the affected Party either impossible or impracticable.” UCLA argued that “(n)othing about COVID-19 made it ‘impossible or impracticable’ for Under Armour to meet its obligations…Nor did COVID-19 make it impossible or impracticable for UCLA to meet its material obligations under the Agreement.”

I think UCLA is right to a certain extent – the pandemic related fallout didn’t make it impossible or impracticable for Under Armour to perform.  (Although I find it hard to believe that UCLA performed as expected given the circumstances).  Rather, Under Armour’s purpose in entering into the contract was frustrated.  This brings me to the all-too-common confusion between impracticability/impossibility and frustration of purpose.  Under Armour’s purpose in entering into the contract with UCLA was to have its brand associated with UCLA’s athletes and to generate publicity for its brand by having its products viewed by the huge crowds that gather to watch UCLA games. And while UCLA claims that it met its obligations, I think an argument could be made that it did not and that its performance was made impracticable/impossible by the pandemic and related government ordered shut-down.  In other words, it seems that Under Armour could claim UCLA's performance was a constructive condition to its performance but that UCLA breached - which then excuses Under Armour's performance.  

Although I do think Under Armour has a frustration of purpose defense to UCLA's complaint, I don’t think that will work to excuse it from performance entirely. If the performance of the parties can be deferred or delayed, rather than entirely excused, that seems to be the right approach to minimize damage for both parties. My guess is that courts will be doing a lot of allocating risks/fairness assessment with an eye to how it will affect third parties and future transactions.

UCLA claims that the real reason Under Armour wants out of the contract is because it is struggling financially and has been for some time even pre-pandemic.  This seems to me all the more reason that it's reasonable for Under Armour to want to escape its obligations under this contract given that it's not really getting what it bargained for given the cancellation of UCLA athletic events.

Virtual Symposium Part IX: Ohad Somech and Hanoch Dagan, Part II: What Follows When Basic Assumptions Fail

A Liberal Account of the Failure of a Basic Assumption (FBA) Doctrines – Part II: What Follows an FBA?
Hanoch Dagan & Ohad Somech

Part I of our contribution offered a liberal perspective of the FBA doctrines. We claimed that the main mission of these doctrines is to safeguard the autonomy of the parties’ future selves.  We now turn to FBAs’ legal consequences.

The first step here is (surprisingly) straightforward. To see why, compare an FBA to cases of a unilateral mistake, where the basic assumption of only one party failed. In those cases, contract law needs to balance competing autonomy claims: the agreement turns out to be incompatible with the mistaken party’s; but the other party can credibly argue that “this is the contact I bargained for and respecting my autonomy requires its enforcement.”

FBA cases are critically different because they involve failure of assumptions shared and take for granted by both parties – not a miscalculation or a losing bet by one of them. Of course, in hindsight, one of the parties may be pleased with how things turned out. But the fact is that both parties made the same false assumption, and so neither can now credibly claim that the script enshrined in the agreement corresponds to her ex ante plan.

When the essence of an agreement fails, its enforcement no longer serves the contracting parties’ original joint plan. In such cases, curtailing the autonomy of the future self cannot be justified by reference to contract’s autonomy-enhancing function.  This means, at least for liberal contract law, that it cannot be justified, period.

How, then, should contract law proceed and what are the legal implications (if any) of the parties’ failed attempt to form a contract and of the script they have created? The first answer to this question follows another core principle of liberal contracts: active facilitation. As shown a previous article, in complying with its autonomy-enhancing task, contract law goes out of its way in proactively facilitating peoples’ attempts to use contract for advancing their joint projects. Applied to the FBA doctrines, this means that if the FBA did not materially affect their joint project, contract law should reinstate the script the parties created notwithstanding its failure.

This conclusion may again be relevant to the COVID-19 litigation. Often, when COVID-19 undermined a basic assumption of the parties, it also generated a material effect on the exchanged considerations. But this is true only where the effects of the crisis were left unmitigated and may not be the case otherwise. Both the Federal government and States have taken measures to mitigate the effects of COVID-19 and some of these measures change the analysis.  

One example is the Federal Paycheck Protection Program that provides government assistance to businesses to cover their operating costs. The Program is pertinent here not because the government provides people with funds. As we explained in Part I, financial ability per se rarely factors in the analysis because parties seldom share assumptions about it. Instead, what is crucial is whether state funds are made available for the purpose of allowing the contractual relations to continue. Thus, if a business receives money in order to pay its operating costs, it can no longer argue that COVID-19 had a material effect on its rent agreement. Or, to give another example, a factory that had to temporarily close because of a lockdown but received funds for payroll purposes cannot resort to the FBA doctrines to terminate employment contracts.

The flipside, as already hinted, is that government assistance does not always mean that the effect of COVID-19 is no longer material. One example is car insurance. Parties to such agreements do not share assumptions about the insured’s use of the car. But, like with the restaurant example, they both assume that driving is a socially acceptable behavior. When this stops to be the case, as when a lockdown is imposed, an FBA has occurred, and its effect – leaving the insured party with no benefits – is material. This remains true even if the insured receives government assistance (e.g., unemployment pay). Because neither eligibility nor the program’s purpose hinges on maintaining these insurance contracts, such payments do not affect an insured’s FBA claim.

Once this first bridge is crossed and the effect of COVID-19 on the exchanged considerations is deemed material, there is little left from the parties’ agreement to save, and the question becomes one of risk allocation. At this point, an autonomy-enhancing contract law should allocate that risk in a way that can best vindicate the parties’ reasonable expectations. This calls for a majoritarian risk allocation which arguably conforms to the parties’ ex-ante beliefs and best reflects their (hypothetical) choice of how to advance their joint project.

In many cases, a majoritarian allocation would require the performance of the script the parties have created or, conversely, excusing performance in its entirety. But in some cases, an intermediary solution is required.

Consider the restaurant example one last time. Renters often invest a lot of money in renovating and adjusting the property to their specific needs and desires. Simply allowing them to terminate the agreement and walk away from the restaurant will be unhelpful and indeed frustrate, rather than advance, their expectations. Existing doctrine offers a better solution: temporarily excusing or reforming renters’ duty to pay rent. On this subject, we recommend Jonathan Lipson’s work on the subject of standstill agreements and his contribution to this symposium. This rule nicely guides courts to craft a ruling that recognizes that the loss at hand is due to a failure of a shared assumption that undermined the parties’ joint project, which the parties did not contemplate.

It goes without saying that COVID-19 is one of the most momentous events of our lifetimes. Such an event requires a public commitment to aid those harmed by it, be it psychically, economically, or mentally. However, contract law in general and the FBA doctrines in particular are not (and should not) always be up to this task. It is therefore not surprising that, following our analysis, the FBA doctrines are not applicable in all cases in which the party seeking to be excused suffered from one or more of COVID-19’s detrimental effects.

Virtual Symposium Part IX: Hanoch Dagan and Ohad Somech Part I, Failures of Basic Assumptions

When Contract’s Basic Assumptions Fail: From Rose 2d to COVID-19

Hanoch Dagan & Ohad Somech

When we started this project, in May 2019, we set out to develop a liberal account of three contract law doctrines: mutual mistake, frustration, and impracticability. These three doctrines tackle a fundamental problem in contracts: the failure of a basic assumption shared by the parties (or, FBA as we call it). At that time, the FBA doctrines were of theoretical importance, but of little practical use. This is no longer the case. As prior contributions to this Symposium point out (Stephen Wilks; Andrew Schwartz; and Mitu Gulati and Mark Weidemaier), frustration and impracticability are expected to feature heavily in Coronavirus litigation. We thus take the crisis – that is: both the virus and the measures to contain it – as a case study for our FBA theory.

A Liberal Account of the FBA Doctrines – Part I: What Makes an Assumption Basic? Does the Pandemic Constitute an FBA?

We begin with first principles. Contract is an empowering practice that is, and should be, guided by an autonomy-enhancing mission. Contract’s operative doctrines allow people legitimately to recruit others to their projects by committing their own future selves in return, thus advancing a joint plan. This commitment necessarily curtails the self-determination of the parties’ future selves. Therefore, liberal contract law must ensure that by advancing the autonomy of the parties at the time of formation it does not overly compromise the autonomy of their future selves. This maxim is the key to understanding the FBA doctrines.

These doctrines allow a party to withdraw from the contract if: (i) a shared basic assumption failed; (ii) the party seeking excuse did not assume the risk; (iii) the failure had a material effect on the exchanged considerations; and (iv) the court does not find it reasonable to allocate the risk to the party seeking to withdraw. These elements help address the two questions the FBA doctrines invoke: (1) what makes an assumption basic; and, (2) when an FBA occurs, what are its legal consequences? In this Part of our contribution we focus on the first question. We will turn to the second question in Part II.

A focus on the autonomy of the parties’ future selves implies that an assumption is basic if its failure undermines the agreement’s autonomy-enhancing properties. This means that a basic assumption is one which pertains to the essence of the parties’ agreement – the raison d’être of their joint plan.

Divining the essence of an agreement does not call for a metaphysical inquiry (the pertinent question in Sherwood v. Walker is not “what is the essence of a cow?”). As with other doctrinal contexts, an autonomy-enhancing contract law takes an objective approach, which relies on prevailing conventions. It examines the type of contract at hand, and more particularly the way actors in the relevant market typically understand the main purpose of this contract type. A careful reading of courts’ decisions (e.g., Florida Power & Light v. Westinghouse, Lewanee Bd. of Health v. Messerly, and Dingeman v. Reffitt) confirms that this is, in fact, what they actually do.

What does this finding mean for COVID-19 related litigation? Most parties to contracts formed before the virus began to spread did not consider the possibility of a global and lasting pandemic or the measures countries have taken (and are still taking) to contain it. Does this imply that the parties’ presupposition as per the absence of a pandemic is tantamount to a basic assumption? The answer varies, as we’ve just noted, across contract types.

Take, for example, rental agreements and focus first on residential ones. Renters, especially if they lost their job because of the crisis, may seek to be excused from the obligation to pay rent based on an FBA. We think that people experiencing economic upheaval due to the crisis should be certainly aided by the State; and we do not necessarily rule out the possibility that other contractual doctrines may be applicable (on this subject, see Cathy Hwang and David Hoffman’s recent work). But we think that the FBA doctrines are not.

The reason is twofold. First, renters and landlords rarely share assumptions about renters’ financial abilities. Instead, they usually acknowledge the uncertainty and allocate the risk. Second, and more importantly, COVID-19 simply did not trigger an FBA in this type of contract. The joint project in residential rents is housing for money, and the virus did not change people’s need for a place to live or their ability to use the property for that purpose. COVID-19, that is, did not undermine the essence of residential rent agreements.

Commercial rents – for example, of a restaurant – are different. To be sure, like in residential rents, parties to commercial rents do not usually share assumptions about the renter’s financial ability or profits. But they do share the assumption – namely: they take for granted – that eating at restaurants is a socially acceptable behavior. When this stops being the case – for example, due to an imposed lockdown or because the virus caused our social habits to change – COVID-19 is deemed to have caused an FBA.

Another example can further highlight the factual aspect of the inquiry. Consider agreements between students and their colleges or universities. We understand the essence of this contract type to be tuition for education. If this is indeed how most parties understand it and if online teaching can (roughly) accomplish this goal, then COVID-19 did not undermine its essence. It has, however, been quite a while since either of us was a student and we may be wrong about the facts. If most relevant actors – that is, students and universities – consider the cultural and social parts crucial aspects, which are part of the essence of their agreement, then COVID-19 may have indeed caused an FBA.

Thus far, we asked whether COVID-19 undermined a basic assumption. But it is also important to examine whether what was undermined was indeed an assumption. Going into a contract, the parties hold various beliefs; but not all beliefs are shared assumptions. An assumption is something taken for granted by the parties – not something that they contemplated, were aware of its uncertainty, and explicitly or implicitly allocated its risk. When the parties are aware that something is uncertain, then, proceeding with the agreement implies that they made the choice to bind their future selves despite the risk. Enhancing their autonomy in this case requires to respect their choice.

Here too a conventionalist approach is in order. That is, to understand what risks the parties have implicitly allocated, we need to consider the risks that are salient to actors in the relevant market. One way to perform this task is to examine the insurance policies market actors typically procure and inquire which types of risks are covered and especially which risks that not covered are nonetheless made salient.

Take again the restaurant example. Commercial renters typically procure “business interruption insurance” that covers renters’ lost profits. Does this indicate that the parties were aware of the relevant risk? As it turns out, business interruption insurance pertains mostly to lost revenue due to physical damage to the property. If this is indeed the case (see Christopher French’s work), then it is only this type of risk – and not lost profits due to the coronavirus crisis – that is made salient by the policy, and that, whether actually covered or not, can be assumed to have been allocated by the parties.

Finding that an FBA had occurred brings us half way through the analysis. We discuss the second half – the legal consequences of an FBA – in Part II.

Virtual Symposium on Contracts and COVID: Introducing Hanoch Dagan and Ohad Somech

Our final posts come from Hanoch Dagan and Ohad Somech, whose work we discussed previously in June.  Now they get to present their work themselves in two parts today and tomorrow.

Ohad is an adjunct lecturer at Tel-Aviv University and a research fellow at the Federmann Cyber Security Center at the Hebrew University. Before joining the Center he was a post-doctoral fellow at the Safra center for Ethics and at the Science-Po Law School. He received his PhD from the Tel Aviv University faculty of law. His dissertation, ‘The Right of Contractual Regret: A Psychological Perspective’, explored the relations between the parties’ emotions and the right to regret in modern contact law and theory. Ohad also holds an LL.B. and a B.A in psychology from Tel-Aviv University and an LL.M. from The European Program in Law and Economics.

Hanoch is the Stewart and Judy Colton Professor of Legal Theory and Innovation and the Director of the Edmond J. Safra Center for Ethics at Tel-Aviv University. He is a former Dean of Tel Aviv University Faculty of Law and also served as the founding director of the Zvi Meitar Center for Advanced Legal Studies, the director of The Cegla Center for Interdisciplinary Research of the Law, and the Editor in Chief of Theoretical Inquiries in Law. Among his many publications are over 100 articles in major law reviews and journals, such as Yale Law Journal, Columbia Law Review, Michigan Law Review, New York University Law Review and more. Hanoch has also written seven books, including Property: Values and Institutions (Oxford University Press, 2011), Reconstructing American Legal Realism & Rethinking Private Law Theory (Oxford University Press, 2013), and The Choice Theory of Contracts (with Michael A. Heller) (Cambridge University Press, 2017). Both his new book, A Liberal Theory of Property (Cambridge University Press, 2020), and The Research Handbook on Private Law Theory (Edward Elgar Publishing, 2020), which he edited with Benjamin Zipursky, are forthcoming in a few weeks.  Hanoch has been a visiting professor at Yale, Columbia, Michigan, Cornell, UCLA, and Toronto. He delivered keynote speeches and endowed lectures at Singapore, Alabama, Toronto, Queensland, Cape Town, Monash (Melbourne), Madrid, and Oxford. Hanoch is a member of the American Law Institute and the International Academy of Comparative Law. He obtained his LL.M. and J.S.D. from Yale Law School after receiving his LL.B., summa cum laude, from Tel Aviv University. 

We are delighted to be able to share their work as part of our virtual symposium!

Tuesday Top Ten - Contracts & Commercial Law Downloads for September 22, 2020

So what's up with our favorite subjects on SSRN these days? So glad you asked! Behold the current Top Ten download lists for recent scholarship in contract and commercial law:

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 24 Jul 2020 - 22 Sep 2020

Rank	Paper	Downloads
1.	Force Majeure, Frustration and Impossibility: A Qualitative Empirical Analysis Smaran Shetty and Pranav Budihal Columbia Law School and National University of Singapore	772
2.	Innovation Versus Encrustation: Agency Costs in Contract Reproduction Stephen J. Choi, G. Mitu Gulati and Robert E. Scott New York University School of Law, Duke University School of Law and Columbia University - Law School	331
3.	Contracts and COVID-19 Andrew A. Schwartz University of Colorado Law School	212
4.	Unlawfully-Issued Sovereign Debt Mark C. Weidemaier and G. Mitu Gulati University of North Carolina School of Law and Duke University School of Law	195
5.	New Light on Twyne's Case Emily Kadens Northwestern University School of Law	166
6.	Smart Contracts and Automation of Private Relationships Pietro Sirena and Francesco Paolo Patti Bocconi University - Bocconi Law Department and Bocconi University - Department of Law	140
7.	The Distinction Between Private Law and Public Law Hanoch Dagan and Benjamin C. Zipursky Tel Aviv University - Buchmann Faculty of Law and Fordham University School of Law	132
8.	Private Ordering and the Role of Shareholder Agreements Jill E. Fisch University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute	131
9.	International Arbitration as Comparative Law in Action Joshua Karton Queen's University Faculty of Law	113
10.	Specific Performance Hanoch Dagan and Michael Heller Tel Aviv University - Buchmann Faculty of Law and Columbia University - Columbia Law School	106

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 24 Jul 2020 - 22 Sep 2020

Rank	Paper	Downloads
1.	Force Majeure, Frustration and Impossibility: A Qualitative Empirical Analysis Smaran Shetty and Pranav Budihal Columbia Law School and National University of Singapore	772
2.	Innovation Versus Encrustation: Agency Costs in Contract Reproduction Stephen J. Choi, G. Mitu Gulati and Robert E. Scott New York University School of Law, Duke University School of Law and Columbia University - Law School	331
3.	כלכלה התנהגותית ודיני חוזים: תובנות תיאורטיות וממצאים אמפיריים Behavioral Economics and Contract Law: Theoretical Insights and Empirical Findings Doron Teichman, Eyal Zamir and Yuval Farkash Hebrew University of Jerusalem - Faculty of Law, Hebrew University of Jerusalem - Faculty of Law and Hebrew University of Jerusalem - Faculty of Law	293
4.	Contracts and COVID-19 Andrew A. Schwartz University of Colorado Law School	212
5.	Unlawfully-Issued Sovereign Debt Mark C. Weidemaier and G. Mitu Gulati University of North Carolina School of Law and Duke University School of Law	195
6.	Private Ordering and the Role of Shareholder Agreements Jill E. Fisch University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute	131
7.	Specific Performance Hanoch Dagan and Michael Heller Tel Aviv University - Buchmann Faculty of Law and Columbia University - Columbia Law School	106
8.	From Automation to Autonomy: Some Non-existent Problems in Contract Law Dr Eliza Mik Melbourne Law School	85
9.	The Unromatic History of Lex Mercatoria in England Warren Swain University of Auckland - Faculty of Law	60
10.	Arbitration: A Creature of Contract? Felipe Jiménez USC Gould School of Law	60

The Lucy v. Zehmer Mug

My students gave me this mug!

And all I had to do was beg for it on Twitter!

LSU Law Seeks Faculty Members

LOUISIANA STATE UNIVERSITY, PAUL M. HEBERT LAW CENTER seeks to hire a tenure-track faculty member in commercial law, including, but not limited to, bankruptcy. Applicants should have a J.D. from an ABA-accredited law school, superior academic credentials and publications or promise of productivity in legal scholarship, as well as a commitment to outstanding teaching.  

We additionally seek to hire a full-time faculty member with security of position to direct the Immigration Law Clinic as part of LSU Law’s Experiential Education Program. The Immigration Law Clinic is a fully in-house, one-semester, 5 credit clinic in which students represent non-citizens in their defensive proceedings before the Executive Office of Immigration Review (EOIR) and affirmative applications with U.S. Citizenship and Immigration Services (USCIS) Applicants must have a J.D. from an ABA-accredited law school, superior academic credentials, substantial experience in Immigration practice and be admitted and in good standing in a U.S. jurisdiction. Prior clinical teaching experience and fluency in Spanish is preferred. We may consider applications from persons who specialize in other areas as additional needs arise. 

We also seek to hire a full-time Assistant Professor of Professional Practice to teach legal analysis and writing. A successful candidate will teach the fundamentals of legal reasoning and writing by way of predictive and objective memoranda in the fall semester and advance those skills by teaching persuasive writing of an appellate brief and appellate oral advocacy in the spring semester. The legal writing faculty collaboratively develop the course materials that are used across the 1L curriculum. Applicants must have a J.D. from an ABA-accredited law school, superior academic credentials, and should have at least two to three years of post-J.D. experience in a position or positions requiring substantial legal writing. 

The Paul M. Hebert Law Center of LSU is an Equal Opportunity/Equal Access Employer and is committed to building a culturally diverse faculty. We particularly welcome and encourage applications from female and minority candidates.         

Applications should include a letter of application, resume, references, and teaching evaluations (if available) to:  

Christina M. Sautter 
Chair, Faculty Appointments and Adjuncts Committee 
c/o Pam Hancock (or by email to phancock@lsu.edu) 
Paul M. Hebert Law Center 
Louisiana State University 
1 East Campus Drive 
Baton Rouge, Louisiana 70803-0106 

 

Virtual Symposium, Part VIII: Jonathan Lipson, Part II: Standstill Agreements

CONTRACTING COVID: PRIVATE ORDER AND PUBLIC GOOD
JONATHAN C. LIPSON*

Part II: Standstill/Tolling Agreements

Like the health-safety standards discussed in Part I of this post, the economic shutdown in the wake of the pandemic has been dominated by public institutional responses, including bailouts, bankruptcy, and litigation.  While all three are inevitable, they are also problematic.  Like health-safety standards, bailouts are politically fraught, leading to uncertainty about what sort of support we can expect from the government—when and how it will be doled out.  At the same time, courts may lack the resources and power to address a state of the world in which all or most contracts are suddenly in breach. 

A court may, for example, conclude that a loan agreement or lease is in default because the borrower or tenant did not pay. But so what?  Putting to one side temporary stays of residential evictions, how valuable is a judgment against a borrower or tenant who may be unable to pay due to the pandemic?  If the judgment debtor has valuable assets, it may hide them or seek protection in a chapter 11 bankruptcy court, in which case the judgement will have little practical value.

Here, too, contract can provide a potentially sensible solution through a standstill/tolling agreement.  Under a model that I (along with Norman Powell) recently published with the American Bar Association (ABA), the creditor agrees to take no “legal action” during the agreed standstill period, which would include commencing a law suit or exercising self-help rights, while the debtor agrees not to sell its assets outside the ordinary course of business or otherwise fundamentally change its structure so as to disturb the creditor’s basic expectations. 

In all but a small number of cases, standstills are likely to be better for the parties than any form of judicial intervention, whether bankruptcy or litigation, and may provide stability needed to take advantage of bailouts.  Bankruptcy is likely to be costly in terms of professional fees and managerial energy, and may deprive the debtor of control.  Litigation over contract disputes is likely to kill most relationships.  In either case, the parties will be faced with difficult decisions, such as whether to switch to other contract counterparts or simply to do without.  Switching costs are often high, and the uncertainties of the pandemic would seem to exacerbate that.  Establishing new relationships during COVID may be fraught because the parties may have had little pre-pandemic experience with one another, and little reference for how to assess performance going forward, due to the inherent uncertainty of the situation.

At the same time, standstills may support efforts to obtain new financing, whether from the government or privately.  Under the Paycheck Protection Program, for example, the Small Business Administration has concluded that it will not approve lending to companies in chapter 11 reorganization, and significant litigation may pose even greater risks to private lenders.  This means that staying out of court (bankruptcy courts or otherwise) may be better for all concerned, if at all possible. In any case, it will almost certainly be better for a firm to tell a new investor or lender that it is not currently fighting with its major contract counterparts.  The fact that it is has entered into a standstill may signal to new sources of capital a collaborative capacity and cautious optimism. 

Moreover, because the economy appears to have been largely healthy prior to the shutdown, there is reason to think that the economy could rebound rapidly when an effective vaccine becomes widely available.  This is hardly irrational exuberance: it appears to have happened in the wake of the 1918-19 pandemic.  While it will take an amount of time that is difficult to determine, the risk of missing gain coming out of the crisis may be just as significant as the risk of loss going into it.

Like health-safety precautions, standstills can also have important network effects.  The bank and borrower that agree to a standstill may enable the borrower to make partial payments to other, more fragile suppliers, thereby helping to keep all afloat.  Temporarily halting precipitous action at one link in a chain may help to keep the chain together long enough to get through the pandemic.

As with health-safety precautions, a key doctrinal question about standstill agreements is whether they violate public policy.  They will generally be enforceable if they do not harm the larger collective.  Courts may not enforce a standstill to prevent a voluntary bankruptcy commenced by the debtor, for example, because the process has implications for all of the debtor’s creditors, and not just the counterparty (e.g., creditor) to the standstill.  But, that same creditor may be able to assert rights under the standstill to lift the automatic stay and to seize collateral, an outcome the debtor may wish to avoid.

As with health-safety terms, standstills are hardly perfect mechanisms.  In the absence of good faith (or at least mutual assured destruction), there may be little appetite to forebear.   The benefits of forbearance may be hard to explain to an angry client who has not been paid by her debtor, yet is being dunned her creditors. 

Yet, this may be one of the more important, if subtle, benefits of a standstill: it enables the parties to focus on a concrete set of comparatively constructive steps in a moment when there is otherwise so much uncertainty in the world.  Even if the standstill fails to bridge the gap to a renewed relationship, a timeout of short and negotiated duration can buy parties the opportunity to peer around an uncertain corner together, in order to make better collective decisions. At some point the hammer may fall, of course, and parties may have to make more drastic choices.  But in the near term, agreeing neither to agree nor disagree may be the best most parties can hope for.

Conclusion

We generally consider contract the domain of private and pecuniary order: voluntary exchange will tend to make more of us richer more of the time.  While that may be true enough, moments like COVID suggest that this only part of the story.  Private ordering through contract can and should also contribute to public good.

*Earlier versions of this essay or aspects of it were presented to the National Business Law Scholars Plenary, the Business Law Section of the American Bar Association, the Fellows of the American College of Commercial Finance Lawyers, the Association of Commercial Finance. Errors and omissions are mine, alone.  © 2020, Jonathan C. Lipson, all rights reserved.

Virtual Symposium Part VIII: Jonathan Lipson, Part I on COVID and Health Safety

CONTRACTING COVID: PRIVATE ORDER AND PUBLIC GOOD
JONATHAN C. LIPSON*

Part I: Health Safety

Responses to the novel coronavirus (COVID) have been framed largely in terms of public institutions: What can governments do to create and enforce health-safety standards, resolve or prevent litigation, and float the economy? The answer, of course, is many things. While necessary, these solutions are, however, often politically controversial, poorly executed, or simply ineffective. 

In a new draft paper, Contracting COVID:  Private Order and Public Good, I explore ways in which contract can be a substitute for, or supplement to, public institutional responses to the crisis.  I focus on health-safety terms, the subject of today’s post, and standstill/tolling agreements, which I address in tomorrow’s post.  Both have important capacities that public institutions lack.  They are (or can be) voluntary, tailored, and capable of transmitting standards through networks which may cross sovereign boundaries.  They can thus overcome important limitations of public intervention, including politicization, overbreadth and jurisdictional constraints.

Take health safety.  We might assume that government will provide and enforce standards to determine how to reduce the spread of COVID.  Indeed, many government actors have sought to do so, including the Centers for Disease Prevention and Control (CDC) and state public health agencies.  But their efforts were hampered not only because we understood little about transmission patterns early in the pandemic, but also because there was often active resistance to health-safety mandates on liberty and/or economic grounds.  This resistance, in turn, led to conflict and confusion about the scope of public health interventions and whether they were properly tailored.  Sometimes, government actors told us to shutdown; other times, they told us the virus was a “hoax.”

Contract can play an important role here by offering a degree of certainty that public institutions have failed to provide.  Many market actors, for example, may want assurance that they will not have legal liability for the transmission of COVID, and so seek contractual releases to this effect. It is likely that we all have agreed to exculpate restaurants, schools and gyms in the event we were to become infected while on premises.  Although theories of liability are not well formed at this point, such agreements may provide some comfort that the beneficiary will not be liable on whatever theories may eventually develop.

Under cases such as Tunkl v. Regents of Univ. of Cal., 383 P.2d 441, 443 (Cal. 1963), health-safety waivers are generally enforceable unless they offend “public policy.”  While reasonable minds can differ about the meaning of “public policy,” it is not hard to see that there might be a problem here.  Waivers that reduce or eliminate the risk of liability might shelter poor health-safety practices.  Conversely, a blanket ban on health-safety waivers might create unacceptable levels of risk. 

Contracting COVID argues that such waivers should generally be enforceable if the party exculpated from liability can show that she took reasonable health-safety precautions notwithstanding the reduced risk of liability.  But this may be easier said than done, if public actors fail to provide clear guidance on how to proceed. 

This is where contract may help.  In some cases, it appears that market actors with sufficient power, such as Apple and Tesla, have embedded health-safety standards in their supply chain agreements.  Thus, they may require their contract counterparts, and perhaps others throughout the chain, to undertake practices that promote health safety in the workplace and, by extension, in dealings with the public. Apple would do this not out of the goodness of its heart, but in order to stabilize its supply chain. 

In principle, this can be powerful.  Contract terms are likely to be more detailed and tailored to the parties’ needs and capacities than public-health mandates, alone.  Apple, for example, might negotiate the sorts of protections it believes its suppliers should take, and those negotiations should produce mutually acceptable standards in more cases than not.  It might not get all that it asks for, of course, and it might have to share the costs of implementing new precautions. But a negotiated set of standards acceptable to both parties may be as good as, or better than, the confused and conflicting signals we’ve gotten from government thus far.  Apple may, for example, require that its suppliers provide their employees with personal protective equipment.

Moreover, embedded in multinational supply contracts, these health-safety standards could cross borders, and apply to parties who have agreed to them in foreign jurisdictions where domestic law governing Apple might not otherwise reach. 

At the same time, contract dampens liberty-based objections to such standards.  If Apple’s suppliers agree to these precautions, they are not being forced to do so in the same way as if health-safety agencies mandated the standards.  Contract can depoliticize pandemic precautions because it is “just business”—not the “nanny state.”

Thus, the pattern that we should encourage aligns incentives in a way that are socially valuable in the light of COVID.  COVID waivers would be “carrots” available only if the beneficiary has undertaken health-safety precautions, and compliance with those precautions may demonstrate the willingness of buyers or suppliers to adapt their business practices.

Obviously, contract is imperfect.  Most companies are not Apple or Tesla, and so lack the power and incentives to seek and obtain health-safety promises in supply chain or similar network agreements. Moreover, there is no guarantee that the agreed standards will in fact be the right standards.  Although certain baselines seem to be emerging (e.g., masking), there is still much we do not know about how to address the pandemic.  There is no reason to expect market actors who are not health experts to have special purchase on this problem. 

And, inevitably, there are all of the ordinary problems that come with terms that seek “social responsibility” on the part of contract counterparts, including monitoring, enforceability and remedy.  After all, companies may market themselves as socially responsible without meaningfully practicing what they preach, and there may be little in the way of vetting or enforcing their promised better behavior. These costs of contracting are important, and cannot be ignored.  But they do not necessarily outweigh the potential benefits that come with it.  Apple and Tesla are using contract to achieve health-safety goals because they know, implicitly or explicitly, that government by itself cannot do the job.

*Earlier versions of this essay or aspects of it were presented to the National Business Law Scholars Plenary, the Business Law Section of the American Bar Association, the Fellows of the American College of Commercial Finance Lawyers, the Association of Commercial Finance. Errors and omissions are mine, alone.  © 2020, Jonathan C. Lipson, all rights reserved.

Virtual Symposium on Contracts and COVID: Introducing Jonathan Lipson

The ContractsProf Blog's Virtual Symposium on Contracts and COVID is continuing into its third week with a post by Jonathan Lipson.  We have previously noted Jonathan's work on the blog here and here.

Jonathan Lipson holds the Harold E. Kohn Chair and is a Professor of Law at Temple University Beasley School of Law. He teaches Contracts, Bankruptcy, Corporations, Commercial Law, Lawyering for Entrepreneurship, International Business Transactions, and a variety of other business law courses.  In addition to Temple, he has taught at the law schools of the University of Wisconsin (where he held the Foley & Lardner Chair), the University of Pennsylvania, and the University of Baltimore.

His research focuses on corporate governance, restructuring, and contracting practices.  He has published in many of the nation’s top law reviews, including those of the UCLA, Boston University, Notre Dame, and Southern California law schools.  He is also a coauthor (with Macaulay et al.) of Contracts Law in Action, the nation’s leading casebook that takes a “law in action” approach to contract law.

Jonathan is a member of the American Law Institute, a Regent of the American College of Commercial Finance Lawyers, and is active with the Business Law Section of the American Bar Association where, from 2011 to 2017, he was Section Content Officer.  He is now a member of the Section Council and the Corporate Laws Committee.  He has also served as an expert in complex corporate reorganizations, including that of Enron Corp.  His shorter works have appeared on, among others, The Huffington Post, Concurring Opinions, and Credit Slips. He also writes op-eds for the National Law Journal and USAToday.  He is the founding editor of The Temple 10-Q, an electronic business law newsletter published by the Beasley School of Law.

It is great to have Jonathan joining us for the virtual symposium.  His posts are a great way to kick off the week!

Ruth Bader Ginsburg, 1933-2020

Virtual Symposium Part VII: Ben Davis on the Wisdom of Wisdom-Tooth-Extraction During a Pandemic

Selling out the ordinary citizen: COVID-19 Limitation of Liability
Benjamin G. Davis, University of Toledo College of Law

I. The Wisdom of Fixing My Wisdom Teeth in a Pandemic

This is a dental story about wisdom teeth.

This past July I had my son over with a couple of friends to grill steaks.  When it got dark, we went inside to finish the meal. 15 days later I learned that one of those friends might have been exposed to COVID-19.  So I immediately set up to be tested three days later.  And I called my dentist to reschedule my upcoming appointment because I was not sure if I had been exposed and was getting tested.  Fortunately, another week later the test came back negative.

II. Contractual Assumption of Risk?

So I went to my rescheduled dentist appointment in early September and one of the conclusions was that my wisdom teeth needed to be removed.  And I was referred to a maxillo-facial surgeon for that.  In the first meeting I was asked to sign a document entitled COVID-19 PANDEMIC DENTAL TREATMENT AND ACKNOWLEDGEMENT OF RISK FORM.  I posted that document to the Contracts listserv.

That document – as a contractual matter was saying that I was assuming the risk of contracting COVID-19 in this treatment.

III. Enter State Limitation of Liability Law

On Friday, September 19, 2020, I am to have the first of two wisdom teeth surgeries under general anesthesia.

And today I learn that the governor has signed  Ohio legislation that would grant employers state law immunity from COVID-19 related civil lawsuits.  As reported in the National Law Review,

Ohio employers will likely soon enjoy greater legal protections when it comes to their efforts to stem the spread of COVID-19. Acknowledging the legal uncertainties faced by essential workers and businesses in the wake of reopening, the Ohio Senate on September 2, 2020, passed House Bill (H.B.) 606, a measure which, if signed into law (and it is expected that Governor Mike DeWine will sign the bill very quickly), would grant state-law immunity from civil lawsuits for “injury, death, or loss” related to “the transmission or contraction” of the novel coronavirus. The bill specifically provides that public health orders issued by the executive branch (i.e., the governor and the Ohio Department of Health), as well as public health orders issued by federal government agencies, counties, local municipalities, and boards of health or public health agencies, do not create new legal duties for purposes of tort liability. The bill and its corresponding protections will be retroactive to the date of the declared state of emergency in Ohio, March 9, 2020, and will expire on September 30, 2021.

The bill significantly limits legal exposure to Ohio businesses, which, absent a showing of reckless, intentional, or willful or wanton misconduct, would not be liable to customers, employees, or others for actions or omissions resulting in the exposure to, or transmission or contraction of, COVID-19. The bill, which is expansive, extends protections to all Ohio entities, including schools, nonprofit and for-profit entities of any size, governmental entities, churches, colleges, and universities.

Subject to limited exceptions, the new law would also shield health care providers from liability in tort actions arising from the “provision, withholding, or withdrawal” of health care services resulting from the coronavirus pandemic. The bill does not provide total protection; plaintiffs who can prove a health care provider acted with “reckless disregard for the consequences” of their actions, or engaged in “intentional misconduct or willful or wanton misconduct” could still recover.

In addition to the above protections, the bill would flatly bar class actions based in whole or in part on allegations that a health care provider, business, government entity, or person caused “exposure to, or the transmission or contraction of” COVID-19.”

As reported on Patch.com, Andrew Doehrel, president and CEO of the Ohio Chamber of Commerce said, "Ohio businesses stepped up when asked to help with this pandemic crisis and we are pleased that the Senate and House, along with the governor, have acted to help protect jobs and our economy,"

The story continues:

Health care providers are also protected from liability in tort actions related to COVID-19 care and services under the law. Again, anyone looking to sue a health care provider would have to prove they were acting recklessly or displaying intentional misconduct.

IV. What if I were to get COVID-19 in this wisdom tooth operation?

As the form I signed was prior to the operation, I would imagine that if I could prove I got COVID-19 during the operation on Friday, I would have to face a question as to whether I had assumed that liability and therefore a breach of contract claim would fail.

If I were to assert a breach of contract or tort claim, given that the operation is two days after the passage of the above law, the bar for my getting any relief for COVID-19 illness contracted in that operation and even for a death from it (I hope not, egads) has been significantly raised by this law.

And there will be a second wisdom tooth operation in the future where the same issue would arise for that operation too.

I could walk into the operation wearing my “Everybody Say, Corona Virus Don’t Play” t-shirt as a kind of new offer that if they operate on me and I contract COVID-19 from it, the surgeon is assuming that risk.  But, that might be a bit too ambiguous.  So maybe I should make up a t-shirt like Ian Ayres once suggested in Guerilla Consumerism that says, “Notwithstanding any other document or legislation, by serving me in any manner you waive any rights or defenses that you may have with respect to any legislation or contractual or other document that limits your liability to anything below the liability that you would have had before the COVID-19 pandemic.”

That is a bit long to put on a t-shirt but maybe I could get it done in very small print that was big enough for them to see, but small enough that they skip over reading it.  Maybe I could put the words NOTICE in big letters to attract their attention.

V. Been warning about this kind of thing since April. 

Pernicious contractual waivers to address a systemic risk that is a pandemic, I have warned, are not a solution to risk.  Nor is this type of legislation.  All these things do is shift the risk to the individual and away from employers.  They do nothing to address the underlying problem, which is the COVID-19 pandemic.

So we have a combination of market failure and state government failure in betraying the public trust by getting employers off the hook for COVID-19 liability.

It is all of a pattern of repression and weaponizing COVID-19 that I have described in a number of articles since April

• We Should Be Concerned with COVID-19 Vaccine Corner-Cutting, JURIST – Professional Commentary, September 1, 2020
• Force Drift: Thuggery in Portland with Toxic Mission Creep using Mystery Men, JURIST – Academic Commentary, July 23, 2020
• The Business of Reopening Colleges and Universities in a Pandemic, JURIST – Academic Commentary, July 7, 2020
• The Insanity of Using Riot-Control Chemical Agents on Peaceful Protesters in the Middle of a Pandemic, JURIST – Academic Commentary, June 9, 2020
• More Worker Endangerment: Pernicious COVID-19 Contractual Waivers, JURIST – AcademicCommentary, June 2, 2020
• An Open Letter to the Congressional Leadership on COVID-19 Limited Liability for Universities, JURIST – Academic Commentary, June 1, 2020
• How Covid-19 Human Endangerment Might Be Approached as a Domestic Crime or an International Crime Against Humanity, JURIST – Academic Commentary, May 20, 2020
• Worker Endangerment in the Meat Industry During COVID-19, JURIST – Academic Commentary, April 30, 2020
• (With William H. Widen), No Market Solution for Black Death: COVID-19 Guidelines As Crime, JURIST – Academic Commentary, April 18, 2020

VI. So what does one do?

A state constitutional, federal constitutional, or international law challenge of these kinds of approaches are something that I think I should think about.  But, in the meantime, I have to get this wisdom tooth out.

The systemic failures of the federal, state, and business communities to do what was and is needed to protect the ordinary citizen are appalling and criminal.  And, ordinary citizens, like me are left to the dogs of COVID-19 – air-borne, relentless, and many times deadly.

No wonder the United States is the butt of jokes around the world such as the following:

Q:  What borders on insanity? 

A: Canada and Mexico.

Virtual Symposium on Contracts and COVID: Introducing Benjamin Davis

Rounding out the second week of symposium, we are delighted to have as a guest blogger Ben Davis. We have noted Ben's Davis's work on this blog as early as 2006 and as recently as May.  We have covered his other activities going back fifteen years!  But this is his first post on our blog, and we are happy to have him on board.

Professor Benjamin Davis is a graduate of Harvard College (B.A.), Harvard Law School (J.D), and Harvard Business School (M.B.A.), where he was articles editor of the Harvard International  Law Journal. Professor Davis teaches in the areas of Contracts, Commercial Law, Alternative Dispute Resolution, Arbitration, Public International Law, International Business Transactions, and 3L Extended Bar Preparation.  He is a former Chair of the ABA Section of Dispute Resolution and a Former Member of the ABA Standing Committee on Law and National Security.  Professor Davis has given numerous presentations and speeches around the world. He is a contributing editor at Jurist. He has published dozens of articles on topics related to international and domestic arbitration, online and offline dispute resolution, and international law.

We look forward to his contribution to the blog to be posted later today!

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part III

Part III: Non-performance Related to the COVID-19 Crisis Under UCC Article 2: The Role of Repudiations and Adequate Assurances
Jennifer S. Martin

In Part I, I discussed the lessons from Steves and Sons, Inc. v. Jeld-Wen, Inc., 2020 WL 1844791 (E.D. Va. Apr. 10, 2020), and how it might be instructive to others asserting breach related to COVID-19, particularly where an injunction is desired. In Part II, I highlighted Volga Dnepr UK Ltd. v. Boeing Company, 2020 WL 2850572 (W.D. Wash. June 2, 2020), where a party who repudiated the aircraft wanted to retract the repudiation due to an increase in business arising from COVID-19. Here, I would like to look at the problem of repudiation and §2-609 adequate assurances and how that might affect parties affected by COVID-19. In particular, how might parties seek to “get it right” and what have courts said recently when faced with repudiations and requests for adequate assurances.

Recall that in Volga, the buyer, Volga Dnepr UK Ltd. (Volga), a cargo transport operation, contracted with the seller, Boeing Company (Boeing), for the purchase of five aircraft in 2006, with delivery of the aircraft occurring over multiple years, with the parties amending the contract multiple times. Volga initially notified Boeing on January 22, 2020, of the “impossibility to fulfill our obligations,” though it later claimed this was an invitation to work cooperatively and to alert Boeing of its difficulties. Boeing’s initial response on January 28, 2020, which it confirmed on February 5, 2020, clearly considered there to be a repudiation and requested retraction. Yet, the parties held meetings and on April 13, 2020, Boeing again restated its position that Volga had repudiated.

The decision of the trial court takes up these matters only in the context of Volga’s motion for a temporary restraining order. Does that necessarily mean that Boeing will prevail in the end? Perhaps not. Section 2-610 provides actions that a contracting party can take in the event that there has been a repudiation, but it does not permit a party to unilaterally characterize a communication as a repudiation. Of course, comment 1 does suggest that an “overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance” is a repudiation. And, Volga did state it was “impossible to fulfill” its obligations concerning the aircraft. Yet, the parties’ continued discussions and meetings might undercut Boeing’s position in this case on the certainty that Volga had in fact repudiated, especially given the uncertainties of COVID-19, which were becoming apparent during the early months of 2020 while the parties were having their discussions about aircraft.

It might be questioned during court proceedings why Boeing did not access the available rights to request adequate assurances under §2-609. Boeing had at its disposal the means to avoid this issue in litigation and to make sure that Volga would either “fish or cut bait” by demanding a thirty day (30) response in light of Volga’s clear communications that performance would be challenging at the least. As Spring 2020 progressed, Boeing was still working with Volga and COVID-19 was spreading, making it obvious that the demand for freight aircraft might increase, thereby increasing the likelihood that Volga would perform under the contract. Of course, further complicating matters, in March 2020, Boeing notified Volga that it was suspending its own operations due to COVID-19. We might wonder if Boeing itself wasn’t ready to provide the aircraft or that it was simply able to sell the aircraft at a higher price to another customer once the demand increased. In any event, it does not appear that Boeing availed itself of its ability to request adequate assurances, which the communications of Volga and the pandemic would have given it the legal right to do.

It is worth noting, though, that accessing adequate assurances during COVID-19 does not provide a party a certain route toward declaring a repudiation. However, it might clear up some of the uncertainties that will now need to be litigated by Boeing. As to how adequate assurances might play out, the case of AMG Vanadium LLC v. Global Adv. Metals USA, Inc., 2020 WL 1233752 (Sup. Ct. Del. Feb. 6, 2020) is instructive. In that case, the court found that a fire in a mine in Brazil was enough of an event to entitle the buyer to request adequate assurances under §2-609. The sourcing of the tantalum pentoxide at issue was important due because it would be classified a “conflict” mineral if improperly sourced. Yet, the court found, at least at the summary judgment stage, that the response by the seller to the buyer’s request for adequate assurances created questions of material fact as to sufficiency, such that the buyer might not have been entitled to claim a repudiation.

The biggest takeaway from these cases is that parties have recourse under §2-609 (assurances) and §2-610 (repudiation). The ongoing pandemic would seem to be a trigger for adequate assurances under §2-609, just as the fire was such an event in AMG Vanadium. There is uncertainty for parties that claim repudiation due to COVID-19 outright, especially if their own ability to perform might be at issue. Recall that after Volga had sent their initial letters to Boeing, Boeing itself sent out notices that it was suspending its own operations due to COVID-19.  COVID-19 clearly affects many participants in a commercial marketplace, buyers and sellers, as is demonstrated in the Boeing case. A seller that wants to preserve its rights against a “shaky buyer” like Volga and make decisions regarding other potential customers, is better served by making the request for adequate assurances. It is not known why Boeing did not do this, but there might have been problems with Boeing’s own ability to deliver during COVID-19. My last point here, though, is that even where a party does request such assurances due to uncertainties from COVID-19, it does not necessarily equate with a right of cancellation, as the other party has the ability to respond with the required assurances.

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part II

Non-performance Related to the COVID-19 Crisis Under UCC Article 2: Impracticability and a Role for Injunctions? Part II
Jennifer S. Martin

In Part I, I discussed the lessons from the Steves and Sons, Inc. v. Jeld-Wen, Inc., 2020 WL 1844791 (E.D. Va. Apr. 10, 2020) case and how it might be instructive to others asserting breach related to COVID-19, particularly where an injunction is desired. Here, I would like to highlight another case involving injunctions and a transaction for aircraft affected by COVID-19.

The case of Volga Dnepr UK Ltd. v. Boeing Company, 2020 WL 2850572 (W.D. Wash. June 2, 2020) presents another approach to a request by a buyer for an injunction, but in the context of a repudiation by the buyer. The buyer, Volga Dnepr UK Ltd. (Vulga), a cargo transport operation, contracted with the seller, Boeing Company (Boeing), for the purchase of five aircraft in 2006, with delivery of the aircraft occurring over multiple years, with the parties amending the contract multiple times. Volga initially notified Boeing that it would not be able to take the promised aircraft. Then in March 2020, Boeing notified Volga that it was suspending its own operations due to COVID-19. When global freight demands then increased on account of the pandemic, Volga requested the aircraft as promised and to retract its repudiation. Volga brought suit May 2020 and requested a temporary restraining order (TRO) to prevent Boeing from selling the aircraft at issue and requesting specific performance.

While Steves and Sons turned on both impracticability and a preliminary injunction, the Volga Dnepr UK decision takes up only the TRO. In sharp contrast to the buyer in Steves and Sons, the court concluded that Volga had not demonstrated a likelihood of success on the merits of its case where the facts indicated that it repudiated at least part of the contract (see §2-610). The court noted that while intention to repudiate must be unequivocal, Volga had written to Boeing “In this regard we hereby inform you of the impossibility to fulfill our obligations under the Purchase Agreement.” Even if there was doubt to that statement’s intention, Boeing clearly considered it a repudiation and told Volga as much and requested retraction. Yet, rather than retract at that point, Volga reaffirmed its position. Moreover, the court found that a party has a “limited window to retract their repudiation” or the retraction may be too late. The court, after rejecting other arguments made by Volga, found that the window for retraction closed when Volga failed to make required payments under the contract.

With this in mind, the court considered Volga’s argument that is would lose an important opportunity during an “international health crisis wherein [Volga] needs additional aircraft to fulfill customers’ air freight delivery needs.” Despite the potential truth to Volga’s assertion, the court was unwilling to use a TRO to assist a party that had repudiated of “its own accord” and “inflicted harm upon themselves.” As such, the balance of equities did not favor Volga and could actually damage Boeing’s “goodwill and reputation with other customers and reasonably impair its ability to market aircraft in the future.” Lastly, the court concluded that despite rising needs for freight worldwide due to COVID-19, there was no indication that the public was better served by Volga having the aircraft, as opposed to other buyers, or that granting Volga the relief it sought would have any impact in the “public’s ability to battle COVID-19.” As such the court denied the TRO.

The biggest takeaway from Volga Dnepr UK Ltd. v. Boeing Company would surely be that courts will not employ their power in equity to aid a perceived wrongdoer, even in a pandemic. The commercial nature of purchases still prevails in a world with COVID-19, such that contracting parties who do not help themselves will not find a receptive court. Moreover, COVID-19 affects many participants in a commercial marketplace. A contracting party that wants to assert that it is a more favored beneficiary of receiving goods should be able to prove it, or, as in the case of Steves and Sons, not be a breaching party. Both cases also demonstrate that while courts will entertain arguments regarding the impact of COVID-19 on performance of contracts, commercial parties are still expected to perform the deals they have made. A contracting party desiring to argue that it has been affected by COVID-19 or that it should be otherwise favored in litigation as a result of the pandemic better provide proof of such.

Virtual Symposium Part VI: Jennifer Martin on UCC Problems, Part I

Non-performance Related to the COVID-19 Crisis Under UCC Article 2: Impracticability and a Role for Injunctions? Part I

Jennifer S. Martin

The challenges of the COVID-19 crisis have created issues of nonperformance and enforcement of contracts. Parties simply may be unable (or unwilling) to fulfill their contractual obligations. While these issues arise across many types of contracts, it is worth looking at particular issues arising in cases arising under Article 2. Without much deliberation, one can predict that there will be arguments that reference COVID-19 in connection with modifications (§2-209), adequate assurances (§2-609), casualty to identified goods (§2-614) and excuse to failure of presupposed conditions (§2-615). We might expect for the time being that parties might argue the effects of COVID-19 in many cases for breach of contract. While breach cases might seem routine, at least two courts in interesting cases have already taken up whether the court should grant an injunction due to COVID and one takes up an allegation of impracticability that is relevant to COVID-19 related breach arguments.

The first of these cases is Steves and Sons, Inc. v. Jeld-Wen, Inc., 2020 WL 1844791 (E.D. Va. Apr. 10, 2020), which concerned a claim of breach of contract brought by the buyer (“Steves”) against the seller (“Jeld-Wen”) for the purchase of eighty percent (80%) of Steves requirements of interior door skins (see §2-306). The dispute between the parties arose from Jeld-Wen’s allocation of door skins, during a shortfall of supply that arose when the two largest providers of door skins, which included Jeld-Wen, announced substantial price increases would take place in 2020. After buyers, including Steves,  increased orders in 2019, Jeld-Wen did not fill Steves’ orders in full, claiming the orders were disproportionate to Steves’ forecasts and prior orders.  In February 2020, Steves brought suit for breach and sought a preliminary injunction in the case, which the court granted.

This might appear to be a routine, but interesting, dispute in a requirements contract where there is a dispute arising from alleged shortages created by the seller’s own announcement of dramatic price increases to hit in the near future and an argument that Steves’ orders were disproportionate to stated estimates. The court found that Steves’ increases in its orders to Jeld-Wen were minor, only 7.11%. Moreover, the contractual provision for allocation in the event of “shortage in production capacity” was not triggered where Jeld-Wen actually had excess capacity. Two aspects of this case, though, are notable in a COVID-19 marketplace: (i) Jeld-Wen’s claim of impracticability under §2-615 and (ii) Steves’ request for a preliminary injunction.

As to the claim of impracticability under §2-615, it is important to note that Jeld-Wen’s alleged shortages began before COVID-19. However, the court’s consideration of contract language regarding potential shortfalls may have implications in other cases where parties desire access to §2-615 allocations due to COVID-19-related shortages. Jeld-Wen claimed that §2-615 supported its allocation of door skins where there was a production shortage in two styles of the door skins, as that provision  permits a seller to “allocate production and deliveries among his or her customers but may at his or her option include regular customers not then under contract as well as his or her own requirements for further manufacture.” The court rejected application of this provision, finding that Jeld-Wen could not demonstrate any contingency the “non-occurrence of which was a basic assumption on which the contract was made.” Instead, the parties’ contractual language that addressed shortages precluded Jeld-Wen’s argument that shortages were not contemplated as anticipated under §2-615(a). The court also rejected Jeld-Wen’s argument that increases in market price themselves can be a contingency under §2-615 where there was no expectation that prices would remain level, such that its allocation was supportable.

In considering whether to grant the preliminary injunction to Steves’, the court found a likelihood of irreparable harm to Steves and took up the balancing of hardships and, in particular COVID-19. The court noted that “[i]n balancing the hardships, it is necessary to assess what impact, if any, the coronavirus (COVID-19) spread has, or reasonably may be expected to have, on the parties and on the public interest.” While not requested by the parties, the trial court, sua sponte, asked the parties to submit briefing on the question.  The court recognized that COVID-19 has affected businesses and will be challenging in terms of operations in light of government restrictions. Of course, that does not mean that a party is (or is not) entitled to an injunction in a transaction occurring in a COVID-19 environment. Instead, the court concluded that Jeld-Wen did not have any reduction of capacity due to COVID-19 or that the spread of the disease was considered in the allocation of capacity made by Jeld-Wen. Moreover, any “possible future damage” arising from COVID-19 and any volatility in the marketplace from it did not “change the analysis,” and the court granted the preliminary injunction to Steves. Not surprisingly, Jeld-Wen has appealed to the 4^th Circuit in this case.

Jeld-Wen may be instructive as to other cases arising due to non-performance during the pandemic. First, the inclusion of contract language that addresses pricing issues, product shortages and allocations of supply would seem to be applicable to other transactions affected by COVID-19. Parties will be bound by the language that they had the foresight to include. Second, while the court did not believe that Jeld-Wen could access the allocation provisions of §2-615 due to price increases, it may be that price escalations and product demand might be unforeseen circumstances in other cases due to COVID-19. Finally, in cases where an injunction is requested, it is clear that if a contracting party can demonstrate a COVID-19 impact, the court will consider it in balancing hardships. In short, COVID-19 is not a license for breach, and contracting parties are still expected to fulfill their obligations.

This post continues in Part II.

Virtual Symposium on Contracts and COVID: Introducing Jennifer Martin

Our symposium continues today with a series of posts from Jennifer Martin.  Over the years, we have had many occasions to take note of Jennifer Martin's contributions to contracts scholarship, both in written form and in the form of her participation in the annual KCON conferences. She and her institution hosted KCON IX in 2014.   

Jennifer S. Martin joined the law faculty at St. Thomas University in 2010. She teaches courses in contracts, transactional skills, business associations and commercial law. She is an elected member of the American Law Institute where she is part of the Members Consultative Group for Uniform Commercial Code Issues and the Restatement of the Law, Consumer Contracts, as well as being a Fellow of the American Bar Foundation. In addition to her regular gig at St. Thomas, Jennifer has also visited at Drexel University Kline School of Law, University of Oregon School of Law, University of Louisville and University of Pittsburgh. Before entering the legal academy, Jennifer was a Principal Attorney for Houston Industries Incorporated (now Reliant Energy), working on power generation transactions domestically and internationally.

Jennifer has published many articles and given lectures on subjects such as contract and commercial law remedies, wartime and conflict contracting, consumer rights, and lender liability. She is a co-author of CONTRACTS: A CONTEMPORARY APPROACH (West Academic 3d ed. with Chomsky, Kunz and Schiltz) and LEARNING SALES (West Academic 1st ed. with Chomsky, Kunz and Schiltz). She is also the author of the American Bar Association’s Annual Survey on Sales Law published annually in THE BUSINESS LAWYER and prepares the annual update to COMMERCIAL AND CONSUMER WARRANTIES (Lexis).

We are grateful to Jennifer for her willingness to join us in the Symposium.

Tuesday Top Ten - Contracts & Commercial Law Downloads for September 15, 2020

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 17 Jul 2020 - 15 Sep 2020

Rank	Paper	Downloads
1.	Force Majeure, Frustration and Impossibility: A Qualitative Empirical Analysis Smaran Shetty and Pranav Budihal Columbia Law School and National University of Singapore	754
2.	The Social Cost of Contract David A. Hoffman and Cathy Hwang University of Pennsylvania Law School and University of Virginia School of Law	469
3.	Innovation Versus Encrustation: Agency Costs in Contract Reproduction Stephen J. Choi, G. Mitu Gulati and Robert E. Scott New York University School of Law, Duke University School of Law and Columbia University - Law School	321
4.	Contracts and COVID-19 Andrew A. Schwartz University of Colorado Law School	192
5.	Unlawfully-Issued Sovereign Debt Mark C. Weidemaier and G. Mitu Gulati University of North Carolina School of Law and Duke University School of Law	187
6.	New Light on Twyne's Case Emily Kadens Northwestern University School of Law	163
7.	Smart Contracts and Automation of Private Relationships Pietro Sirena and Francesco Paolo Patti Bocconi University - Bocconi Law Department and Bocconi University - Department of Law	134
8.	The Distinction Between Private Law and Public Law Hanoch Dagan and Benjamin C. Zipursky Tel Aviv University - Buchmann Faculty of Law and Fordham University School of Law	129
9.	Private Ordering and the Role of Shareholder Agreements Jill E. Fisch University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute	120
10.	International Arbitration as Comparative Law in Action Joshua Karton Queen's University Faculty of Law	110

 

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 17 Jul 2020 - 15 Sep 2020

Rank	Paper	Downloads
1.	Force Majeure, Frustration and Impossibility: A Qualitative Empirical Analysis Smaran Shetty and Pranav Budihal Columbia Law School and National University of Singapore	754
2.	The Social Cost of Contract David A. Hoffman and Cathy Hwang University of Pennsylvania Law School and University of Virginia School of Law	469
3.	Innovation Versus Encrustation: Agency Costs in Contract Reproduction Stephen J. Choi, G. Mitu Gulati and Robert E. Scott New York University School of Law, Duke University School of Law and Columbia University - Law School	321
4.	Contracts and COVID-19 Andrew A. Schwartz University of Colorado Law School	192
5.	Unlawfully-Issued Sovereign Debt Mark C. Weidemaier and G. Mitu Gulati University of North Carolina School of Law and Duke University School of Law	187
6.	Private Ordering and the Role of Shareholder Agreements Jill E. Fisch University of Pennsylvania Law School - Institute for Law and Economics, European Corporate Governance Institute	120
7.	Specific Performance Hanoch Dagan and Michael Heller Tel Aviv University - Buchmann Faculty of Law and Columbia University - Columbia Law School	102
8.	Relationship as Product: Transacting in the Age of Loneliness Shmuel I. Becher and Sarah Dadush Victoria University of Wellington and Rutgers, The State University of New Jersey - Rutgers Law School	101
9.	From Automation to Autonomy: Some Non-existent Problems in Contract Law Dr Eliza Mik Melbourne Law School	84
10.	Intellectual Property: Commercializing in a University Setting Cynthia Dahl University of Pennsylvania Law School	61

 

Virtual Symposium Part V: Rachel Arnow-Richman on Employee Rights, Part II

Individual Employee Rights and COVID-19
Part II (What we really want to know):
Can faculty be terminated for refusing to teach in person?
Rachel Arnow-Richman

 Part I of this symposium contribution addressed the general public and private law rules bearing on whether an employer can lawfully terminate an employee who refuses to return to work because of COVID.  This Part focuses on a specific example of considerable interest to our community: tenured university faculty members seeking to teach remotely.  But first, one brief (and final) digression . . .

I. Unforeseen circumstances

Those who focus primarily on B2B contracts may think that I gave short shrift to the unprecedented nature of a global pandemic in Part I. Much of the commercial world is consumed with the question of whether contractual obligations can be set aside due to catastrophic circumstances.  But excuse doctrines are of less significance in the employment context where, under employment at will, the law imagines that parties have no long-term obligations to one another. 

In the case of employees with contract rights, however, concepts like impracticability could conceivably be brought to bear. If this were an actual exam question rather than a real-life dilemma, I would expect students to invoke doctrines of excuse. I would also expect them to begin their invocation with two mantras that I force then to incant in class:

Contract liability is strict liability.  It does not matter why a party fails to perform, only that the contract terms have not been satisfied. If we were to imagine that the contract clearly obligated the employee to work in person, then her failure to do so is a breach even if she is acting justifiably.  The same holds for the employer: if it is contractually obligated to provide a safe work environment, it is liable for its failure to do so despite its inability to fully contain the risks that make the workplace unsafe.

Changed circumstances do not excuse contract performance. Rather, they are the reason we contract in the first place. In entering a contract, parties obtain a degree of security in the face of an uncertain world: whatever happens, the other side is obligated to perform.  The tradeoff is that come “hell or highwater,” they must perform too. 

Of course, those are baseline principles.  There are exceptions, and COVID-19 would appear to be a textbook example. Doctrines like impracticability exist to absolve a party from breach when an event so outside the norm of what either party expected makes performance virtually impossible.  A global pandemic surely fits the bill for an unforeseen event – one so extraordinary that neither party can be blamed for failing to anticipate it at the time of drafting.

Whether the employee’s performance is indeed impracticable is a more nuanced question.  Coming to work is not physically impossible. Its practicability or impracticability depends on a number of fact-driven considerations ranging from the contact-intensiveness of the work, to the employer’s mitigation efforts, to the employee’s underlying health issues.  But such matters need not detain us. At this point I hope students recall the difference between recission and breach. Impracticability generally operates as a shield not a sword, meaning the employee could use the doctrine to relieve herself of any continued commitment to serve the employer.  But what the employee wants is either to continue the relationship on her terms (remotely rather than in person) or access the remedies associated with breach of contract.  Recission is not the outcome anyone is seeking.

Or maybe it is. If any party is going to make a successful COVID-based impracticability argument, it is likely to be the employer, and not with regard to the safety or feasibility of in-person work. Rather an employer might be inclined to argue that the dire economic fallout from the virus has made it all but impossible to retain the employee for the duration of her contract. This argument may sound eerily familiar to readers whose universities have begun or threatened to lay off faculty pursuant to exigent financial circumstances provisions in their appointment and tenure policies.  Such language is the faculty-employment-contract counterpart to a force majeure clause, and the prospect of its deployment is sobering. For present purposes, though, we will stick with the question of remote versus in-person work, rather than the dreaded scenario of no work at all. But word of warning to otherwise job-secure employees seeking to draw on excuse doctrines in the fight to obtain remote work: be careful what you wish for.

II. Are faculty a special case?

 And now to the much-awaited question:  what are the possible job consequences to faculty who decline to teach in person?

Tenured faculty members are similar to corporate executives.  True, they earn less.  But they have the equivalent of an individual written contract precluding termination absent specific grounds in the form of the university’s promotion and tenure policy. Unlike individual written contracts, it never ends.  An executive at the top of the corporate hierarchy generally has a fixed term of employment. If the employer does not have the grounds or the stomach to terminate her during the life of the contract, it can wait it out and refuse to renew.  The same goes for so-called “contract” faculty, whether or not they are on a tenure track. These employees can be terminated upon contract expiration absent any presumption of renewal.  Not so with tenured faculty. If the university wishes to terminate a tenured professor for refusing to teach in person, it must establish that her conduct satisfies the narrow and exclusive criteria under which tenure may be stripped for performance-related cause. 

In some cases, these causes may be even narrower than the already pro-employee definitions found in the high-level employment contracts of the corporate world. Consider the following publicly posted example from the tenure policy of a large public university in the southeast (that is not my employer):

Cause for termination must directly and substantially affect the fitness of the faculty member to function … in an academic community, or be related to a serious failure of a faculty member to discharge his or her obligations to [the University].  Examples include, but are not limited to, serious professional or personal misconduct, serious failure to perform academic duties in accordance with generally accepted norms, conviction of a serious crime and serious violations of [University] policy.

Just count the number of times the word “serious” appears to qualify the grounds for removal, and you see which way the deck is stacked.  It will be extremely difficult for this university to revoke the tenure of a faculty member for refusing to teach in person but still genuinely seeking to fulfill those obligations in a different modality. This is particularly so if the faculty member is still fully performing her other “academic duties” – scholarship and institutional service.

In addition to having exceedingly narrow justifications for removal, university personnel policies on tenure revocation guarantee affected faculty a robust form of internal review.  Depending on the type and culture of the institution (public or private, large or small, strong or weak traditions of faculty governance), this process will vary. It may be styled as a disciplinary proceeding or a grievance, it likely involves review by a particular faculty committee or governing body, and it probably concludes with an appeal to the university’s board of regents or trustees.  Universities not being known for their institutional efficiency, this process can take a very, very long time. In addition, any failure to comply with the required procedural steps can itself create a breach of contract, potentially giving the professor another bite at the apple. 

In sum, even if a university is confident that it has substantive grounds to remove a tenured faculty member, it may lack the ability to execute on it. By the time it dots and crosses every “i” and “t” of its procedures, the pandemic will surely be over. At that point one can imagine a simple resolution under which the university drops its charges and the professor quietly returns to the classroom.

Conclusion

Let us return to the not-so-hypothetical question that began Part I. I end all of my exams with the same instruction: Advise the client. If a colleague who fears both for her safety and her job asks me what to do about institutional pressure to teach in person, I need to provide a coherent response, not the meandering intellectual analysis we subject ourselves to grading (or which I have imposed on you here). This is where the true teaching moment lies: students learn that lawyers do not make decisions, but merely lay out the likely results of different scenarios. Ultimately the client must weigh the strength of her convictions against her tolerance for risk.  All things considered, tenured faculty are well positioned to take the risk of refusing to return to in-person work. Most employees -- including many elite workers who enjoy just cause protection -- are not.