ContractsProf Blog

Weekly Top 10

There are quite a few treats but no tricks on this week's Top Ten.  The list is little changed from last week, with the top three papers holding their own.  Following are the top ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending October 30, 2005.  (Last week's rank in parentheses.)

1 (1) Risk Management in Long-Term Contracts, Victor P. Goldberg (Columbia).

2 (2) Katrina's Continuing Impact on Procurement - Emergency Procurement Powers in H.R. 3766, Christopher R. Yukins & Joshua I. Schwartz (Geo. Washington).

3 (3) Bargaining Power in Contract Theory, Daniel D. Barnhizer (Michigan State).

4 (6) Competition and the Quality of Standard Form Contracts: An Empirical Analysis of Software License Agreements, Florencia Marotta-Wurgler (NYU).

5 (7) Are 'Pay Now, Terms Later' Contracts Worse for Buyers? Evidence from Software License Agreements, Florencia Marotta-Wurgler (NYU).

6 (5) Resolving the Paradox of the Consideration Doctrine: The Implications of Inefficient Signaling and of Anti-Commodification Norms, David Scott Gamage (Texas) & Allon Kedem (Independent).

7 (4) Are Heuristics a Problem or a Solution?, Douglas A. Kysar (Cornell).

8 (8) Credit Card Accountability, Samuel Issacharoff & Erin F. Delaney (NYU).

9 (9) The Myth of the Rational Borrower: Rationality, Behaviorism, and the Misguided 'Reform' of Bankruptcy Law, Susan Block-Lieb (Fordham) & Edward J. Janger (Brooklyn).

10 (10) The Hidden Roles of Boilerplate in Standard Form Contacts, David Gilo & Ariel Porat (Tel Aviv).

The Great Pumpkin and Demands for Restitution

Those who remember It's a Great Pumpkin, Charlie Brown, might remember Sally's outrage after sitting all night in the pumpkin patch with Linus, waiting for the arrival of the "Great Pumpkin."  The "Great Pumpkin" turned out to be a silhouette of Snoopy in his fighter pilot outfit.  Sitting in the pumpkin patch with Linus, Sally missed the night of trick or treating.  She threatened to sue; she demanded restitution.  Sally to Linus:

I was robbed! I spent the whole night waiting for the Great Pumpkin when I could have been out for tricks or treats! Halloween is over and I missed it! You blockhead! You kept me up all night waiting for the Great Pumpkin and all that came was a beagle!

I didn't get a chance to go out for tricks or treats! And it was all your fault! I'll sue! What a fool I was.  And could have had candy apples and gum! And cookies and money and all sorts of things! But no, I had to listen to you! You blockhead. What a fool I was. Trick or treats come only once a year. And I miss it by sitting in a pumpkin patch with a blockhead. You owe me restitution!

[Meredith R. Miller]

Happy Halloween!

[Frank Snyder]

The Fright Business

In honor of Halloween, check out this story about the economics of haunted houses.  Apparently consumers are willing to pay up to $20 - $30 a head to be scared out of their minds.  Estimates of the number of haunted houses this year range from 600 all the way to 3,000.  But some are claiming that the haunted house industry has peaked, given the high price of good quality special effects (such as animatronic zombies) and the increasing difficulty of finding a house big enough so that the werewolves have room to roam.

[Miriam Cherry]

The Halloween Social Contract

On the Episode entitled “Trick or Treat,” on the show Curb Your Enthusiasm by Larry David, Larry indignantly denies candy on Halloween to some girls who are in their late teens, and are in no costume.  The girls, obviously angry, later toilet paper Larry’s house and write derogatory graffiti on his front door.  When Larry calls the police to his house, the following exchange occurs:

Officer: So they had no costumes?

Cheryl: Right, no costumes, and for some reason that really upset him [Larry].

Larry: Yeah.

Officer: Now, you’re sure there were no costumes, I mean, because sometimes they can be very subtle costumes.

Larry: No, they weren’t subtle at all, there were no costumes.  They were just going around from house to house trying to get candy, okay? . . . .

Officer: But they knocked on the door, they said “Trick or Treat?”

Larry: Yeah, they said “Trick or Treat.”

Officer: And you had treats?

Larry: I was giving out candy all night.  But, I don’t have to give them candy.  They don’t deserve candy.  And I don’t deserve this (gestures to house and door, which had been toilet-papered and laced with derogatory graffiti). . . .

Officer: Did they threaten you in any way?  Did you see weapons of any kind?

Larry: No, there was no threat, except for the “trick” threat.

Officer: What’s the “trick” threat?

Larry: The trick or treat.  No treat?  Trick.  It’s a threat!  How far can you take these threats?

Officer: If it was any other night, sir. . . .

Larry: Trick or treat – bang bang! (gesturing as if pointing a gun).

Officer: But, it’s trick or treat, we cut the kids a little slack on Halloween.  There’s a kind of a social contract that you enter when you open up that door.  They say “trick or treat,” I would advise you to give the treat.

Cheryl: (Shaking head) Why don’t you just give them the candy, next time, Larry?

Larry:  I will not be intimidated.  Even on Halloween.

[Wayne Barnes]

Journal Honors Cibinic

The late John Cibinic (Geo. Washington) was one of the titans of government contract law.  The Public Contract Law Journal has a tribute to him in a forthcoming issue, In Memoriam: John R. Cibinic, Jr., which features appreciations by a range of leaders in the field:

For three decades, he taught at the George Washington University Law School. Throughout that period, and until his passing, John made a huge and lasting contribution to the literature and practice of government contracting. These short pieces, authored by colleagues, students, and friends, offer a glimpse into the impact of John's full and productive life.

[Frank Snyder]

Today in HIstory: October 31

1517: Martin Luther posts his Disputation . . . on the Power and Efficacy of Indulgences (known familiarly as the “95 theses”) on the door of the Castle Church in Wittenberg, Germany.

1864: Nevada joins the Union as the 36th state.  Motto?  "Battle-Born."

1875: Eugene Isaac Meyer is born at Los Angeles, California.  A successful stock speculator who kept his wealth during the Depression, he’ll buy the Washington Post at a bankruptcy auction, which will later bring fame to his daughter, Katherine Graham.

1912: The Biograph Co. releases the first Hollywood gangster film, the 17-minute silent Musketeers of Pig Alley, written and directed by Anita Loos and D.W. Griffith.

1941: Sculptor Gutzon Borglum and 400 workmen finish the portraits of the four U.S. Presidents on Mount Rushmore, South Dakota.

1988: Actor John Houseman, whose portrayal of Charles Kingsfield, Jr. remains the gold standard for contracts professors, dies at Malibu, California.

1998: President Clinton signs the Iraq Liberation Act, which makes it U.S. policy “to support efforts to remove the regime headed by Saddam Hussein from power in Iraq and to promote the emergence of a democratic government to replace that regime.”

2003: A federal approves MCI’s reorganization plan, letting the telecommunications firm exit bankruptcy.

John Glenn on Contract Bids

This story from anecdotage.com:

John Glenn, the first American astronaut in space, was once asked to describe his (presumably profound) thoughts just before taking off into space. "I looked around me and suddenly realized," Glenn replied, "that everything had been built by the lowest bidder!"

[Meredith R. Miller]

A Matter for Consideration

Why do we enforce contractual promises only if they are supported by consideration?  That question has troubled contract theory from the very beginning.  David Scott Gamage (Texas) and judicial clerk Allon Kedem have come up with a new take on the question, in Resolving the Paradox of the Consideration Doctrine: The Implications of Inefficient Signaling and of Anti-Commodification Norms, now available on SSRN.  Here's the abstract:

This paper addresses one of the central problems of contract law, a puzzle that has troubled generations of contracts scholars: Why do we only enforce promises backed by consideration?  Or, how can we justify insisting on the bargain context, but not requiring that the bargains be adequate? The lack of a theoretical solution to this puzzle has plagued the application of the consideration doctrine in courts of law.

We resolve this paradox through two innovations. First, using a game theory model based on asymmetric information, we dispute the common wisdom that the law should honor parties' intentions as articulated at the time of contract formation. We show how parties' expressed intentions may not conform to their underlying desires. Crucially, the mere fact that parties take advantage of a legally binding option does not imply that they desire the existence of that option.  When courts create an option for the legal enforcement of promises, parties can essentially be forced into exercising that option.

How then can the law determine which promises to enforce? Our second innovation shows how social norms against commodification limit the availability of the consideration form. Where previous scholarship has assumed that anyone so wishing can invoke nominal consideration, we argue that anti-commodification norms make even nominal consideration unavailable within certain social contexts. Moreover, the contexts in which norms block the use of consideration are precisely the circumstances where creating a legally binding option would be most likely to harm both promisors and promisees.

Ultimately, what matters is not whether the parties actually do offer consideration, but rather whether they can voice consideration. Only when norms allow the use of consideration should we conclude that parties truly desire the option to have their promises legally enforced.

Today in History: October 30

1340: The last Islamic invasion of Spain from Africa is defeated by Kings Alfonso IV of Portugal and Alfonso XI of Castile at the Battle of Rio Salado.

1735: Boston lawyer, rebel, and future President John Adams is born at Braintree, Massachusetts.

1831: The leader of a failed slave rebellion, Nat Turner, is captured at Southampton County, Virginia.  He will later be hanged and skinned, with body parts kept by spectators as souvenirs.

1864: Four miners who struck it rich at Last Chance Gulch, Montana, found a new town on the site, called Crabtown.  For P.R. reasons, the name will later be changed to Helena.

1892: The father of the modern fitness industry, Angelo “Charles Atlas” Siciliano, is born at Arci, in southern Italy.  Thirty million people have bought his mail-order course.

1947: At Geneva, Switzerland, twenty-three countries sign a new General Agreement on Tariffs and Trade.

1961: Soviet authorities remove Josef Stalin’s body from Lenin’s tomb for his “violation of Lenin’s precepts.”  Yep, that shows him.

1988: Tobacco giant Philip Morris buys Kraft Foods for $13.1 billion.

Celebrating 25 Years of CISG

The University of Pittsburgh is hosting a conference next week marking the 25th anniversary of the United Nations Convention on Contracts for the International Sale of Goods.  They've lined up a great program, featuring six of their own faculty, Ronald Brand, Vivian Curran, Harry Flechtner, Kenneth Lehn, John E. Murray, Jr., and Mark Walter, along with a raft of international experts, including Volker Behr (Augsburg), Michael Bridge (University College, London), Harold Burman (U.S. State Department), Filip De Ly (Erasmus-Rotterdam), Johan Erauw (Ghent), Franco Ferrari (Verona), Henry Gabriel (Loyola-New Orleans), Alejandro Garro (Columbia), Albert Kritzer (Pace), Joseph Lookofsky (Copenhagen), Ulrich Magnus (Hamburg), Alejandro Osuna (Iberoamericana-Tijuana), Pilar Perales Viscasillas (Carlos III-Madrid), Sandra Saiegh (U.N. Procurement Service), Peter Schlechtriem (Albert Ludwigs-Freiburg), Jernej Sekolec (UNCITRAL), Marco Torsello (Bologna), Michael Van Alstine (Maryland), and Peter Winship (Southern Methodist).

The conference, The CISG and the Business Lawyer: The UNCITRAL Digest as a Contract Drafting Tool, is slated for next Friday and Saturday, November 4-6, at Pitt Law School.

[Frank Snyder]

Choosing the Right Valuation

When entrepreneurs and venture capitalists sit down to discuss financing, they often set ownership percentages based on "pre-money" (the amount the firm is worth before the VC investment) and "post-money" valuations.  The VC's share will often depend upon the ratio of its investment to the pre-money value of the business.

This is the wrong way to go about things, argue the authors of a new paper, Effective vs. Nominal Valuations in Venture Capital Investing, forthcoming in the New York University Journal of Law and Business.  Michael Woronoff, a partner at Proskauer Rose and lecturer at UCLA, and Jonathan Rosen of Shelter Capital argue that negotiators should focus not on how much the business is worth now, but on how much each will get upon exit.  Here's the abstract:

Any serious conversation between venture capitalist and entrepreneur ultimately leads to the issue of valuation of the enterprise. The discussions typically focus on some combination of pre-money value, the amount of capital being raised, and post-money value.

In turn, these values may be used to calculate a percentage of the company being sold. The entrepreneur will typically use these amounts to compare offers from different investors, or in the absence of multiple offers, as one of the primary items of negotiation.

The focus on the nominal pre-money and post-money value and ownership percentage, though common, is misguided. All parties would be better served by focusing on the actual value that will flow to each party upon a monetization event (or exit), which will be only partially dependent upon the percentage ownership implied by the pre- and post-money valuation contained in the term sheet. As obvious as this advice may seem, it typically goes unmentioned in even sophisticated discussions of the valuation of venture capital deals. Indeed, some actually counsel against this advice, arguing that cash flows are not significantly affected by factors other than price, so these other factors should not be overemphasized.

This Article explores how the structure of the typical venture capital transaction can significantly affect the distribution of value among various interested parties upon exit.

Today in History: October 29

1616: Sir Walter Raleigh, who left the Middle Temple and a potential law career for one of adventure and fame, is beheaded on Tower Hill.  There’s a lesson there.

1815: Daniel Decatur Emmett is born at Mount Vernon, Ohio.  He'll go on to invent the first truly American art form, the minstrel show.

1877: Nathan Bedford Forrest, who had become one of the richest men in the South as a slave trader before the Civil War wipes out his business, dies at Memphis, Tennessee.

1910: Logical positivist philosopher Alfred Jules Ayer is born at London.  “No proposition, other than a tautology,” he will argue, “can possibly be anything more than a probable hypothesis.”

1929: Black Tuesday on the New York Stock Exchange - a final collapse of prices that will send the nation spiraling down into the Depression.  The Dow Jones index will lose 89 percent of its value of 1932 and will take 25 years to recover to pre-crash heights.

1945: At $12.95 a pop, Gimbels Department Store in New York City sells $100,000 worth of the newfangled "ballpoint" pens the first day they go on sale in the U.S.

1954: Louis B. Mayer, the first U.S. executive to earn $1 million a year in salary (in 1936) dies at age 75.

1969: The first message is sent over the ARPANET, the forerunner of the Internet.

1983: Pink Floyd’s Dark Side of the Moon passes Johnny Mathis’s Greatest Hits to become the longest-charting album in music history.

Objective Unconscionability

The drafters of the UCC might have thought that over time case law would develop to give the concept of “unconscionability” some objective meaning.  But it's clear that the concept has a lot of subjective elements in it.

A proposal for squeezing subjectivity from the doctrine of unconscionability comes from lawyer Paul Bennett Marrow in a new article, called (not coincidentally) Squeezing Subjectivity from the Doctrine of Unconscionability, forthcoming in the Cleveland State Law Review.  Here’s the abstract:

Continue reading

New Biz Law Chair at MSU

Michigan State University's College of Law has a new Chair in Business Law, funded by a $4 million grant from the school’s president and his wife.  The Clifton E. Haley Chair in Business Law is one of two new positions funded by the gift.  The Chair, says the school, “will provide a stipend and additional program funds for the professors chosen for the distinction.”  The gift will, in addition, “establish two endowed scholarships for entering students with exceptional academic credentials.”

Haley is a 1961 graduate of MSU (when it was Detroit College of Law), and is the former chairman of the board of Budget Rent-a-Car.  He’s served as the law school’s president since 2001.

[Frank Snyder]

Post-Contract Event Can Cut Off Damages

When you measure contract damages, you usually do so as of the time of the breach.  But what if something happens after the breach that would have caused the plaintiff to suffer some of the loss even if the contract had been performed?  That was the question before the English Court of Appeal in Golden Strait Corporation v. Nippon Yusen Kubishiki Kaisha, decided last week.

In July 1998, NYKK chartered the tanker Golden Victory from Golden Strait.  The charter period was for seven years, through July 2005.  The charter had a specific provision governing wars:

33.  If war or hostilities break out between any two or more of the following countries: U.S.A., former U.S.S.R., P.R.C., U.K., Netherlands, Liberia, Japan, Iran, Kuwait, Saudi Arabia, Qatar, Iraq, both Owners and Charterers have the right to cancel this charter.

In December 2001, NYKK returned the ship to Golden Strait and repudiated the charter, apparently without any excuse.  In March 2003, the Second Gulf War broke out, involving the U.S., the U.K., and Iraq.  It was undisputed that the war would have justified NYKK in terminating the charter.  So the question was whether damages should be measured until July 2005, the original charter period, or should end as of March 2003.

The general rule, said the court, is that damages are measured as of the time of the breach.  But this rule isn’t invariable, nor is it the most basic rule of damages.  The most basic rule is that damages should put the party into the position it would have been in but for the breach.  If measuring damages at the time of the breach would create an injustice, a court may use another method.  Here, even if the contract had not been breached, NYKK would have had the right to terminate the charter in March 2003.  Golden Strait therefore could claim damages only to that point.

[Frank Snyder - thanks to Andrew Tettenborn for the tip]

Today in History: October 28

1704: The father of the “Social Contract,” English political economist John Locke, dies at age 72.

1919: Over President Wilson’s veto, the U.S. Congress passes the Volstead Act, outlawing the sale of alcoholic beverages in the United States.

1927: Pan-American Airways makes the first commercial international flight, from Key West, Florida, to Havana, Cuba.

1943: The U.S. Navy turns the destroyer USS Eldridge invisible and accidentally teleports it from Philadelphia harbor to Newport News, Virginia, and back again, accompanied by blue flashes of light.  All records of the “Philadelphia Experiment” are destroyed in a massive cover-up.

1948: Paul Hermann Müller of Swiss chemical firm J. R. Geigy wins the Nobel Prize in Medicine for his development of DDT as an insecticide.

1950: Lucky Strike Cigarettes presents the first episode of television's The Jack Benny Show, which will run for 15 years.

1955: William Henry Gates III is born at Seattle, Washington.

1986: The Neiman-Marcus catalogue offers a 100-year subscription to the Wall Street Journal for just $6,000, or $5,400 off the regular rate.

Non-Appealability Clause in Arbitration Agreement is Enforceable

In a case of first impression, the Tenth Circuit recently held that an agreement which forecloses judicial review of an arbitration award beyond the district court level is enforceable, so long as it is clear and unequivocal.

In a contract dispute concerning the payment of royalties for a patented invention, an arbitrator awarded the defendant $4.5 million.  The plaintiff filed an application in the District Court for the District of Colorado to vacate the arbitration award pursuant to the Federal Arbitration Act (FAA).  The District Court denied the application, and the plaintiff sought to appeal the District Court decision.  The Tenth Circuit dismissed the appeal, holding that it lacked jurisdiction over the appeal because of a non-appealability clause in the parties’ arbitration agreement.

In a previous case, Bowen, the court refused to enforce an arbitration agreement that permitted judicial review of the arbitrator’s award based on sufficiency of the evidence. Bowen held that the clause impermissibly expanded the right to judicial review under the FAA. The court reasoned that “[b]y agreeing to arbitrate, a party trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration." 

With Bowen holding that private expansion of judicial review is unenforceable, the court had to reconcile its acceptance of private restrictions on judicial review.  It held that the two views were both consistent with the underlying purpose of the FAA to reduce litigation costs by providing a more efficient forum.

Mactec v. Gorelick, (10th Cir. Oct. 25, 2005).

[Meredith R. Miller]

Red Owl Collectible Toys

Today in contracts class we discussed that classic promissory estoppel case, Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965).  In connection with teaching the case, I did some research on the internet.  Although I had hoped to learn about the history of the Red Owl grocery chain, that information mostly eluded me.  But, on the bright side, I did find a number of collectible toys bearing the Red Owl logo.  Apparently the Red Owl store is a popular component of midwestern Christmas displays. 

[Miriam Cherry]

Handbook Doesn't Change Employment at Will

An employee whose written employment application provided for at-will employment lost a claim that his employer’s policy bulletin promised dismissal only for just cause, in a recent decision by the Oregon Court of Appeals.  In the case, plaintiff Robert Ewalt signed an employment application with the Coos-Curry Electric Co-Op.  The application included these clauses:

     3. I understand and agree that if I am offered and accept a position, I may resign or be terminated, with or without cause or notice, at any time;
     4. I agree to conform to all existing and future Coos-Curry Electric Cooperative policies and rules, and I understand that such policies and rules may be changed, interpreted, withdrawn or added to as the company deems appropriate.

After he was hired, Ewalt was given a company handbook that stated:

These work rules are to be enforced fairly and uniformly, and not in an arbitrary manner by supervisors. Employees are entitled to adequate notice and warning of the consequences of their behavior and a fair and objective investigation of the facts must be made before discipline is administered. Where immediate action is required, an employee may be suspended, pending an investigation. Discipline short of discharge shall be used whenever possible for violation of these rules.

It also contained a list of things for which an employee could be terminated, and provided suggested punishments for first, second, and third violations.  After Ewalt was fired for “deficient job performance,” he sued, claiming that he had a contractual right to be afforded the protections of the policy manual.

The question, said the court, was whether the bulletin was an agreement to alter the original at-will employment created by the application and the hiring.  Here, the terms themselves were plainly "guidelines" for application of management discretion.  There was nothing to suggest any intent that employment at will be abrogated.  The original application had stated that the employer would be free to change or alter such procedures at any time.  Under the circumstances, there was no triable issue of fact and the contract claim was dismissed.

Ewalt v. Coos-Curry Elec. Coop., Inc., 2005 Ore. App. LEXIS 1353 (Oct. 19. 2005).

[Frank Snyder]