ContractsProf Blog

7 Crucial Words: "Except as otherwise specified in this Agreement...."

In sexier law subjects, you might discuss the 7 dirty words.  Here, at ContractsProf Blog, we talk about 7 crucial words: "Except as otherwise specified in this Agreement..."

On ocassion, we've mentioned Dan Rather's breach of contract suit against CBS.  Yesterday, a New York appellate court held that the trial court erred in declining to dismiss Rather's breach of contract claim against CBS.  It looked to the "pay or play" clause in Rather's contract and reasoned:

Rather alleges that he delivered his last broadcast as anchor of the CBS Evening News on March 9, 2005, and that, since he was only nominally assigned to 60 Minutes II and then 60 Minutes, he should have received the remainder of his compensation under the agreement in March 2005. Rather claims that, in effect, CBS "warehoused" him, and that, when he was finally terminated and paid in June 2006, CBS did not compensate him for the 15 months "when he could have worked elsewhere." This claim attempts to gloss over the fact that Rather continued to be compensated at his normal CBS salary of approximately $6 million a year until June 2006 when the compensation was accelerated upon termination, consistent with his contract.

Contractually, CBS was under no obligation to "use [Rather's] services or to broadcast any program" so long as it continued to pay him the applicable compensation. This "pay or play" provision of the original 1979 employment agreement was specifically reaffirmed in the 2002 Amendment to the employment agreement.

That Amendment also provided, in subparagraph 1(g), that if CBS removed Rather as anchor or co-anchor of the CBS Evening News and failed to assign him as a correspondent on 60 Minutes II or another mutually agreed upon position, the agreement would be terminated, Rather would be free to seek employment elsewhere, and CBS would pay him immediately the remainder of his weekly compensation through November 25, 2006.

We agree that subparagraph 1(g) must be read together with the subparagraph 1(f), which provided that if CBS removed Rather from the CBS Evening News, it would assign him to 60 Minutes II "as a full-time Correspondent," and if 60 Minutes II were canceled, it would assign him to 60 Minutes as a correspondent "to perform services on a regular basis." However, this construction does not render any language of the agreement inoperative, since, consistent with the "pay or play" clause, neither subparagraph 1(g) nor 1(f) requires that CBS actually use Rather's services or broadcast any programs on which he appears, but simply retains the option of accelerating the payment of his compensation under the agreement if he is not assigned to either program.

It is clear that subparagraph 1(g) applies only to a situation where CBS removed Rather as anchor of CBS Evening News and then failed to assign him "as a Correspondent on 60 Minutes II." The amended complaint alleges that when Rather no longer performed anchor duties at CBS, he was assigned to 60 Minutes II. Thus, Rather implicitly concedes that CBS fully complied with subparagraph 1(g).

Supreme Court erred in finding that subparagraph 1(g) modified the "pay or play" provision when it ignored the initial prefatory clause to the rest of that subparagraph, which states "[e]xcept as otherwise specified in this Agreement." As the defendants correctly assert, the seven words are crucial because they require subparagraph 1(g) to be read together with the "pay or play" provision, and thus, subparagraph 1(g) cannot modify the "pay or play" provision to mean that CBS must utilize Rather in accordance with some specific standard by featuring him in a sufficient number or types of broadcasts. As the defendants aptly observed, "the notion that a network would cede to a reporter editorial authority to decide what stories will be aired is absurd."

Rather v. CBS Corp., 2009 NY Slip Op 06738 (App Div 1st Dep't Sept. 29, 2009) (emphasis added).

[Meredith R. Miller]

The Sucker Theory of Contract

Do individuals view breach of contract as a moral harm?  Dave Hoffman (Temple) and Tess Wilkinson-Ryan (UPenn) explore this question by way of psychology and offer an explanatory theory of contract: we view the unrequited promisee as a sucker.  Their engaging paper "Breach is for Suckers" is forthcoming in the Vanderbilt Law Review.  Here's the abstract:

This paper presents results from three experiments offering evidence that parties see breach of contract as a form of exploitation, making disappointed promisees into “suckers.” In psychology, being a sucker turns on a three-part definition: betrayal, inequity, and intention. We used web-based questionnaires to test the effect of each of the three factors separately. Our results support the hypothesis that when breach of contract cues an exploitation schema, people become angry, offended, and inclined to retaliate even when retaliation is costly. This theory offers a useful advance insofar it explains why victims of breach demand more than similarly situated tort victims and why breaches to engorge gain are perceived to be more immoral than breaches to avoid loss. In general, the sucker theory provides an explanatory framework for recent experimental work showing that individuals view breach as a moral harm. We describe the implications of this theory for doctrinal problems like liquidated damages, willful breach, and promissory estoppel, and we suggest an agenda for further research.

[Meredith R. Miller]

Contracts Limerick of the Week: Fitzpatrick v. Michael

The Law in Action casebook includes two nicely contrasting cases in its section on the Statute of Frauds and problems that arise in enforcing contracts in the family setting.  The first is Fitzpatrick v. Michael, 9 A.2d 639 (Maryland, 1939), in which a man (Orion C. Michael) hires a woman (Marie Ellen Fitzpatrick) to be his nurse, chauffeur, companion, gardener and housekeeper for $8/week plus a promise to will her his home property with all its furnishings and furniture.  After she performs for two years, culminating in a trip in which she drove him from Maryland to Miami, Florida -- and somehow got him to Cuba as well -- Mr. Michael abruptly decides to end the contractual relationship by having her arrested for trespass when his attempts to get her to leave the property were unavailing.  There can be no doubt that Mr. Michael was satisfied with Ms. Fitzpatrick's performance until that point because, in my favorite fact from the case, he took out a newspaper advertisement to announce their happy return to "their home" after a vacation in Florida during which Ms. Fitzpatrick had driven the entire 4,400 miles "without the least mishap either with motor or tires."

Ms. Fitzpatrick sued for specific performance of the contract and relied on her part performance in order to get around the Statute of Frauds.  The court first announced that "[t]here can be no possible doubt that upon these facts the plaintiff should be entitled to some relief against the defendant."  Unfortunately, the only remedy that the court thought was available was to compel the defendant "to accept the personal services of an employee against his wish and his will."  The court found itself without authority to order people to live together when one of them did not wish to do so.

This case made me wonder why American courts are so shy of positive injunctions,  Clearly, if the court had ordered Michael to specifically perform he would have settled with Ms. Fitzpatrick.  So, here is how I would revise the opinion, were I to address Mr. Michael in verse:

Fitzpatrick v. Michael

I now pronounce you and Marie
To be bound by this solemn decree:
She will be your nurse,
'Til you leave in a hearse;
You owe that to your promisee.

Tune in next week for a Limerick on Brackenbury v. Hodgkin, which illustrates why a court might indeed have good reason to be wary of positive injunctions.

[Jeremy Telman]

Contracts Law & Injustice

This year, more than any other year, my students are telling me that they hate contracts.  It's nothing personal, or at least I don't think it is.  That is, they don't dislike my course, but they find it frustrating because contracts law seems to be set up to protect the well-resourced and the knowledgeable.  Sure, they may be able to advise their clients on how to protect their legal interests, but only by adopting strategies designed to exploit the credulity, timidity and distraction of the weak.  This is not quite the message I've been intending to convey, but I can see how my students would have concluded that it is.

We started by discussing intent to be bound and a court's indifference to our actual, subjective intentions when we have manifested a different intention by signing a document or by clicking "I agree" on  a EULA that we do not read and are not really expected to read or to understand.  We also discussed the fact that even expectation damages will not really make a party whole because of the American rule which prevents recovery of attorneys' fees and court costs.  In addition, recovery will not make a party whole when damages are speculative, and in Lefkowitz, at least some of my students felt the court could have provided plaintiff with more of an opportunity to establish his damages with reasonable certainty.  

Still, I was taken aback when I asked a student if she was concerned about the disconnect between legal and moral norms evidenced in Mills v. Wyman.  She responded, "Yeah, but we've already learned that contracts law is not about justice."  Ouch.  

Perhaps contracts doctrine will win their love back when we cover excuses.

[Jeremy Telman]

Postscript: I've just been re-reading Judge Posner's opinion in Classic Cheesecake.  My students made uncomfortable by contracts law's moral neutrality will not enjoy tomorrow's class.

Guitar Hero, Nirvana, (Giving) Love (a Bad Name), and Contract Law

Guitar Hero.  I've never understood the fascination, but I do have a number of friends who've purchased it "for the kids."  (Which, I must assume, is why one new iteration features the Beatles).

Apparently the new version of the game also has Curt Kobain as a character, and his Nirvana bandmates and wife Courtney Love aren't happy.  Love took her disappointment to Twitter and laid the groundwork for the lawsuit in < 140 characters:

For the record this Guitar Hero s--t is breach of contract on a Bullys part and there will be a proper addressing of this and retraction...WE are going to sue the s--t out of ACtivision we being the Trust the Estate the LLC the various LLCs Cobain Enterprises.

Love's attorney issued a statement, clarifying that the claimed breach of contract was the use of Cobain to sing songs of other artists:

Ms. Cobain is extremely upset about Activision's use of Mr. Cobain's likeness to sing the songs of others in its Guitar Hero game. . .. Activision was granted permission by Kurt's trust solely to use his name and likeness. Activision was not given an unbridled right to use Mr. Cobain's name and likeness. Kurt's songs have a special and unique meaning to his fans and his image and legacy are very important to Ms. Cobain.

The agreement Activision has with the trust doesn't allow them to use his likeness in ways that denigrate his image. We would hope Activision would do the right thing on its own and prohibit game users from using Kurt's image to sing others songs and if they don't we expect the trust to take appropriate action to protect Mr. Cobain's image.

Well, that presents an interesting question of contract interpretation: Does it "denigrate" Cobain's image to "belt[] out Flavor Flav ad-libs, Dave Mustaine giggle-rants, Billy Idol come-ons, and Jon Bon Jovi exhortations" -- including, "You Give Love a Bad Name" (and there's no small irony in that lyric)?  You be the judge:

Bon Jovi is the latest to comment, telling the BBC that he declined an offer to be part of the Guitar Hero series:

To hear someone else's voice coming out of a cartoon version of me? I don't know. It sounds a little forced...I had the paperwork, they wanted me to be on that game and I just passed...But no-one even broached the subject with me that I would be singing other people's stuff. I don't know how I would have reacted to that. I don't know that I would have wanted it either.

[Meredith R. Miller]

Macaulay & Whitford on Hoffman v. Red Owl Stores

When I first learned that Steward Macaulay and William Whitford had written a new “Law Stories” article about Hoffman v. Red Owl Stores, all I could do was groan.  I had already read Robert Scott’s piece on the case.  How much background material can I possibly incorporate into a discussion of one case?!?  But Professors Macaulay and Whitford have made use of their access to the plaintiff in the case, Joseph Hoffman, and do indeed have new information to share.  Based on new factual findings the two reach different conclusions from those of Professor Scott.  And they do so, I must say, with class, praising him as a giant of contracts scholarship.   As I have only read a draft of the Macaulay and Whitford article, I will not quote them, but you can find their draft here and their very respectful expression of disagreement with Professor Scott can be found in footnote 15 of the draft.

It is a piece that pays great dividends, not only for what it says about Hoffman, but also for all the pearls of wisdom the authors let fall along the way, which relate not only to contracts doctrine, but also to pedagogy and the advantages of the Law Stories approach to scholarship.  Here is the abstract from SSRN:

Hoffman v. Red Owl Stores is one of the most famous 20th century cases in American contract law, usually credited both with expanding the reach of the promissory estoppel doctrine and with opening up the issue of liability for precontractual reliance. It is a staple in contracts casebooks. By fortunate circumstance we have located the plaintiff, who retains a vivid memory about many of the circumstances in his famous case. We have interviewed him and we have examined the full trial record as well as the briefs on appeal. In this article we tell the story of what we have learned about this famous case, including what happened after the appellate decision. We conclude that a fuller understanding of the facts provides information about a promise that was made, yet was not described in the Court’s opinion. This promise supports the outcome of the litigation. Justice was done! The plaintiff substantially relied to his detriment after receiving specific assurances from an authorized agent of the defendant that he would receive a franchise if he relied by selling his bakery building and business. Reimbursing precontractual reliance in this circumstance can be done without creating a rule that would justify reimbursement of precontractual reliance in all circumstances.

I see that the article is now forthcoming in the Hastings Law Journal, so congratulations to the authors on that fine placement!

[Jeremy Telman]

NY Court of Appeals Hears Contract Damages Case

The 2009-2010 term of the New York Court of Appeals begins today, and scheduled for oral argument is St Lawrence Factory Stores v. Ogdensburg Bridge and Port Authority, a case about contract damages.

 

Here's the case summary prepared by Public Information Office of the Court:

St. Lawrence Factory Stores, a partnership of Frank Arvay and Richard Lepine, entered into an option contract with the Ogdensburg Bridge and Port Authority (OBPA) in February 1990 for an option to buy 12 acres of land to develop a retail factory outlet center. The contract also provided, "Since the objective of [OBPA] in offering this option is not merely the sale of land but rather to encourage the development of this specific project, [Factory Stores] shall erect a retail factory outlet and related facilities on said TRACT and said TRACT shall not be used by [Factory Stores] for any other purpose or purposes." Arvay, who eventually held an 85 percent interest in the partnership, sought financing and tenants for the project and exercised the option in July 1991. OBPA sent a letter to the partners in October 1991 expressing "concern about the viability of your project and your ability to perform" and threatening to void the contract if they did not provide proof of adequate financing by the end of the month. The partnership responded that, under the contract, securing financing was not a condition precedent to closing, which was scheduled for January 1992. At the closing, Arvay tendered his 85 percent share of the $298,000 purchase price, but Lepine refused to tender his share and walked out. Arvay then offered his personal check for the remaining 15 percent, but OBPA refused to accept it and declined to close.

 

The Factory Stores partnership sued for breach of contract seeking, among other things, reliance damages for recoupment of its investment costs. Supreme Court partially granted OBPA's summary judgment motion by dismissing the partnership's claims for reliance damages and lost profits. The Appellate Division, Third Department affirmed. Regarding reliance damages for costs incurred by Factory Stores in preparing to develop the site, the Appellate Division said, "The contract in question does not require plaintiff to engage in any of the preparatory tasks for which it seeks to be compensated. Simply put, this is a contract for the sale of land requiring plaintiff to tender defendant the sale price upon closing. Accordingly, plaintiff's reliance damages would encompass only those ordinarily incurred regarding such a contract, such as a title search, survey and attorney's closing fees."

 

After a bench trial, Supreme Court found that OBPA had breached the option contract in bad faith, but it awarded no damages. The Appellate Division affirmed.

 

Factory Stores argues that it should have been allowed to recover reliance damages because its expenses "were incurred in reliance upon the contract, they are ascertainable, and they arose naturally from defendant's breach in the ordinary course of things." It contends the Appellate Division mischaracterized the contract as one solely for the sale of land, saying the option contract "not only mandated the purchase and sale of the subject property, it also contractually obligated the plaintiff to develop/build, at its own cost, the very outlet center that plaintiff intended to develop/build anyway." Factory Stores also argues it is entitled to damages for lost profits and benefit of the bargain damages.

Here's the Appellate Division decision.

 

[Meredith R. Miller]

Blogging and Scholarship (More Self-Promotion)

The ContractsProf Blog may be a gateway drug that can lead to serious scholarship.  As depicted at left, it may have all started with an innocent conversation at Woodstock about contract law, party sophistication and the new formalism, and the next thing you know, you are writing law review articles.  The ContractsProf Blog has been cited to by name as authority in five such articles since 2008.

But here's where it gets really bizarre: a while back, I posted a Limerick on this blog about one of my favorite business associations cases, Lovenheim v. Iroquois Brands, Ltd.  Some months later, I received a brief e-mail saying "loved the Limerick."  The sender was Peter Lovenheim.  After a bit of research, I discovered that this Lovenheim was the Lovenheim, and I e-mailed back asking if he had any war stories to share.  We got in touch, and the result is a law review article, Is the Quest for Corporate Responsibility a Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd.  Like most law review articles in the Law Stories tradition, it is a piece that should illuminate aspects of the case that do not make it into the casebooks.

Here is the abstract.

Lovenheim v. Iroquois Brands, Ltd. is not only a standard teaching case in corporate law courses, it is routinely cited by the Securities and Exchange Commission (SEC) in response to corporations seeking to exclude shareholder proposals from proxy materials on the ground that the proposals are not significantly related to the corporations’ businesses. Despite the case’s prominence, its story has not been told in detail. That is a shame because the details of the case are as surprising as its outcome must have been when the court granted Peter Lovenheim the injunction he sought, forcing Iroquois Brands to include in its proxy materials Lovenheim’s proposal calling for an investigation into whether Iroquois’ French supplier of pâté de foie gras force-fed the geese whose livers they later harvested.

This Article explores the law of shareholder proposals and the reasons why the SEC and the courts permit proposals relating to social or ethical issues (social proposals) so long as those issues relate to the corporation’s business. After a history of the relevant SEC regulations and their fates in the courts, the Article presents the complete narrative of the Lovenheim case, providing details that are not captured in the decision or in the limited secondary literature relating to the case. Finally, the Article explores the legal landscape in the aftermath of Lovenheim. It explains why the case has remained good law in the 25 years since the case was decided and why corporations are not motivated to pressure the SEC to limit shareholders’ rights to bring social proposals.

You can download the paper here.

[Jeremy Telman]

Limerick of the Week: Leonard v. Pepsico, Inc.

As most readers of this blog likely know, John Leonard saw a Pepsi commercial and then attempted to accept what he took to be Pepsi's offer of a Harrier Jet.  The commercial seemed to indicate that one could get a Harrier in exchange for 7,000,000 Pepsi Points.  Relying on the Pepsi Stuff catalogue, Leonard learned that he could turn in 15 Pepsi Points and provide the remaining consideration in cash, so he attempted to accept Pepsi's purported offer with 15 Pepsi Points and just over $700,000 in cash.

Judge Kimba Wood found that the ad was not an offer, distinguishing it from the advertisments discussed in the last two Limericks cases, Lefkowitz and Izadi.  The ad, said Judge Wood, was not an offer, largely because the Harrier Jet was not included in the Pepsi Stuff Catalogue that provides further information about the Pepsi Points program. Moreover, Judge Wood added, the ad was a joke, and anybody who didn't recognize it as such was simply past help.  Explaining why a joke is funny defeats the purpose of jokes, Judge Wood opined. 

At least some of my students agreed.  They felt that, while both Lefkowitz and Izadi were taken in by intentionally misleading advertisements, Leonard must have known that the Harrier commercial was just supposed to be absurd.  Among other things, my students pointed out that Pepsico was unlikely to have access to a piece of military hardware like the Harrier.  They also deemed it unlikely that the high school kid featured in the commercial would have been able to get a license to fly a Harrier in any case.  

They are probably right, and yet, as far as we can tell, Lefkowitz was the only person to come forward to complain about having been mislead by the Great Minneapolis Surplus Store's ad.  Izadi seems to have been the only one who tried to trade in a matchbox car in order to get $3000 off a new Ford truck.  But Leonard was not alone.  He did not just happen to have $700,000 lying around; he raised the money necessary to accept Pepsi's "offer" by finding interested investors who thought his interpretation of the commercial as an offer had merit.

Interestingly enough, Pepsi released a second version of the commercial.  It contains only one change.  Now the "offer" requires 700,000,000 Pepsi points for a Harrier jet.  There is also a third version, which ads the additional verbiage: "Just kidding."  Apparently Pepsi's non-offer was not as clearly not an offer as it could have been.

Leonard v. Pepsico

Intent to be bound was a barrier
To Leonard's acquiring a Harrier.
Now he only drinks Coke,
And he gets every joke
But I would not say he's much merrier.

[Jeremy Telman]

Alan White on Drafting Exercises

The Third in a Series of Posts by:

Guest Blogger, Alan White 

Thanks to Professor Miller’s post on this blog, I became aware of the Goldberg v. (Paris) Hilton case, which fit nicely into this week’s discussions of uncertain expectation damages, reliance and restitution.  In addition to discussing the case, I decided to use it as the basis for my first drafting exercise.  Last year I asked students to draft a liquidated damage clause based on the Lake River v. Carborundum case from the casebook, in which Judge Posner invalidates a contractual remedy as a penalty.  Because Judge Posner’s opinion steps through the math to show why the contractual remedy resulted in a windfall, the exercise did not allow for a great variety of solutions.  The Hilton case was a considerable improvement in giving free reign to students’ creativity, while still inviting the predictable errors.  The liquidated damages exercise requires not only an understanding of when such clauses are deemed unenforceable penalties, but also a grasp of the expectation, reliance or restitution damages of which the clause is supposed to be a reasonable estimate.

While students are quick to grasp the idea behind the liquidated damages clause, their substantive errors fall into three general categories:

1) writing a clause that does not actually liquidate damages.  If the proposed clause simply describes the producers’ damages in a qualitative way, such as “all promotional expenses incurred at the time of the breach”, it does not provide the certainty of a fixed sum or a sum calculated according to an easy formula, which is the purpose of liquidated damages clauses. 

2) choosing a very conservative amount to avoid unenforceability as a penalty – certainly one can make sure the LD clause is enforceable by using a fixed sum that will always be less than actual damages, but that isn’t very good advocacy for the client seeking the LD clause.

3)  unhelpful recitals – it can be helpful to recite facts that support the fixed sum of damages in the LD clause, but only if those facts support the enforceability of the clause, by establishing the uncertainty of potential damages and the reasonableness of the estimate.

How, fellow teachers, might ask, does one grade 50 to 100 drafting exercises without consuming unreasonable amounts of time that could otherwise be spent on blogging and other key professorial duties?  I have adopted several strategies to get students writing while preserving my own sanity.  First, I have the writing exercises done in groups, not only to economize grading time, but because real-life lawyers typically collaborate on much of their writing, and it is never too early to learn to work with others.  Second, I try to keep writing exercises extremely short, such as drafting a one- or two-paragraph contract clause rather than an entire agreement.  Third, I provide limited written feedback in lieu of a grade, or in some cases assign a grade on a very simplified scale intended only to differentiate those who took the exercise seriously from those who did not.  Reading and writing feedback for the 15 liquidated damage clauses in this instance took me about 3 hours total.  Time well worth investing in the worthy goal of writing across the curriculum, while also reinforcing much of the material in remedies.

Professor Telman and I are on different topics at the moment, but will shortly be back in synch, at which point perhaps we can liven up the dialogue a bit. 

[Posted, on Alan's behalf, by Jeremy Telman]

A Simple Contract Issue or a Moral Issue? Ask a 5th grader.

This week, it is back to school for 5th graders across the U.S.  Maybe we should ask them who should win a legal battle that is heating up in Georgia. 

Kathy Cox, the superintendent of Georgia's schools, won $1 million on the Fox TV game show Are You Smarter Than A Fifth Grader?  On the show, Cox pledged to give the winnings to three public schools for the deaf and blind.  However, after Cox won, her husband filed for bankruptcy.  Now the creditors say that the game show earnings belong to them, not the Georgia schools.  The creditors point to Cox's contract with Fox; the Georgia schools present a powerful moral appeal. Here's the story from yesterday's NPR Morning Edition (you can listen if you follow the link): 

The Atlanta Area School for the Deaf is one of the schools to which Cox promised the money. The school had planned to use part of its share of the money to buy uniforms for its basketball team. The school's athletic director, Reginald Bess, says the team's uniforms are secondhand.

"Most of the uniforms that we have — sort of hand-me-downs — don't fit the kids. They're kind of squeezed into some of the uniforms, and it's a little bit embarrassing for them if they go play other teams," Bess says.

However, the school is now competing for the money with dozens of creditors of Cox's husband, John.

A homebuilder, John Cox filed for bankruptcy after his wife's TV appearance. Atlanta's slow housing market left him and his wife $3.5 million in debt — she had co-signed many of his loans.

Alex Teel, a lawyer for the bankruptcy trustee, says regardless of what Kathy Cox said on the show, the contract she signed with Fox TV says the money is hers.

"The terms of the agreements are that prize money won is income to the recipient subject to taxation," Teel says.

A Legal — And Moral — Issue

Teel says the question of who gets the money is a simple issue of contract law, and that the $1 million would be the Coxes' only asset. But for some in the deaf community, it's a moral issue.

About two-dozen hearing-impaired people marched recently in a quiet circle outside the bankruptcy trustee's office. They hoisted signs reading, "One Million Belongs To The Deaf Children" and "Robbing From The Blind, Shame On You."

Georgia state officials have vowed to fight for the $1 million.

"The state of Georgia's position is that Superintendent Cox was invited to appear on this game show solely in her official capacity as school superindendent, and accordingly, the winnings belong to the Department of Education for the benefit for those three schools," says Russ Willard of the state attorney general's office.

For her part, Cox says she never considered the winnings to be her money. But she does remember signing documents before the show.

"I'm not an attorney," she says. "And so I basically was just cooperating and thinking I was signing, you know, what everybody signs."

Fox TV plans to pay the $1 million winnings to the bankruptcy court, where a judge will decide whether Georgia or creditors will get the money.

[Meredith R. Miller] 

Save the Dates: February 26-27, 2010

Having skipped 2009 because of scheduling conflicts at the intended host school, UNLV's William S. Boyd School of Law is planning to host the Fifth International Contracts Conference (or its likeness) on February 26 and 27, 2010.  More details and a call for proposals to follow.

UPDATE: Please note that my initial post indicated February 27 & 28.  We'll stick with the Friday-Saturday schedule that has worked well at the prior conferences.

[Keith A. Rowley]

Teaching Filanto, S.p.A. v. Chilewich Int'l Corp.

I like to give my students a little taste of the U.N. Convention on the International Sale of Goods (CISG), just so they know that it is out there and so they know that the outcome can be different if their clients' contracts are governed by the CISG rather than the UCC.  Filanto, a case I learned about by reading William S. Dodge's scholarship, is one of the cases I always teach because the Battle of the Forms can come out differently under the CISG's Article 19 than it does under the UCC's Section 2-207.  The case also illustrates what I see as the dilemma of the Contracts: Law in Action approach. 

The authors of the casebook that I use are clearly right that the rules of offer and acceptance do not operate in the manner one might imagine if one only read the Restatement.  The UCC is supposed to be responsive to the more helter-skelter or haphazard way in which offer and acceptance really occur, as is the CISG. Filanto nicely illustrates the way real transactions occur:  Chilewich wants to purchase boots from Filanto and sell them in Russia.  It sends orders to Filanto and it attaches a form contract with a clause calling for arbitration of disputes in Russia.  Filanto responds in correspondence from time to time and always indicates -- without clearly stating -- that it does not want to be bound to arbitration in Russia.  The parties never resolve their differences, but a contract is formed because there is a flow of boots from Italy to New York.  Eventually Chilewich becomes frustrated with Filanto's performance and tries to enforce its understanding of the deal through arbitration in Russia.  Filanto resists and files suit in the Southern District of New York.  The issue before the court is whether the arbitration clause was part of the parties' agreement.

The court resolves the dispute by reviewing the confusion of correspondence, which constitutes an incomplete record of the parties' communications and which indicates that the parties themselves might have been confused about which terms attached to which transactions.  Out of the mass of documents, the court plucks out what it takes to be an offer, which it deems accepted through performance.  This requires some real detective work, because the parties are performing other contracts while the offer was outstanding, and it's pretty hard to identify which conduct could be construed as a response to a particular offer.  What the court describes as Filanto's written "acceptance" of the offer comes five months after what the court regarded as the offer.  The outcome of the case might well have been different if the roulette wheel had stopped on a different document as the "offer" or on a different mode of acceptance.  As delivery of the boots did not begin until after Filanto's writing, a court could have construed that writing as an offer, which was accepted through Chilewich's delivery of the boots.

Law in Action tells us that real-world transactions are like this.  The parties exchange contradictory forms which neither party ever reads, and then they both proceed based on their separate understandings of the agreement.  Neither party anticipates breach, and if breach occurs, both parties assume that they will work out a new deal rather than litigate, and so the terms of the agreement never really matter much.  The problem is that, every once in a while, the parties do litigate, and when they do, courts resolve the dispute by trying to pluck out of their very messy interactions a precise moment of offer and acceptance.  Lawyers come in handy, if at all, only in drafting form purchase orders and form acknowledgments that are designed to lead courts to determine that their clients' forms contain the terms that should govern the deal.  

[Jeremy Telman}

Contracts Limerick of the Week: Izadi v. Machado (Gus) Ford, Inc.

As I mentioned in introducing last week’s Limerick, although Lefkowitz and Izadi cover much the same ground, I think they go well together.  In fact, I also have the students read Leonard v. Pepsico., Inc., which is always good for a laugh.

My students raised some interesting issues with respect to Lefkowitz.  As you may or may not recall, Lefkowitz is about a guy who responds to an ad advertising various fur coats and stoles for sale on a first-come-first-served basis for $1.  When Lefkowitz shows up and tries to buy a fur, the store owners say that they have a policy against selling to men.  Lefkowitz tries the trick again two weeks later and gets the same response.  He sues, claiming breach of a contract for sale. The court sides with Lefkowitz, construing the ad as an unambiguous offer.

We had a really interesting discussion of damages this time around.  The court gave Lefkowitz his expectation damages for the second failed attempt at purchase, which was for a stole valued at $139.  The court refused to grant him damages for his first failed attempt because the ad was ambiguous as to the value of the coats: “worth to $100.”   We explored whether Lefkowitz’s attorneys could not have elicited deposition testimony or gotten some appraisal of the coats.  Perhaps if they failed to do so, that’s their fault and Lefkowitz was properly precluded.

But some of my students wondered whether Lefkowitz should be entitled to collect for his second attempt at purchase.  After all, it seems likely that he was unaware of the store policy against selling women’s coats to men when he first showed up in the Great Minneapolis Surplus Store.  But the second time he came, he knew that the ad in question was not an offer directed at him.  Why grant him recovery?   It seems like the court split the baby, but they gave Lefkowitz the wrong half.  Eww; that’s a hideous metaphor, but you get the point.

I am somewhat sympathetic to Lefkowitz.  I don’t know about Izadi.  Izadi claims to have construed Machado Ford’s ad as meaning that he could get $3000 off a new Ford car or truck if he traded in “any vehicle.”  He showed up with a vehicle which the court acknowledged was likely worth far less than $3000.  Was it a tricycle?   That’s a vehicle.  I feel for Machado Ford, because they were arguing before a highly unsympathetic Judge Alan R. Schwartz.  I’ve had that experience and it was not pleasant.

Judge Schwartz got himself in a lather about what he took to be an intentionally misleading advertisement.   In order to establish that the advertisement was misleading, one might try to learn how many people were actually mislead.  As far as I can tell, only Izadi claimed to have been taken in by the ad -- after all, the case is not a class action -- and I suspect that Izadi was not mislead at all but in fact was opportunistic in his reading of the ad.  

But here’s the rub: Judge Schwartz offers two justifications for ruling against Machado Ford.  First, he reads the ad as an unambiguous offer.  That’s a bit hard to swallow.  The ad is confusing, but that argues for rather than against ambiguity.  The second justification is that people ought not to be allowed to take advantage of consumers with intentionally misleading ads.  I certainly agree with that, but Judge Schwartz is able to find no Florida authority establishing that rule as a matter of contract law.  

I thus use this case to introduce my students to the problems of institutional competence and judge-made law.  In order to do so, I edit out the case which indicates that defendant could also be liable under relevant Florida consumer protection statutes. 

As Judge Schwartz notes, other states have adopted the rule of contracts law that “a binding offer may be implied from the very fact that deliberately misleading advertising intentionally leads the reader to the conclusion that one exists,” but Florida courts had not recognized that rule.  Why not leave it to the legislature to do so, I ask my students.  This can lead to an interesting discussion of why judges often feel that they have to make or adopt legal rules on the fly rather than wait for the slugs in the legislature to act.

Well, this post is already too long.  I’ll have to compose a Limerick for Leonard so that I can explain where that case fits in next week.

Izadi v. Machado (Gus) Ford, Inc.. 

Want to make a used-car dealer weep?
Try to trade in your rusting junk-heap,
Then pretend that your mad
On account of his ad
And seek justice not blind but asleep.

[Jeremy Telman]

Contract Law, Party Sophistication and the New Formalism [File this under: Self-Promotion]

While I took a little break from blogging about the contract foibles of faded celebrities, I managed to get out a draft of "Contract Law, Party Sophistication and the New Formalism."  Coming to a theater near you, courtesy of the Missouri Law Review.  For now, I welcome your thoughts and feedback.  Here's the abstract:

With increasing frequency, courts are mentioning party sophistication as relevant to whether a contract has been formed, whether a contract is enforceable, how the contract should be interpreted, and even, in some instances, the determination of an appropriate remedy.  Sophisticated parties are held to a different set of rules, grounded in freedom of contract.  It is presumed that a sophisticated party was aware of what to bargain for and read (or should have read) and understood (or should have understood) the terms of a written agreement. 

But, just what do courts mean when they call a contracting party “sophisticated”?

"Sophistication” is a slippery word.  Courts and scholars have not established instructive criteria, and often presume that parties to a commercial transaction are sophisticated.  Widely cited and highly regarded works in the area of contract law have stated that their theories only apply to sophisticated parties, without a serious attempt to explain who falls into that category.  Likewise, all too often, courts label parties “sophisticated” without any analysis.

 

Part I of this Article positions the discussion in theoretical context, and describes the significance of party sophistication as a compromise between formalist and realist concerns.  Part II collects examples of contexts in which courts have used party sophistication as a tool to organize the world of contracting parties and, with that, the applicable legal principles.  For sophisticated parties, in answering a wide array of contracts questions, courts employ a formalist approach.  Part III begins descriptively and addresses the general lack of meaningful assessment of party sophistication.  Drawing upon review of hundreds of cases, Part III details the attributes common among parties that courts have deemed sophisticated, and begins to draw the contours of a standard for sophistication.

Finally, Part IV presents the central normative claim of this Article: courts should take a more deliberate and thoughtful approach in addressing party sophistication.  Drawing upon the extensive review of case law, Part IV provides a definition of sophistication that asks whether the contracting parties are repeat players in the relevant market for the transaction.  The proposed standard would require courts to do a contextual, factual assessment of the comparative knowledge and experience of the parties as it relates to the nature of the transaction.  As it stands now, however, in the absence of a meaningful definition of sophistication, courts are not actually addressing the context of the deal.  Rather, they are simply reciting well-worn clichés about “sophisticated parties dealing at arms’ length.”

You can download the paper here.

[Meredith R. Miller]

More Bad News For Seasons Ticket Holders

One issue in the dispute, discussed below, between Washington Redskins fans and the team is the team’s duty to mitigate damages when it resells tickets reclaimed from defaulting seasons ticket holders.  Some of the Redskins fanned interviewed for the Washington Post story decried as “double dipping” the Redskins’ practice of collecting full damages for unused tickets and then reselling the tickets and collecting again. 

Alas, as reported in Connecticut Sports Law, in NPS, LLC v. Minihane, 451 Mass. 417 (2008), the Massachusetts Supreme Judicial Court enforced a liquidated damages clause in a ten-year agreement for club-level seats at New England Patriots games.  The defendant in that case was ordered to pay damages for the full value of the ten-year contract, although he had only used the seats for one year.  The trial court had struck down the liquidated damages clause as “grossly disproportionate to a reasonable estimate of actual damages made at the time of contract formation.”

The Massachusetts Supreme Judicial Court reversed, based on a finding that the damages would have been difficult to ascertain at the time the parties entered into the contract and that the liquidated damages clause represented a “reasonable forecast of the damages expected to occur in the event of a breach.”  The court reasoned that the team could not predict in advance how long it would take them to resell the seats.  In light of the benefit defendant would have enjoyed of having guaranteed seats for ten years without the threat of a price increase, the court found that the damages clause was not “unconscionably excessive.”  Once the liquidated damages clause was found to be enforceable, mitigation evidence was deemed irrelevant. 

[Jeremy Telman – HT again! Zachary Calo]

And Now. . . A Feel Bad Story: Washington Redskins v. Their Fans

Although I am a fan of the Chicago Bears (Walter Payton edition), I’ve always had a bit of a soft spot for the Washington Redskins and especially for their Hogettes.  Well, I’ll always love those beefy cross-dressing pig-snouted guys, but my sympathy for the team has just fizzled.  As reported in the Washington Post, the team has gone to court to enforce the terms of long-term contracts with seasons-ticket holders, even if the ticket holders are unable to pay because of unforeseen changes in circumstances, such as the loss of their livelihoods.  The Post tells the story of Pat Hill, a seasons-ticket holder since the early 1960s.   Now 72 and still working in real estate, Hill has had some down years recently and can no longer afford $5300 a year for her two loge seats behind the end zone.

Unfortunately for Hill, she had entered into a 10-year agreement with the Redskins, which the team is demanding she honor.  The team sued and won a $66,364 default judgment.  Redskins General Counsel, David Donovan, claims the team has done its best to work with its fans and has compromised with those open to negotiation.   He was not familiar with Ms. Hill’s case.  While Mr. Donovan was under the impression that all teams sue their fans, the Post reports that many do not. The Bears, alas, do so on occasion, but I’m sure it’s only if the fans are downright evil. 

[Jeremy Telman -- HT Zachary Calo]

UPDATE: Roxanne's Revenge: Not A True Story [File This Under Debunked Feel Good Stories]

We previously mentioned a story reported in the Daily News about Roxanne's Revenge - the heartening story about a young rapper who got a PhD on Warner Music because of a clause promising to pay for her education "for life."  According to Slate, the story appears to be false. Perhaps it is a better lesson for the journalism students than the law students.

It sure was a good story while it lasted.

[Meredith R. Miller] 

Behavioral Economics and Peevyhouse

The Second in a Series of Posts by:

Guest Blogger, Alan White 

The Peevyhouse case offers all sorts of possibilities for law and economics discussions of the traditional and behavioral varieties, a few of which we were able to touch on in class last week.  The issue, after all, is how (and whether) to place an objective value on a subjective injury.  According to the Oklahoma Supreme Court, Garland Coal breached its promise by spoiling roughly 10% of the Peevyhouses’ 60-acre farm and failing to repair the damage.  Land in the area sold for $50 an acre, so presumably Mr. Peevyhouse could simply have taken his $300 damage award and purchased another 6 acres nearby.  But of course the spoiled land was his family farm, and he was not indifferent as between his 6 acres and a substitute parcel.  This is the well-known endowment effect.  The value one places on an item depends on whether one is buying it or selling it.  We value more highly what we own than what we want.  The market price in this context thus serves to advance values of efficiency and consistency, but not competing values of autonomy and equity.

Equally interesting is the fact that the amount of money that would have satisfied Mr. Peevyhouse, we learn from Professor Maute’s excellent article, fluctuated dramatically as the dispute progressed.  Prior to the breach, Mr. Peevyhouse rejected a $3,000 advance cash payment in lieu of the promise to restore the land.  When first confronted with the contract breach, he asked for only $500 in lieu of specific performance, on the theory that he could rent a bulldozer and repair the damage himself.  When Garland Coal refused that demand, Mr. Peevyhouse retorted that he would demand an additional $500 for each time he was required to visit Garland’s office, a demand that quickly reached $3,000, the amount he had earlier rejected.  In litigation, he demanded $25,000, the highest available estimate of the cost of repair if performed by a contractor.  While rational choice theory could explain the escalating demands as reflecting Mr. Peevyhouse’s own estimate of transaction costs, a behaviorist might say that preferences are shaped, not fixed, and that Mr. Peevyhouse’s indifference curve jumped around partly as an emotional response to his separate preferences for fair treatment.

The common law, in its special treatment of specific performance for land sale contracts, seems to recognize the endowment effect and the inadequacy of market pricing mechanisms as compensation for land, reflecting in part feudal traditions that tied social status to land ownership.  That recognition, however, does not always extend to contract breaches that result in damage to land. 

[submitted, on Alan's behalf, by Jeremy Telman]

Hoddeson v. Koos Bros. Revisited

Is Koos Bros. estopped from denying liability for a contract entered into by a "silver-haired mountebank" on its sales floor?  See Prof. Telman's Limerick for more details about this Business Associations staple on agency and estoppel.

After discussing the case, one of my awesome students alerted me to this Improv Everywhere mission at Best Buy:

Imposters Everywhere!

[Meredith R. Miller]