ContractsProf Blog

Thursday, August 29, 2024

Reviewing Larry DiMatteo and Irma Russell and Barbara K. Bucholtz, Part III

This is the third post in my series on Larry Di Matteo's Principles of Contract Law and Theory (Principles) and Irma Russell and Barbara K. Bucholtz's Mastering Contract Law (Mastering). The aim is to all some attention to these two books while using them to stimulate my thinking as I once again consider how to teach contracts law to first-year students. The two books are very different. Principles is a scholarly textbook addressing advanced topics at a very high level of sophistication. Mastering is a study-guide for first-year students. They both have their charms, but they are very different. Each entry in this series will cover a chapter in each book, with some splitting of chapters because the books don't have the same number of chapters. Most weeks, the chapters will not cover corresponding subject-matters. So be it.

The third chapter of Principles begins with a discussion of freedom of contract, which it splits into negative and positive freedom. Positive freedom is the freedom of individuals to contract without state interference in the form of required terms; negative freedom is freedom from state interference in the form of prohibited terms. And yet Principles notes that, at least in the context of asymmetrical bargaining, which is ubiquitous, some limitations on freedom of contract are unavoidable. (58)

Editorializing here, this is a highly libertarian presentation of positive and negative freedom. The tradition of positive freedom rooted in continental liberalism acknowledges the role of states in creating spheres in which individuals can exercise their freedom. That is, from the perspective of central Europeans prior to German and Italian unifications and the collapse of the Habsburg Empire, it was hard to imagine freedom without a strong state to create a realm in which freedom could develop and nourish.

From this perspective, the two freedoms that Principles describes are simply two sides of the same negative conception of freedom. What is left out is the, in my view, necessary intervention of the state, through, to give just one obvious example, the provision of a court system facilitating the enforcement of contractual obligations. We will soon be posting reviews of recent works by Hanoch Dagan (above left) and Rebecca Stone (right) on freedom of contract, and suffice to say that both of them articulate theories of freedom of contract capacious enough to accommodate much more forceful interventions than contemplated in Principles. That said, the difference may come down to Principles regarding freedom of contract as a relatively narrow principle subject to external limitations, while Professors Dagan and Stone, especially the former, see freedom of contract itself as the source of the limitations.

The next section of the chapter explores five tensions that contracts law seeks to balance. First, Principles acknowledges that while contract law needs to project stability in order to promote confidence in the enforceability of binding promises, the law evolves, usually slowly but sometimes jarringly, in response to exogenous impulses like the arrive of the New Deal or electronic contracting. (58-59) In the next section, Principles veers away from the libertarian perspective discussed above and acknowledges the role of default terms and gap fillers in facilitating contract formation. Regulation might seem in tension with facilitation. In fact, they are symbiotic. (60-61) Third, Principles identifies a tension in theories of enforcement. Classical doctrine enforces based on promises; modern doctrine also enforces based on estoppel. (62-63) Principles next explores a tension between formal and substantive rules. The former may at times prevent the effectuation of the latter, as when a statute of limitation lapses or a contract cannot be enforced for wont of a wax seal. The abandonment of the writ system and a more capacious concept of consideration have eased some of these tensions, but they persist. (64-65) Finally, Principles notes that the seeming tension between the civil law tradition, which favors specific performance and the common law preference for expectancy damages is not as pronounced as it seems. The common law embraces specific performance when unique goods or property are involved, and Article 2 provides for an expansion of the availability of the remedy. Civil courts encourage settlement in lieu of specific performance, because the latter requires potentially costly monitoring (65-66)

In the final section of the chapter, Principles explores tensions in contracts theory as opposed to contracts doctrine. Freedom of contract is tempered by concerns over justice in asymmetrical contracts of adhesion. One-sided terms can be enforced only if reasonable (68-69) or meaningful consent can be guaranteed through disclosure requirements. (70) There follows a discussion of how relational contract theory and the doctrine of good faith result in shifts in contracts doctrine. (71-73) I would add that relational contract theory is especially important in understanding a tension mentioned earlier in the chapter (59) between the law on the books and the law in action. Non-breaching parties may forgive the breach in order to preserve the relationship, or the parties might renegotiate the present deal to adjust for changed circumstances.

Chapter 3 of Mastering is about interpretation. This strikes me as a surprising choice and not the only organizational idiosyncrasy of the book. I would treat formation before getting to interpretation. I suppose the justification for starting with interpretation is that it permits the Authors to foreground the principle that what courts ought to enforce is the intentions of the parties. So even before we learn about formation, we are thinking ahead to the end game of expectation damages.

An additional benefit of foregrounding rules of interpretation is that many of them have applications beyond the realm of contracts law. (20) They begin with Williston's distinction between interpretation and construction (21), on which see Gregory Klass's work, reviewed here. They then proceed to a discussion of interpretation in the statutory context, beginning with the "no vehicles in the park problem" and discussing the role of statutory definitions, legislative history, explication through case law, and public policy as a tool of interpretation. (22-24)

The Authors next discuss canons of construction, mostly focusing on contractual construction, but occasionally referencing statutory construction as well. (24-28) This is valuable material and it is well presented. I just think about how a first-year student would use this book. I have never seen a casebook or treatise that discusses interpretation before formation. The Restatement begins with formation. And so, if I were assigning or recommending Mastering to my students as a supplement, I would tell then to skip chapter 3 and return to it after we have completed formation. By that time, they will have read enough case law so that we could draw from that material to give examples of how the cannons might be deployed.

After a very short section on treatment of extrinsic evidence under the common law (29), the chapter next covers extrinsic evidence under Article 2, which they say is similar to common law rules on extrinsic evidence. (29-31) The chapter concludes with a brief section on the parol evidence rule (32), which certainly makes sense in connection with the discussion of extrinsic evidence, but is a bit odd, given that the authors say the parol evidence rule is not a rule of interpretation (19) and is covered separately in Chapter 9. I teach the parol evidence rule in the section of my course devoted to interpretation, but I agree that it is not a rule of interpretation. However, I would say the same about rules relating to the admissibility of extrinsic evidence.

Again, I have reservations about organization and scope of treatment. Chapter 9 provides a thorough treatment of the parol evidence rule but no further discussion of extrinsic evidence. Again, thinking about this book as something for first-year students, I think the discussion of extrinsic evidence is misplaced here and too cursory, given the importance of the subject matter and its conceptual difficulty. The Authors lay out the relevant UCC rules relating to extrinsic evidence clearly enough, but they provide only one concrete example, and even there they do not cite to a case but just describe it. Absent an opportunity to see how these rules play out in the case law, I don't think students can appreciate the dramatic effects of the UCC's rules on extrinsic evidence in cases like Nanakuli and Columbia Nitrogen. But those are pretty complex cases, best introduced after students have gained some familiarity with the material.

The first post in this series can be found here
Part II is here.

August 29, 2024 in Books, Commentary, Contract Profs, Recent Scholarship, Teaching | Permalink | Comments (0)

Wednesday, August 28, 2024

Sidney DeLong on Contracts in Moby Dick -- Warning: Thar Be Spoilers!

By Jeremy Telman

Ahab’s Doubloon: A Contracts Analysis

Sidney W. DeLong

As he showed in Billy Budd, Herman Melville (right) knew his way around the law of the sea. Moby Dick is not generally thought of as a text on the common law but upon whales and whaling. Yet one of its central episodes invites a contract analysis.

Whaling Wage Contracts. Early in the novel Moby Dick, the narrator, Ishmael, describes the contract (“articles”) that a crew member of a whaling vessel signed with the owners of the vessel before beginning the voyage,

I was already aware that in the whaling business they paid no wages; but all hands, including the captain, received certain shares of the profits called lays, and that these lays were proportioned to the degree of importance pertaining to the respective duties of the ship’s company. I was also aware that being a green hand at whaling, my own lay would not be very large; but considering that I was used to the sea, could steer a ship, splice a rope, and all that, I made no doubt that from all I had heard I should be offered at least the 275th lay—that is, the 275th part of the clear net proceeds of the voyage, whatever that might eventually amount to.

The lay of a crewmember was often so little that after two or three years voyage, it might not cover the cost of liquor and other articles purchased on credit from the ship.

Shortly after the Pequod had set sail, Captain Ahab appeared on deck and addressed the assembled crew, beginning with a sort of catechism:

“What do ye do when ye see a whale, men?”

“Sing out for him!” was the impulsive rejoinder from a score of clubbed voices. . . .

“And what do ye next, men?”

“Lower away, and after him!”

“And what tune is it ye pull to, men?”

“A dead whale or a stove boat!” . . . .

These answers faithfully recited the duties undertaken by all the crew, in return for which they were to be paid their modest lays.

Ahab then made his offer:

“All ye mast-headers have before now heard me give orders about a white whale. Look ye! d’ye see this Spanish ounce of gold?”- holding up a broad bright coin to the sun- “it is a sixteen-dollar piece, men. D’ye see it? Mr. Starbuck, hand me yon top-maul.”

. . . Receiving the top-maul from Starbuck, he advanced towards the main-mast with the hammer uplifted in one hand, exhibiting the gold with the other, and with a high raised voice exclaiming: “Whosoever of ye raises me a white-headed whale with a wrinkled brow and a crooked jaw; whosoever of ye raises me that white-headed whale, with three holes punctured in his starboard fluke- look ye, whosoever of ye raises me that same white whale, he shall have this gold ounce, my boys!”

“Huzza! huzza!” cried the seamen, as with swinging tarpaulins they hailed the act of nailing the gold to the mast . . . .

As things turned out, it was Ahab himself who first sighted Moby Dick. But then, to keep the crew motivated, he enlarged his offer:

“[A]dvancing toward the doubloon in the main mast – ‘Men, this gold is mine, for I earned it; but I shall let it abide here till the white whale is dead; and then, whosoever of ye first raises him, upon the day he shall be killed, this gold is that man's; and if on that day I shall again raise him, then, ten times its sum shall be divided among all of ye! Away now!’”

Suppose it was not Ahab but a crew member who first raised Moby Dick: Could he have enforced the promise of the doubloon upon returning safely to port? Or suppose the conditions of the second promise had been fulfilled: Could the crew enforce the second promise of ten times the sum?

Alas, Melville made sure that we will never know whether the promises Ahab made to the crew of the Pequod would have stood up in a Nantucket courtroom at the end of the voyage. Moby Dick was “raised” but never killed. Ahab’s doubloon went to the bottom nailed to the main mast of the Pequod , while Ahab’s fate was to die affixed to the curse´d whale, entangled in his harpoon line, leaving the contracts questions unanswered.

Until now.

The Pre-Existing Duty Rule, Then and Now. There is a good reason that older contracts casebooks illustrate the law of contract modification with cases drawn from the 19^th century history of seafaring. After the crew members signed their employment contracts (“articles”), they embarked on a journey that could, in the case of whaling vessels, last for years. Once at sea, the parties were locked in a bilateral monopoly: the crew could not quit their jobs and the shipowner could not hire replacements. Under these conditions, a sea captain’s promise to raise the crew’s wages became especially suspect when they returned to port.

In The Death of Contract, Grant Gilmore discussed the law of contract modification, duress, and the pre-existing duty rule citing Harris v Watson 170 Eng. Rep. 94 (1791) and Stilk v Myrick 170 Eng. Rep. 851 (1809). Each decision refused to enforce a captain’s unsolicited offer to pay extra wages to crew members who were unexpectedly forced to work short-handed or in dangerous circumstances. The English courts cited both the pre-existing duty rule and grounds of public policy: The crew had a contractual duty to work under all conditions and so gave no additional consideration for the promised wage increase. More importantly, permitting crews to enforce promises for extra wages would tempt the crew, once at sea, to make extortionate demands or even threaten mutiny. For an empire built on control of the sea, public policy demanded that their claims receive no judicial support.

In America, judicial hostility to mid-course modifications of seamen’s wages continued into the 20^th Century and applied even when the crew was not at sea but only at a remote land location. In the familiar case of Alaska Packers Ass’n v Domenico, 117 F. 99 (9^th Cir. 1902) the court refused to enforce a contract modification raising the crew’s rate of compensation for salmon fishing after the crew complained of bad nets. Law and economics scholars later justified Alaska Packers by its tendency to forestall the “hold-up game” otherwise made possible in locations remote from labor markets. As an added bonus, the mechanical pre-existing duty rule was far less costly to administer than a rule requiring a finding of duress or bad faith as a condition to non-enforcement.

Alaska Packers also found seamen’s wage claims under modified contracts to be unenforceable under agency law. The captain or master of the ship did not have actual or apparent authority to make promises binding on the owners. The captain himself was only a higher-paid employee of the owners.

Thus, under the common law in effect when the Pequod sailed, Ahab’s promise of the doubloon was unenforceable because it was not supported by consideration: the Q&A that preceded the offer showed that the crew were already committed to raise and hunt any whale to the death. Ahab offered them a gift, a bonus for doing what they were legally obliged to do.

The crew might argue that their duty was owed to the Pequod’s owners, but the offer came from Ahab, to whom the crew owed no pre-existing duties. The doubloon represented a side deal. But this argument might have outraged the court even more than the modification argument and for stronger public policy reasons. McDevitt v Stokes 192 S.W. 681 (Ky. 1917) refused to enforce a bettor’s promise of extra pay to a jockey if his horse won a race. Kentucky judges didn’t fancy enforcing bribes of jockeys by racing touts. Likewise, a Nantucket court concerned with protecting the whaling industry would have refused enforcement of a captain’s promise of extra wages to achieve a personal vendetta as tending to divert the crew from their primary mission, as it disastrously did in the case of the Pequod.

The Pre-Existing Duty Rule Today.

The strong public policies associated with marine commerce that led courts to refuse enforcement of promises of extra pay made on the high seas did not persist into land-based commercial contracts in the 20^th Century. Employers’ fears of employee duress have been replaced by employers’ need for flexibility in the rapid modification of ongoing employee contracts. Employers now value the ability to make binding promises of extra compensation in circumstances in which they have a need to increase employee incentives.

The application of the pre-existing duty rule to modifications was modified in Restatement (Second) of the Law: Contracts. Retrospectively applying modern law to Moby Dick, if the bonus offers had been made by the owners, they might well have passed muster as modifications of the crew’s articles.

Section 89 Modification of executory contract.

A promise modifying a duty under a contract not fully performed on either side is binding

a) If the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or
b) to the extent provided by statute; or
c) to the extent that justice requires enforcement and view of material change of position in reliance on the promise.

The crew might have argued that, even though killing Moby Dick was within the literal definition of their duties, nevertheless the additional reward for raising Moby Dick was fair and equitable in light of the extraordinary risk involved, a risk that was not anticipated when they signed on. Indeed, Ahab’s mad quest for the whale destroyed the Pequod and cost the crew their lives. Moreover, once the Pequod had given chase to the deadly whale, the men had indeed incurred a “material change” in their safety in reliance on the promise of the doubloon.

Their reliance might also make Ahab’s later promise of ten times the original bonus enforceable as a gift promise under the modern principle of promissory estoppel, Their reliance was both foreseeable and detrimental. Refusal of enforcement would have been unjust in light of the risks the crew incurred in reliance on the promise.

The crew would still face the agency argument, however. But the claim for the doubloon against its owner, Ahab, should have been enforceable both as a unilateral contract and under the promissory estoppel principle. The crew foreseeably endangered themselves, as they were intended to do, in reliance on the promise and justice surely requires that their reliance made the promise enforceable.

But even if by some rationale the crew (or their survivors) should be deemed to have earned the doubloon, the problem would remain of collecting their bounty. In the literary undersea world, the doubloon remains forever affixed the mast of the Pequod.

August 28, 2024 in Books, Commentary, Labor Contracts | Permalink | Comments (0)

Monday, August 19, 2024

Reviewing Larry DiMatteo and Irma Russell and Barbara K. Bucholtz, Part II

By Jeremy Telman

This is the second post in my series on Larry Di Matteo's Principles of Contract Law and Theory (Principles) and Irma Russell and Barbara K. Bucholtz's Mastering Contract Law (Mastering). The aim is to all some attention to these two books while using them to stimulate my thinking as I once again consider how to teach contracts law to first-year students. The two books are very different. Principles is a scholarly textbook addressing advanced topics at a very high level of sophistication. Mastering is a study-guide for first-year students. They both have their charms, but they are very different. Each entry in this series will cover a chapter in each book, with some splitting of chapters because the books don't have the same number of chapters. Most weeks, the chapters will not cover corresponding subject-matters. So be it.

The second chapter of Principles is a foray into comparative contracts law. It covers the differences between civil and common-law approaches, reciprocal influences, the internationalization of contracts law, and hard and soft law.

Principles identifies two virtues of the comparative perspective. First, knowing other traditions leads us to the humbling recognition that our way of doing things is not the only plausible way. Second, we can take some comfort as Professor DiMatteo reminds us of Hugh Beale's insight: despite differing terminologies that seem to divide the traditions, commonalities predominate. (36-37) Some of these commonalities are the product of legal transplants, and Principles highlights some imports into our common-law system that come from surprising sources. (37). Especially in private law, convergence between common law and civil law is the norm, either through revision or transplant. (40) Exceptions are rare. Specific performance is a standard remedy in the civil system and extraordinary in the common law. (45) Civil law enforces penalty clauses; common law does not. (45-46) More fundamentally, civil law is code based, and courts fill gaps through extrapolation and analogy. Common law courts are suspicious of legislation and construe statutes narrowly to avoid sudden jolts to the slow liquidation of legal norms based on precedent. (40)

One area of notable difference that occupied a lot of time at the recent KCON Conference is good faith. The concept is fundamental in civil law, an implied term in contracts in the U.S., and largely avoided in UK law, outside of the context of consumer contracts. (41-43) Unlike in the U.S., civil law imposes a duty to negotiate in good faith, and failure to do so might result in an award of reliance damages to the non-breaching party. (46-47)

The traditions also differ in interpretive matters. Common law courts attempt to get at the intentions of the parties. Civil courts attempt to determine what category of contract the parties intended and then use the statutes relevant to that category to fill in gaps. (48) Civil law also recognizes fault in contract, and thus the breaching party can sometimes allege that the non-breaching party was negligent or contributed to the fault. Fault comes into the common law indirectly through doctrines like good faith, unconscionability, and other defenses to formation. (49-50)

Internationalization came to contracts through the CISG, which was adopted in 1988 and now has been ratified by over 100 states. It illustrates internationalization but also convergence, as it was the product of negotiations among representatives of both the civil and the common law traditions. Principles then provides a summary of some differences between the CISG and the UCC/common law, contrasting the more seller-friendly approach of the former with the latter's more buyer-friendly approach. (50-53) Finally, Principles discusses hard law obligations found in international agreements and the soft law obligations that make up the lex mercatoria, comprised of trade usages, business practices, and commercial customs. (54-55)

Chapter II of Mastering provides a short road map of definitions and guiding principles. The Authors begin with a brief, clear, helpful discussion of what a contract is and how the word "contract" relates to similar terms, such as "bargain" or "agreement." (13-14) An agreement, the Authors explain, entails a bargain, but it may go beyond that, as the agreement of the party may entail implied terms. Not all agreements are contracts, in the sense that courts may not enforce an agreement in certain circumstances, for example if it is a contract to perform some illegal service. (14-15)

Next, the Authors introduce the concept of freedom of contract, but they also note that freedom is tempered by public policy. (15). They illustrate the limitation on freedom on contract with a discussion of illegal contracts. In that section, they also note that freedom of contract entails the freedom not to contract. (15-17) The stage-setting proceeds very rapidly. This was a very short chapter. Some of the chapters to come are far more lengthy and may end up getting split into multiple posts.

The first post in this series can be found here.

August 19, 2024 in Books, Contract Profs, Recent Scholarship, Teaching | Permalink | Comments (0)

Wednesday, August 14, 2024

Reviewing Larry DiMatteo and Irma Russell and Barbara K. Bucholtz, Part I

By Jeremy Telman

Students often ask me to recommend study aids. I give them two bits of contradictory advice. First, I tell them they don't need any study aids for my course and that such aids might panic or confuse them. Then I tell them that I've never found a bad one. They all provide reliable, insightful, interesting takes on the material. The dangers is only that they contain more wisdom than first-year students can digest. The only thing I don't recommend is the thing they are most likely to use -- Quimbee videos.

But you know who does benefit from reading study aids, hornbooks, and treatises? Contracts Profs. I volunteered some time ago to review a book by Larry Di Matteo (right) and another by Irma Russell (below left) and Barbara K. Bucholtz (below right). It has taken me a while to get to it, but I have decided to review them side-by-side, and chapter by chapter as I use them to help me refresh my approach to teaching contracts. I should add that, while Professor DiMatteo's book is still quite new, having been published in 2023, Irma Russell and Barbara Bucholtz's book dates from 2011.

After a short preface, Professor DiMatteo's book, Principles of Contract Law and Theory (Principles) begins with an introduction, covering history, law and equity, justifications for contract law, rules principles, and standards, specialized rules, and boundaries of contract. As the preface makes clear, unlike most American books on the subject, Principles devotes equal time to UK and American law. The book could serve as a textbook for "intermediate students" but also as a reference for scholars and practitioners looking for an introduction that will situate contracts doctrine in a theoretical frame. (xviii)

Indeed, this is not material that I would recommend to first-year students. Principles delves briefly and deftly into topics, like the relationship between canon law and common law (4-6), that are not usually the stuff of contracts hornbooks. The subject-matter is interesting and leaves the reader wanting more. The work is lightly footnoted. For one used to the obsessive footnoting of law reviews, this makes for comfortable reading, but at times I wished I knew the sources in case I wanted to learn more about, say the role of late-19th century treaties in "developing a more rational and comprehensive system of rules and principles" (13) or how prior to the nineteenth century "much of contract theory was anchored in the Aristotelian idea of contract as commutative justice." (15)

There is a great deal that could be unpacked in the way Principles approaches justifications, drawing clear-cut lines between English law's preference for certainty and predictability, which yields formalist, bright-line rules, and the U.S. preference for justice in the particular case, which makes American law more open to squishy principles like good faith, unconscionability and good faith. (17-18) I assume these contracts get fleshed out in later chapters. There is a richness in this opening chapter to which I cannot do justice in this space. Suffice to say that it sets the table in way that leaves the reader hungry to learn more about literally dozens of subjects.

In the introduction to their book, Mastering Contract Law (Mastering), Professors Russell and Bucholtz make clear that their book aims to provide an overview of topics covered in the first-year contracts course. However, it supplements its organization built on proving elements of a contract claim with an exploration of some of the transactional aspects of contracts law. (xxv)

The first chapter addresses some preliminary matters before they move into the substance of doctrine. Some of these matters, like seriousness of intention (2) and the UCC (7), are addressed briefly in just a paragraph, with indications of more to come in later chapters, while other topics, like the interests protected under contract law (2-4) and the movement towards uniform law (7-9) get lengthier, through still introductory treatment. The discussion of the interests protected under contract law covers expectation, reliance, and restitution. The section on the movement towards uniformity focuses on the American Law Institute's Restatements and covers the history of the two Restatements of contracts law and the status of the Restatements as persuasive authority.

I'm a bit troubled by their section on implied-in-law and implied-in-fact contracts. I don't think it's a good idea to link these ideas in students minds, as the former are not contracts, while the latter are contracts every bit as much as express agreements. I am also a bit miffed that Mastering uses Wood v. Lady Duff-Gordon to illustrate implied-in-fact contracts. That case involved an express agreement. Judge Cardozo did not imply a contract in that case; he implied a term. Similarly, the discussion of Sullivan v. O'Connor seems misplaced in this section, as Mastering uses that case to illustrate different measures of damages rather than implied contracts, whether in law or in fact.

These quibbles aside, the opening chapter provides clear guidance on a number of topics. It begins with five basic questions that one can ask of a typical contracts problem (1-2), and it concludes with six "checkpoints" that provide a quick overview of the first chapter's themes.

August 14, 2024 in Books, Commentary, Contract Profs, Recent Scholarship | Permalink | Comments (0)

Monday, May 27, 2024

Teaching Assistants: Victor Goldberg on the New Business Rule

By Jeremy Telman

This is the thirteenth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the twelfth chapter of RLCD, in which Professor Goldberg addresses the question of lost profits, especially in the context of new businesses.

Ever the iconoclast, Professor Goldberg here rejects both the per se rule that new businesses cannot recover lost profits and the "modern" approach that treats the new business issue as merely a matter of proving lost profits with reasonable certainty. The latter approach is faulty because it fails to consider opportunity costs. Professor Goldberg returns to the Kenford case, previously discussed here, which involved a failed plan to build a domed stadium in Buffalo, to illustrate a first category of new business cases. Kenford should not have been able to recover lost profits on the planned stadium because he retained the capital and he could have used it to make the same profits through similar investments. (RLCD, 228-30)

The relevant question in cases such as Kenford is not whether the stillborn project would have made money but whether it would have made more money than the next best alternative. For such cases, the per se rule that new businesses cannot recover lost profits makes sense. (RLCD, 231) Plaintiff has spent no money in reliance on the project going forward; they are free to invest in other opportunities. Case law examples show that there is a danger of overcompensating non-breaching parties. Moreover, the litigation costs involved in such cases constitute waste, as the court should know going in that the non-breaching party has no claim to lost profits, given opportunity costs. (RLCD 232-39) In some of these cases, there is partial reliance, and in such cases an award of reliance damages is appropriate. (RLCD 233-37)

Professor Goldberg discusses one case that illustrates "an important qualification to the argument." That is where a plaintiff brings specific assets to a project and the expected returns would be positive. (RLCD 237-39) I'm not sure why this qualification would not have application in some of the other cases that Professor Goldberg discusses. After all, assets might not be tangible. They might be a skill set particularly suited to a new business venture.

For example, a franchisee who wants to exploit a new opportunity within the same franchise has unique expertise relevant only to the that franchise, and franchise agreements limit the locations available for new franchises. Sure, the disappointed franchisee could use the same start-up capital to invest in a different venture. But the entire point of the new business rule is that new business ventures are uncertain, while a plaintiff can use the franchisor's own feasibility study, supplemented by evidence from comparable units of the same franchise, to establish the likely success of the abandoned franchise opportunity.

Cases involving the licensing of intellectual property are different, because the licensor has already invested in the project. Absent a liquidated damages provision or some other limitation on damages, the licensor should be entitled to recover its lost profits. (RLCD, 230) These cases seem to fit squarely into Professor Goldberg's exception allowing recovery of lost profits where the plaintiff brings specific assets to the project. In the IP cases, plaintiffs incur costs in developing the intellectual property and getting it to the point where it is marketable. (RCL 241) Courts err in deciding these cases by requiring proof of lost profits with "reasonable certainty." From Professor Goldberg's perspective, that is not the issue. Rather the damage is based on a future stream of earnings from an investment already made. (RLCD, 243) That seems right, but I don't follow why a court is not nonetheless required to establish what that future stream of earnings would be with reasonable certainty, as it would with any claim to harm from a breach of contract. Professor Goldberg's alternative seems to involve a battle of the experts (RLCD, 244), and that too seems right, except that a court would still have to determine whether the expert reports provided sufficient evidence for a jury to determine with reasonable certainty what damages plaintiff had suffered.

A third category of lost profits on a new business venture arises when a project is delayed. Here, the lost profits might raise Hadley problems. (RLCD, 230) In such cases, Professor Goldberg thinks the cases should be resolved according to his preferred "tacit assumption" version of Hadley. In such cases, profits lost due to delay may not be difficult to compute. They may, however, be barred under Hadley or under a contractual allocation of risk. (RLCD, 245-48) Cases involving defective rather than delayed performance are similar, except that here Professor Goldberg would again bring to bear the opportunity cost principle (RLCD, 248-51)

Finally, there are cases in which buyer repudiates a long-term contract. Here, Professor Goldberg argues that seller should recover lost profits as direct damages, but only if market conditions have changed. (RLCD, 230) If market conditions have not changed, the opportunity costs principle comes into play. If market conditions have changed, then there ought to be recoverable lost profits, and just because it will be difficult to determine what they are does not mean that damages should be zero because any attempt at determination would be speculative. (RLCD, 251-52)

Ultimately, courts should be less concerned with speculative damages in new business cases. Either there are no damages because of the opportunity cost principle or there are damages, which can be ascertained, unless they are precluded under the Hadley rule or through contractual limitations on damages. (RLCD 253)

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

May 27, 2024 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Monday, May 13, 2024

Teaching Assistants: Victor Goldberg on Consequential Damages in the UK

By Jeremy Telman

This is the twelfth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the eleventh chapter of RLCD, in which Professor Goldberg addresses consequential damages and exclusion clauses under UK law.

Immanuel Kant famously observed that two things fill the mind with ever-increasing wonder the more we contemplate them: the starry heavens above and the moral law within. As far as I know, Kant never addressed consequential damages, but the more one contemplates them, the more the mind recoils in dread and confusion.

And so Professor Goldberg begins with a quotation from McGregor on Damages, in which the author reflects on court treatments of exclusions of consequential damages and concludes that the entire approach "is to be deprecated." Professor Goldberg narrates the course of UK jurisprudence on consequential damages exclusion clauses. That narrative seems to be heading back to the simplicity of McGregor's approach: the normal loss in contract is usually the contract-market differential; the rest is consequential damages. (RLCD, 199)

This material takes us back to themes we reviewed in our review of the Alien Vomit piece and in a discussion of a recent episode of the Unpacking Contract Law podcast. As we noted in the latter post, the Australians have nicely summarized the UK approach exclusions: "the poms have got it wrong."

Like the podcast, Professor Goldberg speaks of Hadley v. Baxandale's two "limbs," the first of which is direct damages and the second consists of damages recoverable only because they were in the contemplation of the parties at the time of contracting. It seems that courts have often read exclusion clauses as relating to categories of damages in the first limb (i.e. direct damages) when they really belonged in the second limb (consequential). Courts have thus been reluctant to uphold such exclusions. (RLCD, 200-01) Professor Goldberg takes us through the history of court treatment of such exclusion clauses in three periods.

Early Cases

In Millar's Machinery v. David Way and Son, the court awarded direct damages and properly excluded consequential damages which had been contractually excluded. The case seems straightforward but is cited as authority for narrow readings of exclusions of consequential damages. (RCLD 201-02) In Saint Line Ltd. v. Richardsons, Westgarth, & Co., a case about a properly-rejected vessel, the court allowed the arbiter to determine damages, including lost profits when the vessel was not useable, expenses for wages, and superintendents' fees, notwithstanding a contractual exclusion of consequential damages. (RCLD 202-03) Finally, in Croudace Construction v. Cawoods Concrete Products, Croudace sued claiming various losses resulting from Cawoods' delayed delivery, notwithstanding an exclusion of consequential damages. Both the trial and appellate court found, citing the Millar's case, that the damages sought were all direct and thus outside the scope of the exclusion. The courts explained this result, rather hard to square with parties' language or their reasonable expectations, based on the assumption that "commercial men" would not want to limit their liability. (RCLD, 203-05)

Turn of the Century Cases

Deepak Fertilisers v. Davy McKie involved the explosion of a methanol plant in India. Deepak sought ₤100 million in damages, including lost output, fixed costs, and overhead. There was a contractual exclusion of indirect or consequential damages. The trial court (per Judge Rix) excluded fixed costs and overhead, finding them indirect and thus excluded under the contractual provision. The Court of Appeal reversed, finding the losses related to fixed costs and overhead to be "direct and natural," citing Croudace. Lost profits were excluded because they were too remote. (RLCD, 205-06)

Judge Rix confronted the issue again in BHP Petroleum v. British Steel. In that case, seller delivered ₤3 million of steel to a consortium of oil and gas companies for the construction of a pipeline. When the pipeline failed, the consortium sued seller for ₤200 million, including lost profits. If Judge Rix could have just followed his instincts, he would have held that most of what was sought was unrecoverable due to a contractual exclusion of consequential damages. Because the Court of Appeals' judgment in McKie foreclosed that correct application of the law, Judge Rix found that the matter turned on the parties' knowledge of the potential for special damages at the time the contract was formed. The Court of Appeals approved of Judge Rix's disposition, while noting what a hardship it would be for seller if it had to assume the risk of liability so far exceeding the value of the contract. (RLCD 206-11) Indeed. That is why parties negotiate for exclusions of consequential damages.

In British Sugar Plc v. NEI Power Projects, British Sugar sought ₤5 million in damages that arose largely from production delays and lost profits caused by defects in electric equipment that seller provided. The court allowed the claim, notwithstanding a clause limiting recovery for consequential damages to the value of the contract. The court found that the losses were direct, flowing naturally from the breach. (RLCD 211-12). Hotel Services Ltd v. Hilton Int'l Hotels is similar. The court allowed recovery of consequential damages, notwithstanding an exclusion, on the ground that "consequent loss of profit" was not consequential. (RLCD 212-13).

I wish I were making this up.

The Twenty-First Century

The first few cases that Professor Goldberg discusses seem pretty similar to the older cases. (RLCD 213-18) In two case, the courts opine that consequential damages must be recoverable. Otherwise the non-breaching party would have no remedy for breach. Professor Goldberg shows why this is incorrect at least with respect to the first case. (RLCD 216-18)

Professor Goldberg next discusses a few cases that seem to come out right, but do not really address the confusion of direct and consequential damages. Both cases involved direct damages not subject to a contractual exclusion of consequential damages. (RLCD 218-20) The tide really begins to turn with Fujitsu Services v. IBM UK, in which the court gave effect to a contractual exclusion of consequential damages, including lost profits. (RLCD, 221-22)

But the more dramatic change comes with Transocean Drilling v. Providence Resources, in which the court rejected the "two limbs" approach to questions of exclusion of damages. Rather the court distinguished between "loss of bargain damages" -- the contract/market differential, which are direct, and lost profits. (RLCD 222-24) Star Polis v. HHIC Phil then might go too far in the other direction. A contract provided for an exclusive repair and replace remedy, and the court enforced that, but it neglected to consider that direct damages arise when a replacement is inferior to what was bargained for. (RLCD 224-25)

Professor Goldberg concludes with a short rumination on the fate of exclusion clauses in the U.S. and the UK (RLCD 225-27) It must be difficult for attorneys negotiating contracts involving UK and U.S. parties to draft the exclusion contracts. We are two legal traditions separated by a common language.

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

May 13, 2024 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Friday, April 19, 2024

Contracts: Law in Action, Fifth Edition Is Available for Adoption!

By Jeremy Telman

Fans of the “law in action” tradition will be happy to learn that the authors of the contracts casebook bearing that name—Contracts: Law in Action—are on course to publish a new 5th edition for adoption fall 2024. This edition is a significant update that consolidates what had been a two-volume casebook into a single volume that can be used for a 3, 4 or 5 credit course. While the casebook maintains its unique emphasis on remedies and the UCC as exceptionally important teaching tools, the volume also includes important materials on interpretation, performance and breach, which carry on the book’s unique “law in action” tradition. The authors have also added materials on COVID (and contract in crisis, generally); updated problems to provide more experiential and transactional opportunities; added some very recent material on the use of AI in contract interpretation; and supplemented and/or updated the backgrounds to some key cases, including to provoke thought and conversation on the role of race, gender, socioeconomic status, etc., in contract law. An updated Teachers Manual, which will include sample examples with answer keys, will also be available.

Reach out to Prof. Wendy Epstein ([email protected]) (pictured) with any questions or to request a review copy.

April 19, 2024 in Books, Contract Profs, Recent Scholarship, Teaching | Permalink | Comments (0)

Monday, February 5, 2024

Brian Bix, Reflections on Charles Fried's Contract as Promise

By Jeremy Telman

Charles Fried and Contract as Promise
Brian Bix

Image by Matthew W. Hutchins of the Harvard Law Record, CC BY 2.0, via Wikimedia Commons

Charles Fried (1935-2024) (left) passed away recently, and the achievements of his life have been widely recounted: a long-time professor at the Harvard Law School who also fit in service at different times as Solicitor General and as an Associate Justice of the Massachusetts Supreme Judicial Court. He wrote important works across a wide range of topics, including constitutional law, general ethical theory and professional ethics. However, for private law theorists, he may be best remembered for his 1981 book, Contract as Promise: A Theory of Contractual Obligation (Harvard U. Pr.).

It may be hard for a younger generation (that is, pretty much anyone who is currently below retirement age) to recall how important Contract as Promise was. There was little American contract law theory prior to Fried’s book (in the UK, Patrick Atiyah had published The Rise and Fall of Freedom of Contract two years before, but that work has never received, either at the time or since, much attention on this side of the Atlantic). As Fried pointed out, much of the discussion of contract law in his time came from law and economics on one side and critical legal studies on the other (along with the semi-serious provocation of Grant Gilmore’s 1974 The Death of Contract).

In Contract as Promise, Fried sets out to explain and justify contract law in moral terms – not merely as a product of efficiency or class struggle. Fried asserts: “The obligation to keep a promise is grounded not in arguments of utility but in respect for individual autonomy and in trust.” To focus on promise is to focus on how social and legal institutions grant individuals powers they would not otherwise have. Fried states that in societies in which there is a social institution of promising, one can create reasonable reliance in another by making a promise: a promise which can induce behavior or sometimes a decision not to act.

Undoubtedly, there is an aspect of a promise-based approach which rings true to the ideal of freedom of contract: that contractual rights and duties, unlike most other legal rights and duties, are, to a large extent, if not entirely, a matter of choice, self-generated, rather than simply imposed by the state. However, there are also obvious differences between promises and contracts, at least from the perspective of American law. Most saliently, promises, on their own are distinctly not enforceable under contract law principles (though some may be enforceable under promissory estoppel or other equitable doctrines). Fried notes this divergence; it is the primary ground of his objection to the doctrine of consideration, and in Contract as Promise he optimistically predicts that the doctrine will be abandoned in due course (though, of course, to date this has not happened).

Another line of objections to promissory theories is that they leave significant portions of contract law unexplained – to be treated either as mistakes that should be corrected, or as principles whose justifications come from other (“non-contractual”) principles. Alongside the issue of consideration, even as basic a doctrinal idea as holding parties to the objective meaning of the terms they used could be seen as contrary to a promissory approach, strictly understood. (Fried responds: “The practical, economic and utilitarian grounds for holding” promisors to the objective meaning of their terms “are obvious,” and that it is inevitable that certain forms and procedures will be added when government enforcement is layered on top of any practice or relationship.)

An additional line of objections is that reference to the general principles of promise (or to the related principles of consent or autonomy) are insufficiently precise to fill out the details of contract doctrine. Even among promissory theorists, there is a disagreement about what, if anything, a promise to perform entails regarding what remedies should be available for defective performance. Also, it is hard to see the many details of contract formation, interpretation, and excuse as magically incorporated into our promises to pay a certain amount of money for a good or service, or to sell a good or service for a certain amount of money, etc.

In recent years, Fried revisited, reflected upon, and offered some revisions to the argument of Contract as Promise: in a Harvard Law Review Forum (2007) commentary on an article by Seana Shiffrin, in symposia in Suffolk University Law Review (2012) and Theoretical Inquiries in Law (2019), in a chapter in Philosophical Foundations of Contract Law (Klass, Letsas and Saprai, eds., Oxford U. Pr., 2014), and, in a chapter added to the second edition of Contract as Promise (Oxford U. Pr., 2015). These supplements added nuance to the earlier argument, without significantly changing its basic direction.

To readers, there is something that may seem unsatisfying about a theory that states: “promise explains (and justifies) contract law … except for the (numerous and often significant) parts that it doesn’t explain.” At the same time, the argument that contract law is – at the end, at bottom, essentially – about the enforcement of promises still seems to say something important, even with all the conditions, supplements, and caveats that need to be added. And, perhaps, most importantly, Charles Fried’s Contract as Promise remains, 40-plus years later, the consensus starting point for anyone who wants to write about, or just think about, contracts and contract law theory.

February 5, 2024 in Books, Commentary, Contract Profs | Permalink | Comments (0)

Thursday, January 11, 2024

Teaching Assistants: Shawn Bayern on The Analytical Failures of Law & Economics

By Jeremy Telman

Did somebody get you a book as a holiday present, but the book really represents their interests more than yours (right)? Well, perhaps you should return it and get what you really want, Shawn Bayern's The Analytical Failures of Law and Economics (below, left)!

I know, I know, we already know that law and economics (L&E) is wrong, so why do we need a new book about that? Well, hitherto existing critiques of L&E have merely questioned its underlying assumptions; Shawn's book highlights analytical problems or incompleteness in the economic arguments underlying L&E. He does not mince his words. More precisely, Shawn takes aim at "adults in positions of power" who "take high-school-level economics too seriously" and appear "to prioritize callous, senseless, inhuman policies in the name of supposedly hard-hitting theoretical economic reasoning." (x) Shawn takes on hyper-rationalism that introduces new rhetoric but is merely a "sleight of hand" (xi) for reaching the same conclusions one could just as easily have reached without the thin veneer of social scientism (id.) through good old-fashioned contextual analysis. (xi-xii)

More generally, Shawn bemoans our credulity in the face of "sophisticated but reductive analysis." (xii) We have become prone to allow people to cut in front of us in line for the copy machine based on the explanation, "I have to make copies." (id.) We routinely accept economic analysis that is based on arbitrarily-adopted models informed by detailed but made-up assumptions. (id.) Grant Gilmore's observation from nearly fifty years ago still seems valid: we have put our faith in the predictive powers of the social sciences and "after two hundred [fifty] years of anguished labor, the great hypothesis has produced nothing." (xiv-xv) I had a semester of college-level economics, and still I feel seen.

After an introduction, the book proceeds through torts law, contract law, and property. For obvious reasons, this brief review will focus on contracts.

The polemical tone continues in the introductory chapter. L&E is a creature of the US legal academy. Shawn credits L&E's success to the acumen of the marketing department of the Chicago school rather than to the theoretical accomplishment of its adherents. L&E is "naive, fuzzy, and unprincipled." ( 2) Although economic analysis is far from alien to legal reasoning, it took Chicago-style E&L to give it a conservative political valence. Borrowing from no less an authority than Richard Posner, Shawn concludes that L&E offers only "beguiling arguments" that should not "carry the day." (4) But Shawn's point is not to question whether efficiency is a legitimate end of the law. Rather, he contends that the L&E movement provides a poor means of achieving efficiency. Moreover, efficiency "is not the law's only goal." (5)

Shawn identifies seven basic analytical failures in L&E. The first, he calls ungraceful degradation. It is possible for a theoretical model to be a bit off and yet still prove a useful predictor of outcomes, but L&E's core assumption are off in ways that render them "unable to interact usefully with the world in any way." (13) Second, L&E cannot develop models to account for conflicting economic forces -- for example, how to balance the parties' desire to maximize surplus against their desire to reduce agency costs. In the real world, there might be multiple factors to consider, but L&E prefers global theories based on one variable to focused, contextual analysis. (16) Third and fourth, L&E tends to confuse the sufficient with the necessary (17), and it neglects alternatives -- it allows the good to be the enemy of the better. (18-19) At the same time (fifth), L&E lives in terror of externalities. Here again, Shawn's argument is that L&E analysis focuses on one set of economic costs but loses track of the larger context, a context in which those costs might be trivial or offset by benefits that the model does not acknowledge. (20-21) Sixth, L&E scholarship often tries to dazzle with counter-intuitive arguments, but those arguments are only convincing if one ignores context. (22) Finally, L&E suffers from a general myopia. L&E analysis looks only to optimize one particular feature of the world (say efficiency or welfare), but it ignores other values (say conservation or education), and the arbitrary choice of what we are trying to optimize renders the analysis of limited value in the real world. (22-23)

He came not to send peace, but a sword

With respect to contracts, Shawn addresses: efficient breach, other remedial matters, interpretation, unconscionability, excuse and disclosure. His overall message is not that economic reasoning provides no insights into contact law but that American L&E tends to lead to unjust outcomes that are not even as efficient as the doctrines they would replace. (86)

Efficient breach is low-hanging fruit for Shawn. Academics love it, but courts never embrace it. For that reason, the Restatements reject it. (86-89) They reject it because it does not adequately account for the way parties value the transaction, because it ignores alternatives, and because it ignores the costs of litigation. (90-94)

On damages in general, Shawn argues that "economic analysis is as indeterminate as any other open-ended analysis that looks at a variety of considerations. . . " (95) In particular, he looks at L&E defenses of the "new business rule." The approach "treats everything as a statistical aggregation rather than an individual sample." (97) Courts decide the cases in front of them, and if mitigation happened or could have happened, defendant can show it. (98)

On interpretation, Shawn first identifies the textualist/non-textualist divide in approaches. For various reasons, L&E scholars favor textualism, giving weight to written agreements, while Shawn (no surprise here) favors contextual approaches that use all available means to get at the intentions of the parties. (99) Parties, the L&E argument goes, prefer textualism, because it reduces transactions costs. Shawn's critique of this position is lengthy and I can't do it justice here beyond saying that it flows from the basic problems with L&E that Shawn identified in his introduction. L&E's textualism proceeds from arbitrary assumptions not grounded in the particularities of any case and thus leads to arbitrary conclusion that have no predictive value in any particular case. (100-32)

The L&E critique of unconscionability is a subject we have treated recently on the blog in reviewing Duncan Kennedy's defense of Judge Skelly-Wright's opinion in Williams v. Walker-Thomas Furniture. Shawn begins by noting L&E scholars' skepticism regarding procedural unconscionability. As usual, L&E objections to the concept are based on bizarre assumptions about the informational environment in which contracts are formed. In any case, courts pay no mind to these arguments and continue to recognize that procedural unconscionability exists and can negate consent. (133-34) Shawn's main focus in on substantive unconscionability. L&E errs by arguing for the benefits to A & B from a substantively unconscionable agreement. Shawn points out that there are societal effects that flow from allowing for substantively unfair transactions that cause global distortions and inefficiencies. L&E loses sight of that because it does not consider alternatives to the bilateral contract that it regards in isolation. (135-41) Nor does it consider what the party on the short end of an unconscionable contract would have done in a world that did not permit them. (141-44)

While there are some non-Chicago L&E analyses of excuse doctrine, the influential Chicago-style L&E work on excuse suffers from some of the basic analytical failures. This work adopts a least-cost avoider approach that creates a perverse incentive for parties to be unable to handle the risks of the contracts into which they enter. (145) They also focus on one arbitrary consideration (efficiency in risk allocation), leading to an arbitrary result. The model assumes that parties would undertake negotiations of risk allocation in each contract, but contracting doesn't work that way. Contracts are drawn up with an eye to a multitude of factors, and creating default rules based on one of those factors would yield arbitrary and inefficient results. (146-48)

On disclosure, Shawn makes three points in response to the L&E argument that parties should not be required to disclose even material information. First, L&E scholars are inconsistent in rejecting fraud but not non-disclosure while also rejecting the distinction between acts and omissions. (149) Second, the L&E non-disclosure rule is not necessary to encourage productivity. (149-50) Third, as usual, the model refuses to look at alternatives, including possible benefits to a rule requiring disclosure. (150)

In conclusion, Shawn argues L&E reasoning provides very little of value to what we get through good, old-fashioned, contextual legal reasoning. This is a delightfully well-reasoned and lively book. Shawn's arguments are the culmination of scholarly work that now spans two decades. It is exceedingly valuable to have the outlines of his arguments, elaborated at greater length in law review articles, available in one book, distilled, and thematized according to the major subjects and most common analytical failures of L&E reasoning.

January 11, 2024 in Books, Contract Profs, Recent Scholarship | Permalink | Comments (0)

Monday, January 8, 2024

Teaching Assistants: Corbin on the Parol Evidence Rule

By Jeremy Telman

Timothy Murray, the lead author of the current edition of Corbin's Contracts Treatise, was kind enough to share with me his volume, co-authored with Jon Hogue, Corbin on Contract Drafting. Chapter 11 of that book is on drafting merger clauses, but it provides the occasion for an in-depth exploration of the parol evidence rule (PER).

I highly recommend this chapter to instructors and students. The division of the material into ten short sections makes the doctrine easy to follow, analyze, and digest. The Authors provide helpful case studies that illuminate their points, and the material on drafting can help students understand both how the doctrine works and how to think about its operation in practice.

The Authors make the valuable point that integration and interpretation are separate matters. An agreement is integrated if it constitutes the entirely of the agreement between the parties. The PER will not bar the admission of prior agreements that are outside of the scope of the integration. But even if the evidence relates to subject matter that is within the integration, the parol evidence does not bar evidence related to interpretation. The question of integration must come first. Otherwise, a court might determine that the contract is unambiguous and bar admission of evidence relating to a subject matter that the contract does not address.

The Authors' discussion of merger clauses is highly instructive, but the material highlights what I hate most about the PER. As the Authors note, some courts treat merger clauses as conclusive evidence of integration, but most people who enter into agreements through form contracts never see the merger clause or, if they do see it, they have no idea what it means. The Restatement notes that a merger clause is a "clear sign" of integration. Cases then might turn on whether the written agreement is a complete or a partial integration (see R.2d § 213, illustration 4), but courts are pretty much on their own to determine whether the integration is partial or complete. While it seems to be universally accepted that judges, rather than juries, decide the issue of integration, there is no agreement on how to do so. The R.2d follows the Corbinian approach of consulting parol evidence on the issue of integration, but many courts still apply a more formalist approach.

The Authors provide separate brief discussions of three related tests: separate consideration/collateral agreement, natural omission, and scope. I wish they had used Mitchill v. Lath, a case that infuriates me each year but seems necessary, given that, as the Authors note, some courts adhere to the "four corners" or "appearance" test to determine whether the contract is integrated. The case involved a pre-contractual oral promise to remove an icehouse from a neighboring property in connection with the sale of a home. New York's Court of Appeals concluded that the oral promise was collateral, but should have been included in the written agreement, and the Court of Appeals thus allowed the seller to break a promise that nobody doubted was made. I am bothered by the fact that Judge Cardozo concurred in Mitchill, and people less enamored of him than I am point out that he could be quite formalist.

I see no reason for such harsh characterizations. I think the real problem with Mitchill is that Judge Cardozo didn't write it. If he did, I'd like to think he would have pointed out that, notwithstanding the Court's finding that the promise about the icehouse was collateral to the agreement to convey the property, it nonetheless was part of the integrated agreement because there was no separate consideration relating to the removal of the icehouse. For that substantive reason, the promise to convey the icehouse should have been part of the written agreement and was not a "natural omission," even if it was outside the "scope" of the written agreement.

The Authors helpfully explicate the UCC's avoidance of the term "integration" in Article 2's PER provision § 2-202. The doctrinal challenges resurface however, as § 2-202 speaks of a "final expression of agreement" and §2-202(b) speaks of "a complete and exclusive statement of the terms." The former becomes a rough analogue of partial integration, while the latter corresponds to "complete integration." Contradiction of a written agreement is always impermissible. However, parol should be admitted to supplement a final agreement but not a "complete and exclusive" agreement. Other forms of extrinsic evidence (trade usage, course of performance, course of dealing), which the Authors call "invisible evidence," is admissible, unless "carefully negated." An ordinary merger clause will not negate such evidence.

In a negotiated contract between sophisticated parties, I have no problem with the operation of merger clauses, but they are an outrageous trap for the unwary if there are bargaining asymmetries.

I offer a real life example. We are having solar panels installed on our home. I met with the installer, and there are a lot of contingencies. Will the Historic Preservation Society (we live in a historic district) allow the installers to put up the panels as they propose? Will we need a new circuit box or just an additional panel to handle the excess load? Was our generator installation up to code or will the electrician need to attend to that? You get the idea. We talked through these matters and how we would address them as the work proceeded. Then the installer presented me with a 20+-page form contract with a merger clause that did not address everything we had talked about.

If I were not a contracts professor, the merger clause would have meant nothing to me, but even knowing what I know, I think the options are limited. I could have explained to the installer that I'm not comfortable with the merger clause, which does not reflect our oral agreements. He's not an attorney, so he might happily rip it out. In the alternative, not being an attorney, he might think, "I don't know what this thing does, but I know I need it." If he was able to consult with the lawyer who drafted it, the lawyer would likely insist on keeping it in. Or, if the lawyer were more enterprising, they might offer to draft language reflecting all of our various oral agreements. The lawyer could earn a good income through such means, but the parties would not really be better off than we would be in a CISG world where evidence is admitted and given the weight that it is due. Contracts law assumes that writings are more authoritative than oral agreements. But we know that most people do not read form contracts, but they give a lot of weight to oral agreements or representations.

That said, Corbin on Contract Drafting is very up-to-date. It includes a section on the new Restatement of Consumer Contracts Law § 8, which provides that a standard contract term is not a final expression of the agreement if it "contradicts, unreasonably limits, or fails to give the reasonably expected effect to a prior affirmation of fact or promise by the business." The Authors note that Comment 1 to the Restatement indicates the Reporters' intent to replicate the impulse of R.2d § 211, which bars the enforcement of terms where a drafting party has reason to believe that the other party would not have manifested assent if they knew that the writing contained that particular term. I think the Restatement of Consumer Contracts goes beyond the R.2d and may be helpful to consumer advocates. As the Authors note, only Arizona has followed R.2d § 211. Time will tell if the new Restatement moves the ball at all.

One of the challenges in teaching the PER is that evidence of an affirmative defense or of a condition precedent is admissible notwithstanding the PER. The problem is that I have not taught defenses or conditions precedent by the time I get to the PER. If I introduce those topics so that students will have a complete version of the rule, they will want to talk about legal doctrines that they have not yet learned in answering questions about the PER. That's a significant danger, as students love to talk about fraud, but their discussions are rather a mess if they don't know the elements of the defense as a matter of contracts law. But the alternative is also problematic. If I don't mention those limitations to the scope of the PER, they haven't learned the complete doctrine. Damned if you do; damned if you don't.

On the subject of the fraud exception to the PER, the Authors include a rather lengthy section, with several case studies addressing attempts to contract around the fraud exception. These clauses are called "no reliance provisions," and fortunately, it seems that court regard them with great skepticism.

I recommend this chapter to folks who, like me, struggle each year to present the PER in a way that students can follow. It is clear, comprehensive, and up-to-date. It presents the material in a way that is easy to follow, which is very high praise, given the complexities, nuances, and layers of the material.

January 8, 2024 in Books, Commentary, Recent Scholarship, Teaching | Permalink | Comments (0)

Friday, September 15, 2023

Teaching Assistants: Victor Goldberg on Consequential Damages in the U.S.

By Jeremy Telman

This is the eleventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the tenth chapter of RLCD, in which Professor Goldberg addresses consequential damages and exclusion clauses under U.S. law.

My students always struggle to understand the difference between direct and consequential damages, especially with respect to lost profits. I always confidently tell them that direct damages arise as the immediate result of the breach, and the connection to the lost profits as consequential damages is more attenuated, for example, arising from the non-breaching party's inability to run its business due to the breach, as in Hadley v. Baxendale), or liability for its own downstream breach caused by the original breach. The casebook I used for Sales last year even had a great series of hypos in which it asked students to distinguish direct, incidental and consequential damages. How neat!

But the more my students pushed me that more I had that uncomfortable "I know it when I see it" feeling, and Professor Goldberg's chapters on consequential damages illustrate why. The distinction is harder to make the more you look at it.

Professor Goldberg tries to provide some clarity to this area of the law. Right off the bat, he would eliminate two categories of damages. As we already noted in an earlier post, he would not allow lost volume sellers to recover. In RLCD's Chapter 12, he rejects lost profits in the new business context (RLCD, 173). In the American context, Professor Goldberg discusses three categories of cases.

In cases in which plaintiffs seek lost profits in connection with contract terminations, Professor Goldberg argues that the losses should be treated as direct damages (RLCD, 175-80). That holds true whether the claim is for goods not delivered or for anticipatory repudiation of a contract to deliver goods in the future. Professor Goldberg next looks at indirect compensation in the context of distribution agreements. If retailers were paid flat fees for their services, then their harm from a breach would be easy to calculate. Their expectation would be the flat fee. But they usually get paid indirectly, through the difference between the wholesale and the retail price. There is no reason to think that the way payments are structured make the damages a retailer suffers from breach any less direct (RLCD, 180-85).

Professor Goldberg then covers cases, like Hadley, in which the harm is caused by delay. While Hadley clearly involved consequential damages, sometimes delay can cause direct damages, but courts confuse the analysis. They treat consequential damages that would be compensable under the Hadley test as direct and award them, even when the parties have agreed to an exclusion of consequential damages (RLCD, 185-89). Breach of warranty cases pose their own unique challenges in terms of valuing the harm to the non-breaching party, but the direct harm is best measured as either the costs of providing what had been warranted or the value of what had been warranted (RLCD, 190-94). Professor Goldberg does not address the distinction between incidental and consequential damages in this chapter, and in some of the cases he discusses, that distinction might matter.

Courts struggle when the parties include lost profits in their lists of excluded categories of damages. What do the parties thereby mean? Lost profits can be "the purest version of direct damages, the contract-market differential" (RLCD, 195). Are the parties incorrectly assuming that lost profits are always consequential damages or did they really intend to exclude almost all damages? The outcomes turn, appropriately, on the specificity of the exclusion, but courts are reluctant to enforce a limitation on lost profits as direct damages (RLCD, 195-97).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

September 15, 2023 in Books, Contract Profs, Recent Scholarship | Permalink | Comments (0)

Tuesday, August 22, 2023

Teaching Assistants: Understanding Contracts by Jeffrey Ferriell

By Jeremy Telman

I have previously shared here general advice that I communicate to my students about outside materials. Part I of the advice is here; part II is here. The short version is as follows: you don't need to consult outside materials to do well in my course. I provide reading materials adequate for everything I cover in the course. In addition, I provide practice multiple choice, practice short answer questions and essay questions, including questions from past exams.

However, some students want more, and so they want me to recommend study guides. I don't use study guides, I tell them, so I don't know which to recommend. To the extent that I look into them, they all seem good, but they also organize the material differently from how I do, and they cover things that I don't cover. I worry that students working on their own might panic, thinking they missed some vital portion of the course, when in fact, the study guides tend to be more comprehensive than I can be or choose to be.

Jeffrey Ferriell's Understanding Contracts (5th ed.) is no exception. In fact, it is both a very serious work of scholarship and provides a great deal more coverage than students need for course purposes. But that is not a bad thing. It is a learned, comprehensive treatment of the material, a readable hornbook with narrative discussions of relevant caselaw and hypos. The publisher sent me the book and asked me to review it for the blog. Publishers take note: I am always happy to feature contracts books on the blog, and so I agreed, but it did take me eight months to get to it.

I could recommend this book to my students with the utmost confidence that they would learn a great deal from it, and it would help them to firm up their grasp of contracts doctrine. I would however caution them that it covers a lot of material that I don't cover or don't test on. They should, for example, read the book's introduction only when they are preparing for exams, as it references a lot of doctrine that they won't understand until they are near the end of the course. They can skip the very interesting part of the introduction about the history of contract law, unless they want to read it for their own edification. I will not be testing their knowledge of Roman law or of common law writs. A lawyer speaking in the presence of a judge, a supervising attorney, or a client usually wants to come off as the second-smartest person in the room, perhaps with some relevant specialized knowledge that the smartest person in room will easily grasp. Armed with all the knowledge that Professor Ferriell has to share, students might come off as, hands down, the smartest person in the room, and who wants that?

Topics are handled with scrupulous comprehensiveness. So, for example, Professor Ferriell does not treat the Restatement's approach to consideration as the only relevant approach. Courts, he observes, will still look for a benefit or a detriment to each party, even though the Restatement tells us that all we need for consideration is a bargained-for exchange. The book covers subject-matters that I don't but that may serve students well in their preparation for the bar exam. For example, it discusses accord and satisfaction, recitals, and guaranty contracts, as well as consideration in connection with topics like conditions that I would reserve for separate treatment. The result is a weighty sixty-page chapter on consideration. It's a great read for me. I would want to go through it with a student and highlight the parts they can skip. And if they tried to read it in connection with my very brief presentation of consideration, they would understand very little of it, but they could come back to it and profit at the end of the course. Similarly, I would advise my students that they can skip the first eight pages of the thirty page chapter on promissory estoppel.

Because the bar exam loves exploring the details of formation, the statute of frauds, and the parol evidence rule, the loving attention that Professor Ferriell lavishes on those topics in Chapters 4-6 repays careful reading. He also devotes some attention in Chapter 6 to other interpretive issues, including canons of construction. I spend a day on canons of construction in my contracts course, and many students struggle, in part because of their aversion to Latin. But they sometimes tell me that the introduction to the canons helped them when they took Legislation and Regulation, so I am glad that Professor Ferriell devotes six economical pages to that topic.

The fifty-plus page long chapter on warranties, including warranties of title and habitability suggests that this book can be used with Sales courses as well as with the first-year contracts course. Many standard casebooks for the first year course leave out warranties entirely and certainly don't cover title or habitability. Again, it is wonderful to have all of this material, well -organized and well-presented in one handy book. Students need to be able to distinguish topics they need to know for a course and topics they will want to know for a full life in the law.

The remainder of the book proceeds more or less as one would expect, with chapters on conditions, performance and breach, defenses, excuses, expectation damages, reliance and restitution damages, agreed-upon remedies and limitations on remedies, equitable remedies, third-party beneficiaries, and assignment and delegation. All of the chapters are comprehensive in scope; all are much more than a student would need to prepare for a standard contracts course.

None of this is meant as a criticism of the book. I read it both with admiration and with an eye to how my students could use it. From the perspective of a contracts teacher, I am happy to have the book in my library. In addition to being an excellent and detailed compendium of contracts doctrine, the book also provides useful examples, some drawn from case law, some hypothetical, and one can always use a fresh case or hypo to help illustrate some nook or cranny of a well-traveled doctrine.

August 22, 2023 in Books, Contract Profs, Recent Scholarship, Teaching | Permalink | Comments (0)

Thursday, August 17, 2023

Brian Bix, How Do You Explain Contracts Theory to Advanced Beginners?

By Jeremy Telman

When I was young and danced, my first ballet class was for "advanced beginners?" Why? Well, I wasn't a beginner -- I taken a lot of dance classes before I took ballet. I had tights; I had slippers. All I need is a mask, and maybe Suzanne Farrell (right, with George Balanchine) would allow me the pleasure of a pas de deux. The class had everyone in it -- from people like me who had no business being there -- to borderline professionals who just took whatever class fit into their schedule so long as they liked the instructor or knew the instructor would leave them alone. It was a great level, and I stuck with it throughout my years as . . . well, let's just say, as someone who took ballet classes. Ten years in, and still an advanced beginner. No shame in it.

Despite my experience with advanced beginning, I wasn't sure what Brian Bix (left) had in mind with his Advanced Introduction to Contract Law and Theory. It very quickly became clear to me that I would recommend this book to my students at the end of the semester as they are preparing for the exam. It's not something you can read before you take a contracts course. It's not really the kind of hornbook, larded with hypos and examples from the caselaw that I would assign as a supplement. But it is a great, quick, efficient and reliable overview that one can use just at the point when you want to bring all of the concepts together in a coherent Gestalt.

The tone is conversational and direct. Professor Bix introduces a topic and then recounts the relevant rules. Then, in separate paragraphs, he explains exceptions to the rule or situations where the rule does not apply even though one might think it would apply. He assumes some familiarity with contract law -- you already have the shoes and the tights; you just need to improve your technique and refresh your recollection so that you can distinguish a pas de cheval from a pas de chat. Professor Bix makes the transitions between the doctrinal sections seem obvious, effortless, and natural, but anybody who has ever tried to put together a syllabus knows how easy it is to make a faux pas by introducing a doctrine that relies on another doctrine that you haven't yet explained.

Having accomplished a brisk and efficient summary of contracts doctrine in eighty pages, Professor Bix then devotes just over twenty pages to contracts theory. Contracts is a practical subject, and so Professor Bix notes, theoretical approaches to contract law tend to combine explanation, rational reconstruction, and justification. He then provides a nifty summary of the major approaches to contracts theory. I usually start my course with an overview of theoretical approaches to contracts law, and throughout the course, I remind students of those approaches as they inform the opinions that we read. The way Professor Bix organizes this material offers an opportunity to look at it afresh.

Professor Bix starts with Charles Fried's theory of contract as promise and critiques of that, which construe contracts as being more about consent or reliance. Next he reviews theories that think about contracts as creating property rights. He then moves on to relational contracts, efficiency perspectives on contracts rules, and critical approaches, which focus on modern contracts of adhesion and can transform the view of contract as being about consent into a tool for challenging the legitimacy of form contracting.

Professor Bix provides useful perspectives on contracts law and theory. It is a valuable book to have, as I suggested earlier, for students seeking to firm up their grasp of contracts law. It is also a good book for them to have on their shelves as they move into practice so that they can quickly brush up on areas of contracts doctrine as they arise. And for those of us who like to not only practice law but also to understand what ideas underlie it, the book is one to which one can return to remind oneself of the contending theories about what animates contracts law. And then one can make use of Professor Bix's footnotes and bibliography to explore matters further. In contracts, as in ballet, we can all use the occasional master class for advanced beginners.

August 17, 2023 in Books, Contract Profs, Recent Scholarship | Permalink | Comments (0)

Friday, August 4, 2023

Book Contracts and Supreme Court Ethics

By Jeremy Telman

Many have lamented the fact that the U.S. Supreme Court is the only federal court in the country not bound by the federal Code of Conduct. As Robert Barnes reports in The Washington Post, Chief Justice Roberts rejected calls for the court to adopt its own ethics code. Even if it were to do so, it is hard to imagine how it would be enforced.

Justice Alito (left), in an interview with the Wall Street Journal (behind a paywall), said (as quoted in John Kruzel's reporting in Reuters), "No provision in the Constitution gives [Congress] the authority to regulate the Supreme Court — period." That is manifestly untrue and manifestly irrelevant. It is untrue because the Constitution grants Congress the authority to impeach Supreme Court Justices. That is a constitutional mechanism of regulation. But even if there were no express provisions in the Constitution, the system of checks and balances that the Constitution creates gives rise to implied congressional powers to regulate the Supreme Court. Justice Alito, who with his colleagues regularly engage in the practice of constitutional review, is undoubtedly aware that there are constitutional powers that exist notwithstanding the lack of any express constitutional provision to which one can point as the source of that power.

Notwithstanding strong arguments for Congress's power to regulate the ethics of Supreme Court Justices, it has not exercised that power. The remedy for ethics breaches by Supreme Court Justices, as things stand, would be impeachment, but it is hard to imagine any ethics lapses that would garner 67 votes for impeachment in the Senate.

Which brings me to the topic of Justice Sotomayor's book tours. It is very common for authors to promote their books. For example, you might be interested in an edited collection of essays on Hans Kelsen in America. There. That was pretty shameless, wasn't it? Unethical? I don't know. There is no code of ethics for law blogs. See what I did there?

If an author is a celebrity, they have far more opportunities to promote their books, and some of those can be quite lucrative. It is perfectly normal for an author to arrange readings and signings and to have the publisher ship books to the location where the reading will take place. For celebrities, having people line up to have you sign their books is a great way to get people to buy the book, and the author may not mind if many of them don't read past the inscription.

But it is arguably a different matter when a Supreme Court Justice profits from such tours, and those tours raise ethical questions if hours of Court time are devoted to preparing for the book-related events and to pressuring hosts of book readings/signings to buy thousands of copies of the book. According to Brian Slodysko and Eric Tucker, writing for the Associated Press, Justice Sotomayor (right) has earned $3.7 million through book sales since she joined the Court, and she was involved in book-related events, including one that involved Michigan State University's purchase of $100,000 worth of Justice Sotomayor's memoir. The story indicates that Court staff not only coordinate book tour events but pressure the hosts of such events to purchase far more copies of the books than they originally intended.

Some of the story, as reported, doesn't make a whole lot of sense. The story suggests that Justice Sotomayor had thousands of book sent to her chambers for signing. That strikes me as absurd. You don't sign 11,000 copies of your book and then give a reading at which people line up to have you sign your book. I suppose it is possible that they sign up to get an inscription beyond the signature, but from a marketing perspective, that seems like an odd way to do things. But the AP report has documents showing that thousands of books were sent to the Supreme Court. Given the large advance and royalties the Justice earned through this publication, there is no reason why Court resources should be involved in its distribution. The publisher is making a lot of money here; let it send some low-level staff to organize the signing event and arrange for the shipment of the books to the relevant venues. The signings can take place . . . at the book-signing events. Book publishers ought to know more about how to run such an event than Court staff. And Supreme Court Justices have better things to do with their time than sign their names 11,000 times. So does Bob Dylan, as we discussed here.

In my view, the country would be better off if Supreme Court Justices were not all millionaires, but given the extent to which members of Congress are able to enrich themselves, Congress is in no position to scold the Justices for profiting from their status. In the current environment, it is hard to see how book royalties, regardless of their magnitude, can constitute an ethics violation, and I see a lot of value in the book tours. They get the Justices out of the Beltway and give them opportunities to engage with ordinary citizens. To the extent that people come up to have their books signed, that is an opportunity for one-on-one interactions with a Justice, which can be inspiring -- especially for young people -- in so many ways. With Justice Sotomayor, there are issues because her publisher had business before the Court, and she failed to recuse herself. It appears that she acknowledges that this was wrong and attributes it to a gap in the Court's conflicts processes that has now been addressed.

In this case, and in every case involving Justices profiting from their celebrity and possible misuse of public resources, Justice Sotomayor is entitled to argue that she had no idea that her conduct might raise ethical scruples. If she were so inclined, she could point to other instances of similar conduct by other Justices or she could simply raise rhetorical questions about why Justices should be expected not to do what other authors do without raising hackles. But with an ethics code in place, Justice Sotomayor would not have to make such arguments. She would know the bounds of permissible behavior, and she would not act outside of those bounds.

August 4, 2023 in Books, Celebrity Contracts, Commentary | Permalink | Comments (0)

Thursday, August 3, 2023

Teaching Assistants: Victor Goldberg on Victoria Laundry

By Jeremy Telman

This is the tenth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the eighth chapter of RLCD, in which Professor Goldberg reviews the English case, Victoria Laundry v. Newman Industries. This is another take on the "tacit assumption" test for consequential damages, a topic that Professor Goldberg previously addressed in Chapter 8-10 of RCL, reviewed here.

The issue is the extent to which the breaching party must be aware of the possibility of consequential damages flowing from the breach in order to be made liable for them. Between the decision in Hadley v. Baxandale (1854) and Victoria Laundry (1949), courts in the UK would assess consequential damages if the likelihood of such damages were a "tacit assumption" between the parties. In Victoria Laundry, UK courts abandoned that test, but according to Professor Goldberg, it did so based on three errors

Lord Cyril Asquith, who wrote the opinion in Victoria Laundry believed that Hadley's true meaning had been obscured by a misleading headnote. The headnote indicated that the defendant delivery service had been given notice that the mill was shut down due to the broken shaft. Lord Asquith was of the view that the defendant knew only that the mill had requested a replacement shaft. Professor Goldberg argues persuasively that the headnote was correct (RLCD, 166).

Site of Hadley v. Baxandale

Lord Asquith then makes a second error, according to Professor Goldberg, in thinking that the misleading headnote matters. That is, if the facts were as the headnote suggests, the case should come out differently, according to Lord Asquith. If the footnote is correct, the delivery service in Hadley knew that the shaft was urgently needed and that the mill was stopped. But mere knowledge was not sufficient. What is required is an understanding (a tacit assumption) that the breaching party will be responsible for damages consequential to breach (RLCD, 167)

According to Professor Goldberg, in order to arrive at an award of damages in Victoria Laundry, Lord Asquith had to make yet a third error, this time by misconstruing the facts. Regardless of the version of the test, the availability of consequential damages turns on what the parties knew at the time of contracting. In Victoria Laundry, the contract was formed on February 20th, but buyer gave no notice of the urgency of its need for the boiler at issue in the contract until April 26th. Given the knowledge of the parties at the time the contract was formed, Lord Asquith should not have awarded any consequential damages (RLCD, 168-69). But he awarded partial damages for consequential losses that were "on the cards" at the time he treated the contract as having been formed (RLCD, 165).

Despite its flaws, Victoria Laundry remains a celebrated decision to this day and is treated as faithful to Hadley. In The Achilleas, Lord Hoffman and Lord Hope proposed a return to the focus on the intentions of the parties that had informed the "tacit assumption" approach. Professor Goldberg thinks that such an approach is more consistent with Hadley and so he is mystified by continued treatment of Victoria Laundry as authoritative.

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK
Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent

August 3, 2023 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Wednesday, June 28, 2023

Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent

By Jeremy Telman

This is the ninth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the eighth chapter of RLCD, which revisits scholarly takes on Judge Cardozo's opinion in Jacob & Youngs v. Kent, a case about which we have previously posted here, here, and here.

I admit it, I was worried about this chapter. It is possible for me to listen to people criticize Judge Cardozo and still part friends, but only because I "will not visit venial faults with oppressive retribution." Fortunately, Professor Goldberg has come not to bury Judge Cardozo but to praise him. Despite some commentaries going back to 2003 criticizing Judge Cardozo's opinion in Jacob and Youngs for "material misrepresentations of fact and law," Professor Goldberg thinks that Judge Cardozo's result was correct at the time and still today (RLCD, 142). Whew.

As most readers of this blog know, the case involved a contract for the construction of a mansion in New York State. The contract called for Reading pipes, but the contractor installed a lot of comparable pipes manufactured by other companies. Judge Cardozo found the mistake to be inadvertent and ruled that the builders had substantially performed. They were entitled to full payment, less the difference in value between the house contracted for and the house as built. Because the pipes installed were of the same quality as Reading pipe, that difference was effectively zero.

The difference between the four judges, including Judge Cardozo (right), who found that Jacob and Youngs had substantially performed and the three who disagreed was really about facts, not law. The dissenting judges thought the mistake could not be the product of mere inadvertence. The trial court record provided few facts, because the trial court did not let in Kent's evidence, so it seems that, given the differing views of the facts, a remand would have been appropriate. But as Professor Goldberg notes, there had been a previous trial at which the facts were presented to the jury. The jury found for Jacob and Youngs, but the trial court set that verdict aside. After a second trial and appeal, Kent had stipulated that, if the Court of Appeals upheld the Appellate Division's ruling, it should render judgment absolute in favor of the plaintiff. Judge Cardozo just did what Kent asked him to do (RLCD, 143-44).

Another interesting point that Professor Goldberg mentions is that the contract in fact allowed for substitutions of materials contingent on approval of the architect. That being so, the breach was not the substitution of pipes but failure of notice to the architect. That provision in the contract would seem to make the case easier, as the damages for failure of notice would be nominal (RLCD 144-45).

Professor Goldberg thinks that most contracts professors assume that Jacob and Youngs owes its prominence to legal innovation (RLCD, 145). I can't speak for other contracts professors, but thanks to NYU Law's outstanding lawyering program, I had an assignment as a 1L about substantial performance, and so I knew that Judge Cardozo had a lot of precedent to work with when he wrote Jacob and Youngs. Professor Goldberg summarizes this material (RLCD, 146-49).

But I must take issue with Professor Goldberg on one point. He complains that "Cardozo's rationale was phrased in rather flowery language that somewhat obscured the reasoning" (RLCD, 157). The language in question is as follows:

Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.

Flowery? Obscure? I would say that Judge Cardozo wrote in the manner to which we should all inspire -- his writing invites and rewards re-reading -- and once one has appreciated his meaning, a satisfying feat, easily obtained, one can also appreciate why he expressed himself as he did. His meaning is clear enough, and its manner of expression is unmatched among American jurists. I have always assumed that his opinions owe their prominence to Judge Cardozo's reputation, which in my view, at least in the realm of contracts law, derives from his peerless prose style rather than from unique innovations in the law. Professor Goldberg provides his translation of Judge Cardozo's language quoted above (RLCD157-58). He has captured the meaning precisely but in considerably more space and without the glory. Why listen to Salieri (left) when you can hear Mozart (right)? I intend no slight to Professor Goldberg. No American legal authority writes on a par with Cardozo. He is honor alone; the rest of us must make do with the punctilio of an honor most sensitive.

You disagree? Read the mug (right). Sidebar, I actually would be interested to see comments on the subject: what unique innovations did Judge Cardozo introduce (or further) in contracts law?

Professor Goldberg proceeds methodically, eliminating the mysteries underlying the case. He reviews New York precedent for leniency regarding architects' refusals to award certificates where the work was completed in good faith and the diminution in value or cost of completion was relatively small (RLCD, 150-52). There too, Jacob and Youngs did not depart from prior caselaw, but Professor Goldberg also addresses the question of whether the issuance of an architect's certificate was a condition precedent to Kent's obligation to make a final payment in this case. The parties had taken that issue off the table. By the time the case reached the Court of Appeals, the sole issue was whether Jacob and Youngs had substantially performed (RLCD, 154-55).

Judge Cardozo notes that the options for recovery are either costs of completion or diminution in value, but Kent was not seeking to recover cost of completion in his appeal. Why not? He had originally counterclaimed for $10,000, perhaps a rough estimate of what it would have cost to rip out and replace the non-Reading pipes. He dropped that counterclaim, likely because the contract did not provide for that remedy. Rather, Kent could refuse the final progress payment. He could recover the costs of completion if he were actually going to pay somebody to do the work, but he chose not to do so. (RLCD, 156-57). I find that fact significant. Perhaps Kent didn't really care that much about Reading pipes but did care about having a reason to refuse to make the final payment.

Judge Cardozo's results are consistent with industry standards to this day. Professor Goldberg reviews contemporary construction contracts and finds that they generally encourage outcomes akin to what Judge Cardozo laid out in Jacob and Youngs. There are some nuances. Whereas Judge Cardozo treated willfulness as a bar to substantial performance, the modern standard seems to treat it as a factor to be weighed. Professor Goldberg thinks Judge Cardozo would have been fine with that (RLCD, 159). I concur. I think he stressed Jacob and Youngs' lack of willfulness in response to determined opposition from his dissenting brethren. In most situations, standard contracts provide for cost of completion as the standard remedy if such costs are actually incurred or were not incurred for good reason. Where costs of completion significantly exceed the benefits, diminution in value is the contractually pre-determined measure of damages (RLCD 159-60). Standard contracts now direct disputes as to an architect's good faith refusal to issue a certificate to mediation or arbitration. Such disputes now seldom result in litigation (RLCD, 160-61).

The trick here is to find the right balance. If we treat the contract right as akin to a property right and order specific performance, it gives the owner too much leverage over the contractor. If a liability rule provides too little protection to the property owner, a moral hazard arises, and unscrupulous contractors will get away with as much deviation as the substantial performance doctrine will allow. A great deal turns on the willfulness/inadvertence analysis, and modern contracts draw the line pretty much as Judge Cardozo did (RLCD, 161-63).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

June 28, 2023 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (1)

Wednesday, June 21, 2023

Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

By Jeremy Telman

This is the eighth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the seventh chapter of RLCD, which visits an issue related to that covered in the previous chapter (and previous post): does it affect damages in a sale between A and B when B entered into a separate agreement to sell to C?

The issue in this chapter is similar to the issue in the middleman cases covered in Chapter 6 of RLCD and the previous post. In the US context, recovery is sometimes limited in the middleman cases. In the English cases on sub-sales, things could go either way. Professor Goldberg's position is that courts should consider sub-sales when the parties design contracts so as to incorporate sub-sales. Otherwise, sub-sales should not effect the calculation of damages.

Sometimes, the courts reach what Professor Goldberg thinks is the right rule by applying the Hadley rule -- they ignore sub-sales that were not in the contemplation of the parties at the time of contracting. More generally, in the first fifty years of cases considering the matter, courts did not take sub-sales into account in calculating damages (RLCD, 124-27). But beginning with Hall v. Pim, courts returned to the Hadley rule and took sub-sales into account when they determined that the contract contemplated that the buyer would re-sell (RLCD 127-30).

The contract at issue in Hall v. Pim was a string contract. A sold to B who sold to C who sold to D etc. It makes no sense for each party in the string to worry about some contract deep up or down the line. Subsequents sales should have no effect. The relevant trade association felt the same way and overruled the House of Lords through private legislation, creating form contracts that limited the remedy to direct damages from the breach (RLCD, 130-32). Courts have ignored this development and continue to apply the Hall v. Pim rule (RLCD, 132-35). Professor Goldberg sums up his view as follows:

If A contracts with B and B contracts with C, and A breaches, the B-C contract should have no bearing on A's damages. That simple rules does not require the court to speculate about what the parties might have contemplated. If A and B truly contemplated that the B-C contract be taken into account, it would be easy enough for them to make that explicit in their contract. The market measure should, therefore apply irrespective of sub-sales -- subject to the parties' ability to contract out of that rule.

The chapter then moves on to discuss two warranty cases, in which A sells defective products to B, which then sub-sells to C. Courts struggle with the question of whether the consequential damages on the sub-sale (or the lack thereof) should be taken into account in determining the remedy for breach of warranty. Again, the first step should be to look at the contract and figure out whether then parties addressed the issue. The courts do not do so; rather they try to determine what was in the contemplation of the parties (RLCD, 135-38). If the parties have not addressed the issue, the default rule should simply be that damages are the difference between the market price of the goods as warranted and the goods as delivered (RLCD, 139). Where there are exceptions that is because they are expressly written into the contracts (RLCD 139-40).

In his conclusion, Professor Goldberg notes that UK courts have recognized two exceptions to the general rule that the contract-market differential is the standard measure of damages such cases. First, the courts distinguished between cases involving non-delivery and delayed delivery. Second, in string contracts, sub-sales could be taken into account if contemplated by the parties and not too remote. Neither exception made any sense, and the courts persisted in the second exception despite clear evidence that the commercial actors whose contracts were governed by these decisions revised their standard forms to expressly reject the exception to the general damages rule. Courts similarly relied on their own sense of what was within the contemplation of the parties in ruling that sellers should indemnify buyers for harms to their sub-buyers. There is no need for courts to speculate on what the parties contemplate. Commercial parties make their intentions clear with contractual provisions (RLCD, 140-41).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

Teaching Assistants: Victor Goldberg on the Middleman's Damages

June 21, 2023 in Books, Contract Profs, Recent Scholarship | Permalink | Comments (0)

Wednesday, June 14, 2023

Teaching Assistants: Victor Goldberg on the Middleman's Damages

By Jeremy Telman

This is the seventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the sixth chapter of RLCD, which is about the correct measure of damages when there is a middleman, "B," and goods are sold from A to B in one contract, and then from B to C in a second contract.

The chapter in some way typifies Professor Goldberg's approach. There is a basic problem with a straightforward solution. The middleman's damages should be the difference between the price of the breached contract and the market price. The cases discussed often get it wrong, and scholarship, following the cases, justifies the mistaken approach to damages. The interesting part is trying to figure out where the courts go wrong.

But the chapter is unusual, if not unique, in that the key problem with the case law and scholarship is doctrinal. Economic principles and the logic of the transaction play a role, but the key mistake that Professor Goldberg identifies is that the cases and the scholarship lose track of the basic principle of privity of contract. As a result, they fail to distinguish between cases where the middleman acts as a broker and those in which there are two independent contracts, both involving the middleman and no contract at all between A and C.

Were the middleman a broker, a breach would deprive it only of its brokerage fee and perhaps some incidental damages. But the cases handled in this chapter involve situations where the transaction between A and B and that between B and C are clearly distinct. B has exposure to market risks on both ends. For example, imagine that A agrees to sell 1 million units to B at a rate of 100,000 units per year over ten years. B also buys units from other sources. In year three of its contract with A, B enters into a five-year contract with C to supply it with 50,000 units per year. B has other contracts with other buyers. The two contracts are completely independent, and the damages if A breaches can be determined without any need to consider the contract with C. Similarly, if C breaches, B’s damages are not affected by its obligation to buy units from A.

When courts get the damages calculation wrong, they often fear giving the middleman a “windfall.” In part, they fear windfalls because of a problem of statutory interpretation. Some scholars think that the general provision in UCC § 1-305 limits recovery to putting the aggrieved party in as good a position as they would have been in had the counterparty performed. Because they perceive these middleman transactions as involving brokers, they think it is a windfall if the broker recovers more than its expected brokerage fee. But these are not brokerage agreements. As a result, there is no windfall and no problem with damages in excess of what § 1-305 permits.

In Professor Goldberg's view, where the middleman (B) is exposed to market risk if the seller (A) breaches, allowing the difference between contract and market under § 2-713 is the appropriate remedy. If the buyer (C) breaches in a situation where the middleman is exposed to market risk, the appropriate remedy is similarly provided in § 2-708. The courts sometimes reach that conclusion based on the canon of construction that specific terms trump general terms. They reason that § 2-708 or 2-713 is more specific than § 1-305. But from Professor Goldberg's perspective, there is no tension between the provisions, because §§ 2-708 and 2-713 merely grant the non-breaching party its expectation.

Cases discussed in the chapter include:

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

June 14, 2023 in Books, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Wednesday, June 7, 2023

Teaching Assistants: Victor Goldberg on Mitigation

By Jeremy Telman

What does it mean to mitigate damages? Victor Goldberg provides an answer in the fifth chapter of his second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD), and we recap it here in our sixth post on that book. Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.

The chapter discusses two UK cases, British Westinghouse Electric & Manufacturing v. Underground Electric Railways, and The New Flamenco. In British Westinghouse, the plaintiff, British Westinghouse (BW) provided steam turbines used in the London Underground (UER) in 1902. The turbines did not work properly, and UER incurred excess annual costs of £10,000, mostly for coal purchases. After five years, UER replaced the BW turbines with Parsons turbines, which cost less than one third of what the BW turbines costed and saved UER £20,000 in annual fuel costs. At the time, advances in steam engines were occurring at the rate of advances in computer technology today. Although the turbines had a twenty-year lifespan, they were obsolete within five, with or without the defects.

When BW sued on an unpaid balance of £85,398, UER counterclaimed for excess coal costs (either the £40,000 already incurred or the £240,000 that would be incurred over the life of the turbines). In the alternative, BW maintained that it was entitled to the cost of the Parsons turbines, as that was the cost of UER's mitigation efforts (RLCD, 88-89). The arbitrator awarded UER the mitigation damages it sought. The High Court and the Court of Appeals upheld the award. The House of Lords reversed (RLCD, 90). UER would have replaced the obsolete BW turbines in any case (RLCD, 91).

In The New Flamenco, an owner and a charterer fell out while negotiating an extension of the charter period, and the charterer insisted on returning the ship at the expiration of the original charter term. The owner claimed damages in the form of the €7,558375 it would have earned had the charter been extended by two years. Two sets of facts intervened. First, just after the charterer repudiated, the owner sold the vessel for €23,765,000. Second, during what would have been the charter term, Lehman Brothers failed and the market for ships collapsed. The ship's value was now only €7,000,000.

The charterer argued that the owner was better off for the breach, which induced the sale before the market collapsed (RCLD, 94). Those familiar with Professor Goldberg's work will know that this is faulty reasoning, but both the arbitrator and, after reversal in the High Court, the Court of Appeal accepted that argument. The Supreme Court reversed again.

The proper measure of damages is the change in the value of he contract at the time of breach. If there were an available market for the re-charter of the vessel, the owner could mitigate. The parties, it appears, did not put forward evidence of that market, thinking that the sale of the vessel rendered the availability of the charter market irrelevant. However, Professor Goldberg points out, what we really need to know is whether the sale price of the vessel, which had somewhere between five and fifteen years of useful live ahead of it, reflected a new charter covering the next two years or assumed that the vessel would go unused for a time. The sale itself is not mitigation; it is only a datapoint that helps us pinpoint the value of contract at the time of the breach (RLCD, 97-98).

In conclusion, Professor Goldberg comments on the confusion that ensues in both cases when courts treat either the purchase of new turbines or the sale of the New Flamenco as mitigation. The turbines were obsolete, so there was no way to mitigate the damages done by their sub-optimal performance, nor would there be costs to be calculated going forward, because the turbines would have been replaced in any case. The sale of the vessel only gives us data about the value of the contract at the time of the breach. Its value after the 2009 collapse provides no information relevant to that question (RLCD, 99).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

June 7, 2023 in Books, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Monday, May 15, 2023

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

By Jeremy Telman

This is the fifth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD). Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here. Today's post covers the fourth chapter of RLCD, which is about the lost volume problem as handled in courts in the United Kingdom.

This short chapter does not really break new ground in terms of Professor Goldberg's larger arguments. He merely provides more examples of the outrageous results that proceed from courts in two separate jurisdictions making what he regards as the same mistake. Paraphrasing Lord Hoffman in The Achilleas, Professor Goldberg posits that damages in contracts cases ought not yield absurd results. Requiring parties to pay damages well in excess what they would have paid for the option to breach, as lost volume profits often do, renders the resulting contract absurd (RLCD, 69-70). For this reason, sophisticated parties frequently contract around the lost volume remedy (RLCD, 70).

Professor Goldberg discusses three cases involving car sales. The basic rule, as discussed in the cases and the treatises, is that a dealer can collect lost profits when it had adequate inventory to meet demand. In such cases, the courts reason, but for the breach, the dealer would have sold one more car and so it is entitled to its lost profits. It recovers nothing when it had just enough cars to meet demand such that the breach made no difference. In Professor Goldberg's view, "The lost volume seller framing gets it backward. It sets the option price high the the market is slack and low (or zero) when the market is tight" (RLCD 71-72) This is so because in a tight market, the dealer would not be able to get cars from the manufacturer and so could not recover lost profits. In the end, in this context the lost volume remedy sets an option price that is unknown to the buyer, almost certainly too high and "perverse" because backwards. The alternative would be to make the option price explicit by asking the buyer to pay a non-refundable deposit (RLCD, 77).

In B2B cases, lost profits are harder to calculate -- they should be the difference between the contract price and the but-for costs. Lost volume damages can result in ridiculous amounts of damages. In a research-intensive business, lost profits could exceed 50% of the contract price. Imagine that a software developer offers a just-completed product for sale for $100,000. The buyer reneges, and the software developer finds a new buyer. If the product is delivered electronically, but-for costs approach zero, and lost volume damages would be $100,000, more or less. Again, this is an absurd result (RLCD, 69-70). But it is the result ordered in a number of English cases. In In re Vic Mill, and Hill & Sons v. Edwin Showell & Sons, Lim., cases from the World War I era, courts awarded lost volume profits so long as seller had the capacity to meet all demand (RLCD, 78-80).

English courts also applied the lost volume doctrine in the equipment rental context. Both cases involved liquidated damages provisions. In one case, the damages provision was set aside as a penalty, but on appeal, the court imposed lost profits damages calculated as the liquidated damages adjusted for depreciation and other costs. In the second case, the court upheld a liquidated damages provision set at 50% of the contract price because it was not excessive in relation to damages based on a lost-volume theory (RLCD, 81-84). Professor Goldberg would have struck the latter liquidated damages clause because it was in a consumer lease, and it seems unlikely that the defendant was on notice of the clause. I'm surprised that Professor Goldberg does not delve into potential conceptual problems in applying the lost volume sales concept in the context of leases.

Finally, in Sony Computer Entertainment UK Ltd. v. Cinram Logistics , UK, Ltd, there was no breach. Rather, defendant was responsible for warehousing and distributing memory cards for Sony's Playstation. It conceded liability for allowing the memory cards to be diverted. The question was whether damages should be the cost to Sony of the lost cards (£56,246) or or the lost profits Sony could have gotten had it been able to sell not only these cards but other cards that it had in inventory sufficient to meet demand (£187,989). Professor Goldberg argues that the lost volume analysis make no more sense in this context than it does its "natural habitat". The smaller figure is the only one that makes any sense (RLCD, 84-86).

Concluding his section on lost volume profits, Professor Goldberg pleads to put this wayward doctrine out of its misery. His argument for why it is wrong may also explain its longevity: courts impose lost profits damages because they think that the breaching party ought to pay for the harm that they caused. This is the wrong way to approach contracts damages. Rather, courts can and should ask what a buyer would pay for the option to breach. Parties sometimes provide an easy answer to that question through liquidated damages clauses or through non-refundable deposits. But courts, enamored of lost profits, too often ignore such devices, resulting in penalties that can be far harsher than the ones they routinely strike down (RLCD 86-87).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

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