ContractsProf Blog

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

This is the fourth 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 third chapter of RLCD, which is about the lost volume seller under the UCC's § 2-708(2).

Lost volume profits permit a seller to recover damages when, because it has sufficient inventory to meet demand, it cannot effectively mitigate.  But for buyer's breach, the logic goes, seller would have had two sales instead of one.  According to the estimable White and Summers, this is the remedy on which "all right-minded people would agree."  Not so, says Professor Goldberg.  The remedy should be the price that buyer would pay for an option to terminate/cancel.  Where there is no deposit paid and market conditions have not changed, the default rule should be zero damages, absent progress payments, which Professor Goldberg would treat as a series of nested options (RLCD 47).  

Rather than thinking in terms of lost volume, Professor Goldberg asks what a buyer would pay for an option to purchase.  The hotter the market for the goods, the more expensive the option should be, but lost volume profits create the opposite effect.  If it is easy for the seller to fill its inventory, presumably because the market for the goods is slack, the buyer has to pay a high price for breach.  But if no substitute goods are available, perhaps because the goods are much sought after and hard for the seller to obtain, the price for the option is low.  Lost volume recovery sets the price for the option that is not just wrong; it is backwards (RLCD 51). 

In some cases, the parties set their option price through a non-refundable deposit.  But courts have set aside such negotiated liquidated damages in favor of the lost volume remedy (RLCD 51-52).  The lost profits calculation also might also be wildly and arbitrarily different, depending on whether the seller is vertically integrated with the manufacturer (RLCD 52).

Overall, Professor Goldberg uses case law to illustrate three general themes.

(1) Lost volume recovery sets an excessive implied option price for breach.  In Teradyne Inc. v. Teledyne Indus., Inc., for example, the court treated buyer as paying $76,000 for the option to buy a test system for an additional $22,000 (RLCD 53).  In Empire Gas Corp. v. American Bakeries Co., the court ordered American Bakeries to pay 38% of the contract price for conversion units when there was a competitive market for the goods, and the reasonable option price would have been zero (RCLD 67).

(2) Courts ignore explicit option prices.  In Trienco Inc. v. Applied Theory, Inc., the court did not have an explicit option price to work with, but seller had demanded a 20% deposit on previous, similar deals and 10% on the transaction at issue.  The court awarded lost volume recovery in an amount closer to 50% of the contract price (RLCD 55).   In R.E. David Chemical Corp. v. Diasonics, Inc., the court would have invalidated as a penalty a $300,000 liquidated damages clause, but it imposed $450,000 in lost volume damages (RLCD 56).  An even more outlandish result was avoided in Rodriguez v. Learjet, Inc. only because Learjet was only interested in recovering its $250,000 in liquidated damages, rather than the $1.8 million in lost volume profits that the court was poised to award (RLCD 56-57).

(3) Courts sometimes grant lost profits even when seller has an adequate remedy.   In an unpublished California case, Lam Research Corp. v. Dallas Semiconductor Corp., the court treated the seller of specially-manufactured goods as a lost volume seller, even though it could not re-sell after buyer repudiated and seller had to cannibalize the goods for use in other products.   An action for the price under §2-709 would have provided an adequate remedy (RLCD 59-61).   In Nederlandse Draadindustrie NDI V.V. v. Grand Pre-Stressed Corp., the court granted lost volume recovery when simple contract vs. market damages would have been appropriate.  The result was an award of damages amounting to 35% of the contract price instead of 6-10% (RLCD 61-62).  Jewish Federation of Greater Des Moines v. Cedar Forest Products Co. is another case where a court awarded lost profits for a specialty item, notwithstanding seller's ability to reuse the components of the specialty item on other products.  The result was to allow seller to keep a $53,000 deposit on a $214,000 product.   The trial court had limited the remedy to $13,000 in incidental damages (RLCD 62-63).  The Montana Supreme Court upheld a $2 million jury verdict in Bitterroot Int'l Sys., Ltd. v. Western Star Trucks,Inc.  The jury was asked whether the repudiation of a five year freight-hauling and logistics service agreement implicated the lost-volume doctrine, and it concluded that it did.  On what basis the jury so concluded is hard to reconstruct from the opinion (RLCD 63-64).

Professor Goldberg proposes various fixes. Courts have generally made sense of UCC § 2-708(2) by ignoring its final clause.  Professor Goldberg thinks the better approach is to follow the statute and read it to apply only when the buyer breaches after the seller has begun production, leaving the seller with partially completed goods.  Moreover, here as elsewhere, Professor Goldberg favors allowing parties to specify their own remedies, with the UCC remedies provisions proving only defaults.  Buyers could then protect themselves against lost volume damages, which can function as a penalty for breach, with express language disclaiming liability for any lost profits.  But a couple of the cases discussed in the chapter involve large commercial transactions to which the parties committed themselves without a written agreement.  In such circumstances, it is important to have default rules that make sense.   

Professor Goldberg concedes that his approach, conceptualizing damages as a remedy for the exercise of an option to terminate or cancel a contract, does not work in every situation.  He does think it provides a better mechanism for calculating damages in the lost volume context. (RLCD 68)

If case anyone is vaguely interested in the joke inserted in my title, here's the trailer to the 1985 comedy in question

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

OCU Contracts Course Ghost Tour of Oklahoma City!

This year, for the first time, I taught the famous haunted house case, Stambovsky v. Ackley, as part of my unit on duties of disclosure.  The case annoys me, but perhaps it has some value.  I find it hard to respect a court that found that an "as is" clause is inapplicable because it applies only to physical matters and not to "paranormal phenomena."  I find it equally implausible to hold that the seller failed to deliver "the premises 'vacant' in accordance with her obligation under the provisions of the contract rider," because the house was "haunted."  As the dissent wisely cautioned, "The existence of a poltergeist is no more binding upon the defendants than it is upon this court."

My student Ariana Quirino disagreed with me on the materiality of ghosts.  Indeed, she has personal experiences of ghosts in the Law School itself!  In order to get beyond this friendly disagreement, we decided to undertake a joint venture, a ghost tour of Oklahoma City, led by local expert Jeff Provine.  The results are memorialized below:

We actually had a better turnout than the picture reflects, but some of us had to leave early, as the tour started pretty late.  I was among the early casualties, but somehow my being continued to haunt the students.

Blog Editor Emeritus Frank Snyder and the Commemoration of Priday's Mill

in 1850, a mill was established for the Hadley brothers.  Three years later, their crankshaft broke, and they sent the broken shaft off to serve as a model for a replacement.  So contracts history was made.  One hundred and fifty years later, the International Conference on Contracts was born and that first iteration of the conference included a visit to the site of the Hadley brothers' mill, known as the City Flour Mills but also as Priday's Mill.  

The site was being converted into a block of flats, but inspired by the conference, the city of Gloucester erected a commemorative plaque:

Frank Snyder, this blog's founding editor, was also part of the crew that organized that first conference, and he was invited back to Gloucester for the unveiling of the plaque.  Next year, KCON XVII will return to England for the first time since that inaugural conference, and Frank will no doubt continue his central organizational role.

What great unveilings await us as KCON enters its third decade of existence?

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Mel Eisenberg on Ethan Leib

Ethan Leib has had a long and fruitful career – almost sixty articles! – and it’s gratifying to learn that I contributed to his approach to thinking about the academic pursuit in some small measure. Ethan and I disagree about relational contracts, but my strong guess is that we would agree on almost everything else in the law of contracts.  But to our disagreement:

 Ethan’s strong and lucid critique of my article, and later my chapter in Foundational Principles of Contract Law, on relational contracts, has not led me to change my position in a fundamental way, but has led me to expand and clarify my position, which I do here.

To begin with, I believe I’m less rigid about rules than Ethan thinks I am. At the center of my thinking about the common law is that the common law is rule-based and that legal standards and legal principles are legal rules. The dictionary defines a rule as an authoritative prescribed direction for conduct. Expanding that definition a bit, a legal rule is an authoritative prescribed direction that can be applied to determine whether conduct, like nonperformance of a contract, was right or wrong, and whether activity, such as a contract or a will, was legally enabled. Narrow garden-variety legal rules, legal principles, and legal standards are all legal rules, because they can all be applied to determine whether conduct was legally right or wrong and whether activity was legally enabled.

So, for example, the principle of expectation damages, that a promisor who breaches a bargain contract is required to pay the promisee the amount required to put her in the position she would have been in if the promisor had performed that can be and is applied to measure a promisee’s damages. Typically, that principle is expressed in more specific formulas that apply to different contexts – seller’s breach of a contract for the sale of goods, buyer’s breach of a contract for the sale of goods, and so forth -- but these formulas are merely instantiations of the principle, and in any event the principle can be applied directly rather than through a formula, as in the famous case of Hawkins v. McGee. Similarly, the standard of due care is typically expressed in the form of the more specific rule that a negligent actor is liable to a person he injures, but the standard can also be applied directly, as when it is said that a defendant did not exercise due care.

Ethan points out that I reject an approach to contract law rules that involve a spectrum running from discrete contracts to relational contracts. Such an approach requires definitions of the two ends of the spectrum. Ian Macneil, who created relational contract theory as a school of thought about contract law, characterized a discrete contract as having less of certain characteristics – for example, less duration, less personal interaction, and less future cooperative burdens – and a relational contract as having more of those characteristics. The problem is – there are few or no discrete contracts, because almost every contract has relational elements. For example, even buying a car usually involves protracted interactions with a salesman and a sales manager, perhaps more than one visit to the showroom, and repeated cooperative burdens to make repairs in the seller’s shop. 

A Viking and a Saxon
Image created by DALL-E

Indeed, trying to imagine a discrete contract Macneil was driven to a fantastic extreme: “[A]t noon two strangers come into town from opposite directions, one walking and one riding a horse. The walker offers to buy the horse, and after brief dickering a deal is struck under which the horse is to be delivered at sundown upon the handing over of $10. The two strangers expect to have nothing to do with each other between now and sundown, they expect never to see each other thereafter, and each has as much feeling for each other as a Viking trading with a Saxon.” OMG! There are no spectrums in contract law to speak of, because a spectrum has to have two end points, and since discrete contracts are imaginary creatures there are no end points for a spectrums running from discrete contracts to relational contracts.

Ethan thinks I would not accept multi-factor rules as rules. I would. A rule that has three, four, five or more factors is a rule. A court must go through the factors and conclude that a party is liable or not, or that the law did or did not enable certain activity, like whether a contract Is enforceable or a will is valid.

Ethan reads me to be skeptical of the acknowledgement that many  many real-world contracts involve dynamic and that relationships could do more than inform economics and sociology. Uh-uh. I regard contracts as dynamic. Tbey have a past, in the form of course of dealing, and a future, in the form of course of performance. Moreover, they are frequently modified, and under modern contract law modifications are enforceable if . . . . And the fact that parties have enjoyed a mutually advantageous business over the course of decades, as in Eastern Airlines, certainly may be relevant to interpreting their obligations. But that does not require a law that applies to, and only to, parties in a relationship that has lasted decades. The fact that parties have enjoyed a mutually advantageous relationship can be relevant to interpreting their contractual obligations even if that relationship has only lasted months. Again, my point is not that there are no relational contracts – my point is that there are no rules of contract law that apply to, and only to, relational contracts. Similarly, I don’t deny, as Ethan believes I do, that some rules can only be applied through a multi-factor test. First, such a rule is a legal rule, and second, such a rule can be applied to determine what category a relationship falls into even if the parties entered into their relationship two weeks or two days ago.

Finally, Ethan believes I am skeptical about spectrum approaches in the law. But I’m not.

So hip-hip hurray for relational contracts, but not for the proposition that there are rules of contract law that apply to relational contracts and no other contracts.

Previous posts in the Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Subsequent posts in the series:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Finding Morality in Contract Law
Hila Keren

When I was a (much) younger post-doctorate fellow at the Center of Law and Society in Berkeley, I was lucky to experience some of what Ethan Leib shared in his contribution to this symposium: Mel Eisenberg’s warmth and generosity. We shared a lovely lunch, for which I believe he paid, but that’s not my evidence of the previous point. Although we had so little in common in terms of stardom (I had none!), gender, age, or even country of origin, Mel learned about my Ph.D. thesis (a feminist one) and announced that we share something unique. I guess my jaw dropped because he hurried to explain that “nowadays” (read: almost two decades ago), only a few scholars are truly passionate about the good old law of contracts and sincerely focused on the role it plays in our lives. Until today, those words inspire my work. More importantly, they illuminate Mel’s lifetime insistence that morality is integral to contract law and moral behavior is expected from contractual parties who seek to enforce their agreements. To me, this theoretical vision is tightly linked to Mel’s interpersonal kindheartedness.

Frequent readers of contract law scholarship are usually exposed to variations of the argument that this field of law has, and should have, little to do with morality. As early as the end of the nineteenth century, Oliver Wendell Holmes made a strong claim against the integration of contract law and morality. In his Harvard Law Review article, The Path of the Law, Holmes wrote that “[n]owhere is the confusion between legal and moral ideas more manifest than in the law of contract.” He also cautioned that it would be “a gain if every word of moral significance could be banished from the law altogether.”

Fast-forward to 2008, Richard Posner echoed the message from the bench when he stated in Classic Cheesecake v JPMorgan Chase Bank: “it is a strength rather than a weakness of contract law that it generally eschews a moral conception of transactions.” Like Holmes, Posner added a normative warning. In his view, not without followers among contract theorists, it is better to discuss real contractual issues rather than “[r]uminating on the meaning of ‘unjust’ and ‘unconscionable.’” 

Much of the modern resistance to any incorporation of morality in contract law focused on the doctrine of unconscionability, perhaps because its very name reflects an aspiration to such integration. Commentators, many of whom leaders or followers of the law and economics approach, criticized the doctrine’s application in the watershed 1965 case of Williams v. Walker-Thomas Furniture Company. They argued that market actors should be left free and never be expected, as Posner put it in another decision, to be their “brother’s keeper.” Or, as Frank Easterbrook explained in Wilkow v. Forbes, Inc., “an allegation of greed is not defamatory” because “sedulous pursuit of self-interest is the engine that propels a market economy.” Moreover, many in this camp and outside of it also labeled the doctrine of unconscionability “paternalistic.” Many, including most famously Richard Epstein, added caution that excusing exploited promisees due to contracts’ unconscionability would end up harming the victims instead of offering them relief.

Given this dominant opposition, one is left puzzled: How should the law respond to exploitative market behaviors that yield predatory contracts? By and large, our legal system delegates the problem to the judiciary. Then, admittedly, many greed-born contracts slip under the legal radar because the exploited parties simply lack the means, monetary and otherwise, to seek legal help. Those who do manage to access courts request release from their promise, mainly in the name of unconscionability. On the other hand, exploiting parties frequently use their abundant means to turn to the law and demand enforcement of their contracts. Therefore, any time litigation ensues, courts must choose, respectively, between greed and conscience, exploiters and exploited, and enforcement and unconscionability. So, what should courts do? I think they should follow Mel’s analysis.

In the face of the loud attacks on morality in contract law in general and the use of unconscionability in particular, Mel has developed and shared with the world the opposite approach. He has brilliantly analyzed, demonstrated, and compellingly argued that insisting on moral behavior by contractual parties is an integral part of contract law and for all the right reasons. Nowhere is this approach more evident than in his celebration of unconscionability in his phenomenal book Foundational Principles of Contract Law, in which the third part is dedicated to “Moral Elements in Contract Law.” Opening this part is chapter seven, titled “The Unconscionability Principle,” thereby elevating the concept from a doctrine to a leading principle, claiming its centrality to the contractual legal system, and challenging its marginalization by others. To remove any possible doubt about this feature, the chapter starts by unapologetically crowning the principle as “one of the most important developments in modern contract law.”  Morality, Mel explains, is at the heart of this “fundamental principle,” reminding readers that “the term unconscionable suggests a significant degree of moral fault.” The beauty of the principle, he further illuminates, is its ability to connect rather than separate contract law and social morality (the latter eloquently defined as the “moral standards that are rooted in aspirations for the community as a whole”). As our social norms evolve, Mel writes, unconscionability “continues to unfold,” ensuring our law reflects and supports those norms.        

In a set of hypotheticals with lovely titles, the chapter illustrates how essential is the expectation of morality to the appropriate operation of contract law. For example, The Desperate Traveler hypo raises the problem of “immoral exploitation of [a] promisor’s distress.” Similarly, The Desperate Patient story focuses on a medical provider acting “in a morally improper way” when demanding an excessive price for a life-saving procedure that others cannot perform. Further, The Artless Heir example shows how exploiting an unsophisticated counterparty’s lack of understanding of a transaction sometimes “violates social morality” even if basic legal capacity exists. In the same vein, as if predicting COVID-19, Mel states that “price gouging is immoral” because “it is morally improper to significantly raise prices to exploit important needs resulting from a temporary disaster.” This is also his view of cases of sellers’ exploitation of price ignorance on the side of consumers and some door-to-door sales. Those and other compelling examples more generally show how unconscionability is the voice of conscience and morality within our contractual system. Or, in Mel’s words, “Whether a contract is unconscionable normally turns in significant part on whether the promisor engaged in morally improper conduct.”

Significantly, the chapter offers a forceful response to the loud outcry of “paternalism!” This part (which I had the privilege of reading in earlier drafts of the book) truly inspired much of how I think about the role of contract law, so please allow me to consume some more virtual space by presenting the entire idea. Mel writes: “It is not paternalistic to refuse to enforce a contract obtained through morally improper conduct.” He then emphasizes that even if some paternalism is involved, it is “a very diluted form of paternalism.” Why? Because in applying the unconscionability principle: “the government forbids nothing and commands nothing. It simply says to the promisee, ‘If you can accomplish your ends without our assistance, fine. But don’t ask us to help you recover a pound of flesh.’”

Touché! And also, how beautiful it is that Mel’s phrasing echoes not only Shakespeare’s The Merchant of  Venice but also Judge Story’s insistence that Courts of Equity “ought to interfere” because unconscionable contracts “shock the conscience.”

But what I find most thought-provoking in this forceful statement is that it can be read as going far beyond successfully replying to allegations of paternalism. Hidden here, but not too far from the surface, is a precious gem: a robust conceptualization of how a moral contract law should work. In Mel’s reply, I find not only a justification for the judicial invalidation of exploitative contracts but also a broader obligation of the state. Because courts support the contractual system by providing market actors with valuable enforcement services, they must be careful about how they do so. Accordingly, when market actors utilize contractual powers in an immoral manner, the judiciary should refrain from supporting their abuse of the system. As a matter of duty, the state ought to operate the foundational principle of unconscionability to prevent the enforcement of agreements that transgress society’s moral norms.

Recognizing the state’s ability and obligation to discourage the immoral use of contracts via the unconscionability principle is invaluable. Elsewhere, I explained why the way courts operate the principle is critical to how people choose to behave. As scientists have shown, “rightness and wrongness…are things we feel,” and moral emotions like guilt are designed to guide us to avoid what we believe is immoral. What courts say and do when facing the puzzle of contracts blemished by immoral conduct has a significant impact on this human process. Given the immense expressive power of the law, judicial decisions and their dissemination via the media shape what people consider a faulty behavior that should be avoided. For example, when the law defines the exploitation of distressed people as improper, it can induce in market actors the anticipation of guilt feelings if they so misbehave. In response, some actors may decide to escape this foreseeable unpleasant emotion by taking the course of more self-restraint. By contrast, the conventional insistence that contract law should focus merely on economic incentives and avert questions of morality suppresses this emotional incentive to refrain from exploitation.

And there is more. Fully understanding the power of the unconscionability principle carries an even broader meaning. It suggests that contract law’s principles should reflect and support the idea that contracts—as powerful private tools trusted in human hands—should be morally used. For instance, as I have recently written, much like unconscionability, the foundational principle of good faith should be operationalized to discourage market providers from humiliating their counterparties. On this view, employers act in bad faith (and not only discriminate as decided in Bostock v Clayton County) when they terminate contracts with LGBTQ+ employees after learning about their sexual orientation or gender identity. Likewise, MacDonald’s performs its contract with a Black diner in bad faith when its manager responds with horrible racial slurs to an ordinary request to replace cold fries with fresh ones.

Once more, it all goes back to Mel’s argument that the state should not accept and reward immoral abuses of the contractual system. Following this guidance, I would add that the state should secure market citizenship for all its members whenever its judiciary applies the law of contracts. That means that the foundational principles of contract law must be used to prevent those profiting from contracts from damaging the contractual experiences of others. Note that this broader point is again a matter of morality: free and equal citizens must respect each other, and the state ought to refuse to support their contractual endeavors when they intentionally and severely harm the human dignity of their counterparties. Because exploitation and humiliation both have this injurious effect, such behaviors should be handled via foundational principles like unconscionability and good faith.

Mel Receiving the KCON Award in 2012

All told, read as embedding morality in contract law’s leading principles, Mel’s chapter on unconscionability, and his entire notable body of work, inspires a deeper conversation regarding contracts, the people who use them, and the role of contract law. It invites us to imagine a world in which contracts are not battlefields wherein the winner takes it all but rather an essential type of relationship between humans. Those humans are not only rational and selfish but also equipped with good amounts of social and emotional intelligence. As such, they are much more amenable than the infamous homo economicus to moral cues, including those expressed by the law. Furthermore, under this view, contract law is not only a quintessential strain of private law designed to support the free market. Instead, it is also a unique social institution that can (and should) foster morally healthy relationships between market actors. So, in conclusion, I hope you can see how such a generous outlook on contracts, humans, and the law not only arises from Mel’s remarkable work but also ties in with the generosity and care he exhibited in that lovely lunch many years ago.

Previous posts in the Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Subsequent posts in the series:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

My Relationship with Mel Eisenberg About Relational Contracts
Ethan J Leib

When I was a fresh-faced contracts professor in San Francisco, I was lucky enough to be invited to Mel Eisenberg’s class to defend a paper I was then publishing about relational contract theory.  It felt exciting to be welcomed to the big leagues by a leading light in the field – but also daunting to be subjected to scrutiny by someone I was criticizing and by someone who knew a lot more contract law than I would ever know.  The class was deeply stimulating and the students especially probing and thoughtful.  I met a future co-author in that class, an intellectual partnership that continues to inform my scholarship. 

But what I remember most – and the thing that shaped me most from that encounter – was Mel’s graciousness in engaging a young punk with sympathy and care.  Experiencing someone who knows it all dealing with a know-it-all in a workshop setting provided a model for how I come to workshops today: Is there something I can learn here?  Mel showed me how it is done, and I can still remember him asking me seriously rather than facetiously, “Do you think I am making a mistake, and am too rigidly interested in rules rather than standards in my approach to relational contract theory?”  He saw intellectual exchange as a way to see his own thinking from others’ standpoints – and more than any specific paper of Mel’s, this is the most important mode of thinking he added to my life back when I was still impressionable.

I’ll admit I came to Chapter 54 of his Foundational Principles of Contract Law hoping to see him convinced by our dialogue.  I had tried to impress upon him all those years ago that searching for a “relational contract law” that would apply only to “relational contracts” with specialized rules was not really the objective of a thoroughgoing relational contract theory.  Although he was always happy to concede that many contracts do not fit the paradigm of contracts between strangers that occur in a single moment in time in a perfect market, as classical contract law often seemed to assume, he remained skeptical that the acknowledgement that many real-world contracts involve dynamic and ongoing relationships could do more than inform our economics and sociology.  In short, he always felt that until one could really successfully define in a legally operationalizable way “relational contracts” there could be no “relational contract law.”  In his recent book, he sticks to his guns, highlighting why using duration or incompleteness won’t do the trick in dividing the world between relational and discrete contracts.

I’m sticking to my guns, too.  There is nothing legally impossible about a spectrum approach if one is comfortable with loose standards and judicial discretion.  Here is what Mel says about that: “Under this approach a contract is characterized as lying at the discrete end of the spectrum if it has less of certain characteristics—for example, less duration, less personal interaction, less future cooperative burdens, and less in the way of units of exchange that are difficult to measure—and as lying at the relational end of the spectrum if it has more.”  (735)  Mel doubles-down here to say that the spectrum approach works if you are doing economics or sociology but not law: “the enterprise of contract law entails the formulation of rules and a spectrum approach is inadequate to that enterprise because it cannot be operationalized . . . Rules whose applicability depends on how many relational indicia a contract has . . . would be rules in name only.”  (735) 

By my lights, the law routinely uses a set of indicia to make legal categorizations.  Contract and tax lawyers will easily be able to think of the employee/independent contractor distinction as an example (even if they aren’t sure whether it is a 9-factor test, a 20-factor test, or a 3-factor test).  Notwithstanding that some want bright-line rules rather than multi-factor analysis, it would be hard not to acknowledge that these efforts to classify workers are legal rather than merely economic or sociological.

Thus it seems to me still, all these years later, that Mel continues to prefer not to adopt the spectrum approach largely because it feels too messy to him and isn’t “rule-like” enough to his taste.  There is nothing wrong with that sensibility, of course, but it doesn’t prove that relationalists are unable to advocate for a spectrum approach in the law.  I also don’t think the spectrum approach ultimately requires a legal system to proliferate regimes that toggle between different types of contracts necessarily; one could have one law and one “good faith” requirement – and then implement it differentially depending on relational dimensions.  What counts as good faith for two companies in a multi-decade relationship may be different from what it requires for two companies in a new venture dealing far at arms’ length. 

That seems like a relationalist contract law even Mel could live with – and it doesn’t seem to require a singular technical definition of a relational contract.  I always like to point out the first line of Eastern Air Lines, Inc. v. Gulf Oil Corporation to my students: “Eastern Air Lines, Inc. and Gulf Oil Corporation, have enjoyed a mutually advantageous business relationship involving the sale and purchase of aviation fuel for several decades.”  Isn’t this just a judge setting the stage for his decision-making by telling us that relationships matter in the application of contract law?  Isn’t that enough to help remind us that there is such a thing as relationalist contract law, after all?

Related posts from the Mel Eisenberg Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Posts from the second week:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Unscrambling Excuse
Douglas Baird

The domain of classical contract law has discrete boundaries and hard edges. Legally enforceable promises are limited to bargained-for exchanges. There must be an offer and an acceptance. A contract exists, or it does not. You receive expectation damages or nothing. Such rigid traditionalism, however, no longer captures what contract law is about, if it ever did. Mel Eisenberg’s corpus, in particular his exemplary work on excuse, makes this manifest.  See Melvin A. Eisenberg, Impossibility, Impracticability, and Frustration, 1 J. Legal Analysis 207 (2009).

Boundedly rational parties do not always precisely spell out their contracts to account for the unexpected, and hence promises that appear unqualified on their face should not be understood literally. If a bargain rests upon assumptions about future states of the world, the deal is sensibly called off if those assumptions for unexpected reasons do not hold. You agree to rent my theater for an evening and, through no fault of mine, it burns down. In this event, we each should go our separate ways. Similarly, if I have an apartment that overlooks the King’s coronation, and you are eager to see it, it is too bad for both of us if the event is called off. I lose the handsome sum from letting out my apartment for a day, and you lose the chance to entertain your friends with a spectacular view of the pageant.

Frustration and excuse are heavily fact dependent. The doctrine in the first instance is merely a default term. Dickered contracts contain elaborate force majeure clauses. We can spill ink over what counts as excuse or frustration, but Mel Eisenberg shows that this is not what is conceptually hard. The problem comes from what happens next. Money may have changed hands, and both parties might have spent money in reliance on the contract. Unexpected events typically bring with them a loss, and someone must bear it. This makes it fruitless to reduce excuse and frustration to a simple yes/no, on/off affair. Any coherent account of excuse and frustration must couple the finding of excuse or frustration with the appropriate relief. The egg must be unscrambled.

It is well accepted that restitution operates in this environment. If one party pays the other in advance, that party should be able to get its money back. But beyond this, much hard thinking needs to be done. It might seem that reliance damages should have no role to play. Both parties to a contract spend money in anticipation of the performance, and it makes little sense for each party to hold the other liable for her expenses. But the two parties do not necessarily stand in symmetrical positions. Often it is too simple to say that no one was responsible. The theater owner, while not at fault, controlled the theater and had some capacity to reduce the chance of fire. Even when excuse applies, some parties may be more at fault or better positioned than another.

Mel Eisenberg (right) draws on a series of old Massachusetts cases to shed light on the problem. A general contractor’s contract to build a hospital was cancelled and awarded to another bidder instead. The general contractor then faced its own subcontractors, and the doctrine of excuse applied. The general contractor could not be sued for expectation damages. The cancelation of the main contract called off the contract between the general contractor and the subcontractor. ­At the same time, however, the general contractor was, at least to some extent, responsible for the contract being voided. The subcontractor should be able to recover some of its reliance expenditures. See Albre Marble and Tile Co., Inc. v. John Bowen Co., 338 Mass 394 (1959).

What remains a mystery is how far this idea extends. The testing excuse case is one in which the unexpected event keeps both parties from performing and money passes from one to the other. Consider two singers. They agree to perform together at a specific time and specific venue and then split the gate. One singer faces $100 in expenses that the other does not. To ensure that they come out even in the end, the second singer gives $50 to the first. An unforeseeable act of God renders the venue unusable and the joint performance is cancelled. What happens now? If the first singer had been spent none of the $100 she received from the second, the second singer should have a restitution action for $50. But what if the $100 has been spent? Does the second singer still get her $50 back? It might seem that the two singers invested in a joint enterprise and should share the losses equally.

Assume that your intuition suggests that the losses should be shared in this case, and the second singer is not entitled to recover the $50 she gave to the first. How much does one have to change the facts to alter your intuition and for you to find that one party can recover what she has given the other notwithstanding the expenses the other has incurred? Consider, instead of two singers, there is a couple that engages a restaurant for their wedding reception and pays in advance. Power is lost halfway through the event. It is not the fault of either party, and the contract explicitly lists a power failure as an event of excuse. The unhappy wedding couple can obtain restitution of the money they gave to the venue less any benefit they received before the power failed. Facto v. Pantagis, 915 A.2d 59 (N.J. App. 2007). But does it make sense that the venue bears the entire loss for the food that is uneaten and has to be thrown out?

I suspect that many share my intuition that the couple should have an easier time recovering the money they have paid notwithstanding the substantial loss the restaurant faces, but how is the restaurant different from the first singer? English law allows some account to be taken for the out-of-pocket reliance costs as an offset against restitution in excuse cases. See Gamerco SA v. ICM/Fair Warning (Agency) Ltd., [1995] E.M.L.R. 263 (High Court, Queen’s Bench). But when exactly should this happen?

The genius of Mel Eisenberg’s work here, as elsewhere, shows how best to cope with such questions. He does not confront this problem in particular, but his work does suggest, perhaps, that regardless of where one draws the line, the wedding couple has a better chance of recovery than the first singer. To be sure, the restaurant is not at fault for the power failure. If it were, there would be no excuse. Nevertheless, it is possible to lay some responsibility at its doorstep, and it is not something that rigid formalism should require us to ignore. Again, the law of excuse, like the law of contract, need not be a rigid, yes/no, on/off affair.

Related posts from the Mel Eisenberg Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Posts from the second week:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Teaching Assistants: Victor Goldberg on The Golden Victory

This is the third 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 second chapter of RLCD.

In his chapter on The Golden Victory [2007] UKHL 12; [2007] 2 WLR 691, Professor Goldberg again illustrates why the best way calculate damages for breach of a long-term commercial contract is to determine the value of the contract as an asset at the time of the breach (or the time repudiation is accepted by the non-breaching party).  The Golden Victory involved a seven-year time charter of a shipping vessel, which began in 1998 and was to terminate in 2005.  The charterer repudiated in 2001.  An arbitrator determined that there had been breach in 2002.  The award was not calculated until late 2004, and in the interim the second Persian Gulf War broke out, which would have triggered a clause in the time charter that permitted termination in case of war or hostilities between named states, including the United States and Iraq (RLCD 36-37). 

The House of Lords, in a 3-2 decision, determined that damages must take into account the fact that the United States' invasion of Iraq in March, 2003 would have triggered a right of termination regardless of the breach, and therefore reasoned that granting damages beyond that point would result in a windfall to the owner.  This seems obviously daft.  If damages were determined in 2002, they would have compensated the owner for the full term of the time charter, but they also would have taken into account that the allocation of risk between the parties meant that the value of the time charter might be something less than the most advantageous recovery sought by the owner.  That allocation of risk would include the chance of war or hostilities but also the chance of numerous other contingencies that the parties anticipated might have occurred but did not occur.  The amount of damages should not turn on what the adjudicator knows at the time of the award; it should turn on what can can be known about the value of the contract at the time of the breach (RLCD 37-39).

Professor Goldberg discusses, Flame v. Glory Wealth, which seems to take the mistake of The Golden Victory one step further.  In Flame a charterer repudiated a contract based on its belief that the owner, due to its deteriorated financial position, would not be able to provide the vessels it required.  The owner's position had deteriorated because the collapse of Lehman Brothers had resulted in a 75% decline in the market for freight.  Here we have a dispute involving a fact in control for the non-breaching party (RLCD 39). 

The court determined that Glory Wealth suffered no loss because it indeed could not have supplied the vessels.  Professor Goldberg argues that, having taken a short position in vessel market, its position was not as dire as the court assumed, and granting it recovery that reflected the discounted market value of contract at the time of the repudiation would not have resulted in a windfall to Glory Wealth (RLCD, 40).  There would be no injustice if the repudiating party paid for its breach.  Its "decision to breach is evidence of its contemporaneous belief in the owner's ability to perform" RLCD 41).

In The Golden Victory, the court awarded lessened damages because of an event that it knew had taken place but that seemed unlikely at the time of the breach.  In Bunge SA v. Nidera BV, the court similarly bungled the damages award in a case in which both parties knew that a bargained for right of termination was likely to be triggered.  In that case, a decision by the Russian government to place an embargo on wheat exports triggered a right of cancellation.  Under the contract, a delivery of wheat was to be made at the end of August.  Buyer, citing the Russian legislation, cancelled the contract on August 9th, and this repudiation was accepted on August 11th (RLCD, 41).

Here again, the UK Supreme Court followed The Golden Victory and awarded nominal damages of $5.   It did so notwithstanding the parties' "damages clause" which specified that damages should be the contract-market differential at the time of the breach (RLCD, 42).  The court just could not accept that the clause could apply in these circumstances. 

The case thus illustrates two of Professor Goldberg's themes.  First, courts err in associating the value of the contract with the value of the goods at issue at the time of the award rather than considering the value of the contract as an asset at the time of the breach.  In so doing, they should not consider subsequent events.  Second, courts err in refusing to respect the allocation of risk to which sophisticated parties have agreed.  Courts apply the default damages rules that they have devised, even if those rules are daft and even when the parties have chosen to depart from those daft default rules.  "Properly understood, the compensatory principle would compensate the promisee for the change in value of the contract at the time of the breach."  

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

Guest Post by Otto Stockmeyer on Wood v. Boynton and Murph the Surf

Otto Stockmeyer (left) has taught at the WMU-Cooley Law faculty since 1977. He has also taught as a visiting professor at California Western School of Law and Mercer University Law School, and in the "Down Under" Foreign Study Program.  He has taught Contracts, Criminal Law, Equity/Remedies, Legal Writing, and Research & Writing

A three-time recipient of the Stanley E. Beattie Teaching Award, Professor Stockmeyer was named national Outstanding Professor in 1985 by Delta Theta Phi Law Fraternity. He has also received the Socrates Award from the Hellenic Bar Association and the Student Bar Association's first Barrister Award.

Professor Stockmeyer is the editor and co-author of the book Michigan Law of Damages (1989) and is the author of articles in a wide variety of professional journals and newsletters. He is a past president of Scribes — the American Society of Legal Writers. In 2009, he was named to the ABA Communication Skills Committee. You can find his recent publications on SSRN.

A former president of the Michigan State Bar Foundation, Professor Stockmeyer has also served on the State Bar Board of Commissioners and in the ABA House of Delegates. He is a Life Fellow of the Michigan and American Bar Foundations and was named Professional of the Year by the Michigan Association of the Professions.

The Lansing State Journal recognized Professor Stockmeyer in 1988 as one of mid-Michigan's "88 Greats" for his service to the community and the legal profession. He was profiled in Michigan Lawyers Weekly as one of Michigan's "Leaders in the Law" in 2005.

Professor Stockmeyer's post follows:

I haven’t taught Wood v. Boynton in a decade. But I remain intrigued by its dramatic backstory. So I was excited to learn that MGM+ is streaming a four-part series on the life of Jack Roland Murphy: “Murf the Surf: Jewels, Jesus and Mayhem in the USA.”

Episode 1, “The Heist,” covers Jack’s sensational 1964 theft of world-renown gems. His haul included the “Eagle Diamond” (left), the mystery stone at issue in Wood’s case. Presumably upcoming episodes will detail Jack’s subsequent major life events: a double-murder conviction, self-proclaimed prison conversion, parole, ministry, and recent death.

I prefer the less-dramatic 1992 American Justice documentary “Murph the Surf” (Season 1, Episode 3). It’s narrated by lawyer-commentator Bill Kurtis. A 1975 movie (“Live a Little, Steal a Lot: The True Story of ‘Murph the Surf’”) is also based on his exploits. Whether “Murf” or “Murph,” Jack Murphy led a cinematic life, for sure.

My blog post “The Adventure of the One-Dollar Diamond“ includes links to more information on Wood’s aftermath. I should have included Jack’s slim autobiography “Jewels for the Journey” (1989).

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

Last week, we resumed our series of posts on Victor Goldberg's collected writings on contracts. Links to previous posts on  Rethinking Contract Law and Contract Design (RCL) can be found here.  Last week's post was the first in a new series of posts on the second volume, Rethinking the Law of Contract Damages (RLCD).   Today's post covers the first chapter of RLCD.

Expectation damages are the standard measure of contracts damages, and they put a party in as good a position as they would have been had the promise been performed.  But how does one measure expectation?  Professor Goldberg proposes that the best way to do so is to value the contract as an asset and seek to restore to the non-breaching party the value of the asset at the time of the breach.  He illustrates this approach in connection with concepts of cover, lost profits, and mitigation.

As to cover costs, Professor Goldberg begins with a discussion of the controversy over UCC sections 2-706 and 2-708, which seem to give the non-breaching seller the option of choosing between contract price and market price at the time of the breach or contract price and market price at the time of sale.  It seems like using the latter could result in a windfall to the seller if the price rises after sale.  Courts seem to allow it, and this has always annoyed me.  For Professor Goldberg, the issue is simple.  Give the seller the value of the contract at the time of the breach.  If the price has dropped, seller may choose to recover the certainty of expectation damages, and Professor Goldberg notes that a seller that recovers expectation damages from a breaching buyer under § 2-708(1) retains the goods.  If the seller then sells those goods at a price above the contract price, the result is the same as if the seller had waited and recovered the difference between contract price and re-sale price under § 2-706.  E.g., a seller may have a contract to sell goods for $100,000.  When the buyer breaches, the market price is $70,000.  Seller can recover $30,000 in expectation damages, but he might then re-sells the goods six months later for $120,000.  The outcome is the same if we take the difference between re-sale price and contract price.  In both cases seller gets $120,000 for the goods (RLCD, 4-9).  No windfall; no tension between the sections.  Eureka!

Professor Goldberg also notes in passing the reason why buyers' remedies are more limited than sellers.  The court in Peace River Seed Co-operative explained the difference in terms of the conjunctions used in Article 2.  "The issue was not grammar," Professor Goldberg observes, "it was economics" (RLCD, 7-8).

As to anticipatory repudiation where the court decision comes after all performance was due, Professor Goldberg argues that damages should be reckoned from the time the repudiation was accepted (or deemed accepted) (RLCD, 10).  This accords with the general approach of awarding damages that treat the contract as an asset.  In cases of repudiation, the cover price is often good evidence of that value (RLCD, 15), but is not the only evidence, and so we ought not to become overly enamored of cover.  Yet Professor Goldberg concedes that calculation of damages in this context can be challenging, especially in thin markets (Id.).

The challenge becomes more daunting when a party repudiates a twenty-year contract in year three.  To make matters worse, the contract might not be for a fixed quantity and the price might be variously indexed.  Courts attempt to value the goods at the time of the repudiation, but that is a mistake.  What they need to do is value the contract at the time of the repudiation (RLCD, 16).  Judge Richard Posner (left) took this approach in NIPSCO v. Carbon County Coal (RLCD, 17).  Courts struggle to fit such contracts into the boxes provided in UCC damage provisions. 

"Take-or-pay" contracts, in which parties commit to buying a certain quantity or, in the alternative, to pay for a percentage of the contract quantity at a certain price, pose special challenges.  Here too, courts err in trying to figure out the price of the underlying commodities rather than trying to value the contracts as assets, taking all of their components into account (RLCD, 17-23). 

On the whole, the UCC's damages provisions work well enough when the problem is shortfalls in installment contracts.  But courts struggle with repudiations of long-term contracts, because the UCC's damages provisions do not address fluctuating quantities, and it ignores relevant contractual provisions, like termination rights and price re-determination rights.  And overall, the model is incorrect to the extent that it focuses on the valuation of the goods rather than the valuation of the contract as an asset (RLCD 24-25).

Professor Goldberg's approach to minimum quantity contracts, such as that at issue in Lake River Corp. v. Carborundum, another Posner decision previously discussed in Chapter 7 of RCL, is essentially the same:

The damages should be the change in the value of the contract at the moment of repudiation -- the present value of the difference in expected cash flows.  That would be based on the projected market-contract price differential or the lost profits, depending on whether the seller could do something else with the goods in the remaining years (RLCD, 30).

Professor Goldberg entertains the possibility of alternatives.  Courts could order specific performance, although Judge Posner gave good reasons why doing so was less than ideal in NIPSCO.  But an order of specific performance can be a good way to foster settlement, and Professor Goldberg thinks the parties might do a better job valuing the contract as an asset than the courts do (RLCD, 31-32). 

While Professor Goldberg suggests that damages should be measured at the time of breach, because the value of the contract will fluctuate, the parties could pick any time to measure damages.  All that matters is that they set the time for measuring damages before the dispute arises.  While cover that occurs immediately after breach is highly useful evidence of the value of a contract, cover becomes less relevant in long-term contracts, where the court is going to have to determine damages before cover is possible (RLCD, 32).  

Professor Goldberg concludes the chapter by returning to his acknowledgement of the uncertainties involved in calculating damages for repudiation of long-term contracts.  He ruminates on the wide variation in valuation reports presented before the Chancery Court and proposes ways to return us from "the outer margins of plausibility" where these expert reports too often reside (RLCD, 33-34).

Meanwhile, in Lady Duff News

James J. Fishman, Professor of Law Emeritus at the Elisabeth Haub School of Law at Pace University, shares with us the following: 

Lady Lucy Duff Gordon (pictured left with an unnamed but very fetching dog) features prominently in a new exhibition at the museum of the Fashion Institute of Technology in New York City: “Designing Women: Fashion Creators & Their Interiors."  In a review in the Wall Street Journal, Laura Jacobs, Homes in High Style, we learn the following about Lucy:

In the early 1900s we meet Lucile, a British designer otherwise known as Lady Duff Gordon. Along with gowns, she promoted lingerie, racy pieces that were presented in her private Rose Rooms—curtained boudoir settings complete with daybed and dressing table, a mise en scène that allowed clients a “virtual” experience of their potential purchase. Lucile’s London fashion house, distinctively painted with pale gray walls (Christian Dior would do the same when he launched in 1947), was formative inspiration for her close friend Elsie de Wolfe, the first professional “lady decorator.” De Wolfe, however, never acknowledged Lucile’s influence.

Judge Cardozo’s opening words in Wood v. Lucy Duff-Gordon seemed a putdown of her ladyship:

The defendant styles herself a creator of fashions. Her favor helps a sale. Manufacturers of dresses, millinery and like articles are glad to pay for a certificate of her approval. The things which she designs, fabrics, parasols and what not, have a new value in the public mind when issued in her name.*

In fact, she was a major figure in the history of fashion. She is represented in the Metropolitan Museum of Art’s Costume Institute collection.

The exhibition extends through May 14.  FIT is the repository for Lady Lucy’s archives.

[I add editorially, that I do not think that Cardozo (left) was demeaning Lady Duff-Gordon in particular.  I get a sense from his prose that he had a rather low opinion of the entire fashion industry.  The case makes clear that Judge Cardozo knew that she was a big deal in the fashion industry, but I sense that he thought little of the idea of making money by putting your name on designs.  I look forward to student notes on the subject of what sartorial splendor Judge Cardozo modestly concealed beneath his robes.] 

Sid Delong on Speech Act Theory and SCOTUS's Notorious eBay Opinion

When SCOTUS Says It’s So, It’s So:
A Speech Act Analysis of the eBay Opinion
Sidney W. DeLong

Suppose that in the Spring of 2006, you had been grading final exams in your Remedies class. You had posed a question about whether a property owner could obtain a permanent injunction against a neighbor who was threatening to misappropriate some of the owner’s property. Several classes had been devoted to the rules and principles on which courts enter permanent injunctions.

One student began his answer as follows:

According to well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

Notwithstanding its superficial precision and its confident tone, you gave this answer no points because you identified at least six substantive errors in it. The most glaring mistake is that says that issuance of a permanent injunction requires a plaintiff to “demonstrate that it has suffered an irreparable injury.”

That statement is wrong in at least two ways. First, because an injunction is intended to prevent future injury, it is never necessary that the plaintiff demonstrate that it has already suffered an injury. More importantly, the student fails to say that a court will not issue an injunction unless the plaintiff demonstrates that it will suffer injury in the future if the defendant is not enjoined. (The other obvious errors are discussed at the end of this post.)

Now suppose that, in an exam review after the end of the semester, the student who wrote that paragraph unexpectedly defended his answer by drawing your attention to a hot-off-the-presses Supreme Court slip opinion in eBay v Mercexchange, L.L.C, 547 U.S. 388, 390 (2006) where, (miraculously?) the identical 85-word paragraph appeared. The student demanded to know how his answer could be “wrong” if it coincided exactly with Justice Thomas’s opinion? How would you have explained his grade?

I would have found this to be a formidable task. Just saying “Well, the Court just got it wrong!” as I would have to a colleague would have sounded arrogant if not megalomaniacal to a student, even though it is exactly what I thought. Incidentally, I am not alone in this view.  See, e.g. Laycock and Hansen, Modern American Remedies (Concise 5^th Ed. 2019) 353-57 (below, right); Mark P. Gergen, John M. Golden, & Henry E. Smith, The Supreme Court’s Accidental Revolution? The Test for Permanent Injunctions, 112 Colum. L. Rev. 203 (2012).  But how can I explain what “wrong” means in such circumstances?

Not wishing to get into waters this deep, I think instead I would have invoked speech act theory to explain how the court could have been “right” and the student wrong. In speech act theory, despite all appearances, this was not a case of two different people saying the same thing. The two identically worded utterances are different speech acts that are doing different things.

The student’s answer consisted of assertions, which are speech acts that make a statement of fact. Assertions are either true or false. Unhappily, the student’s statements about the law of permanent injunctions were all false and misleading, which I could easily prove.

Although the Supreme Court’s opinion used identical language, it performed a completely different speech act. Rather than being assertions, the Court’s language was a series of performative utterances, sometimes known as declarations. Performative utterances are what most people think of when they think of speech acts and they are particularly characteristic of legal speech. According to speech act theorist John Searle (below left) “Declarations bring about some alteration in the status or condition of the referred to object or objects solely in virtue of the fact that the declaration has been successfully performed.” When uttered by the right persons under the right circumstances, declarations or “explicit performatives” change the world in the way mentioned in the utterance.

In a successful declaration, just saying something makes it so. “I hereby declare the meeting to be adjourned” adjourns the meeting. “The motion is hereby overruled” overrules the motion. “I hereby accept your offer” accepts the offer. The speaker’s use of the legal-sounding adverb “hereby” is a universal signal of an explicit performative. Although the word may be omitted when it is tacitly understood, “hereby” can be added to any performative phrase without changing its meaning or effect.

John Searle, Image by FranksValli, CC BY-SA 4.0 
via Wikimedia Commons

Unlike assertions, declarations are neither true nor false: instead, they are effective or ineffective, depending on who does the declaring and under what circumstances. When an umpire yells “You’re out!” in a baseball game, the runner is out. When a fan yells “you’re out” in identical circumstances the runner is not out. When a law student writes, “A plaintiff must demonstrate that it has suffered an irreparable injury,” his writing has no declarative effect and does not affect the law. When five justices of the Supreme Court write the same sentence in an opinion, the words have a declarative effect, which creates the rule it just announced.

But it gets a bit more complicated. Often an utterance can have both assertive and performative illocutionary force. “The bar is closed” when said by a disappointed patron to a hopeful arrival is an assertion and is either true or false. But when it is loudly announced by the publican to the patrons in the bar, it is a declaration that becomes “legally” effective upon its utterance: Saying it closes the bar. But in those circumstances, it is also a true statement by the publican about the bar’s status. As such it is an assertion whose purpose is to give information to the hearers.

The same expression can thus serve two functions, formally closing the bar and truthfully informing the patrons of that sad fact. Searle called such hybrid expressions “assertive declarations.” An assertive declaration in a judicial opinion would simultaneously change the law in some way and truthfully assert that the law had become the way it described.

Finally, to complicate things still further, whether an utterance is an assertion, a declaration, or an assertive declaration depends on its correct interpretation by the hearer. The “illocutionary force” or speech act status of an utterance is always a matter of interpretation, no less than is its meaning.

What then is the speech act status of the eBay Court’s statement that, under the familiar four-factor test, the issuance of a permanent injunction requires a plaintiff to “demonstrate that it has suffered an irreparable injury”? If it was only an assertion, like the student’s answer, then it was false, as a host of Remedies authorities have confirmed. See above. It completely misstated existing law.

On the other hand, if the Court had written an explicit performative: “We hereby rule that a permanent injunction requires a plaintiff to demonstrate that he has suffered an irreparable injury,” that utterance would have been neither true nor false because it would not be an assertion. It would instead have been legally effective to change the law of injunctions in federal courts. It would have been formally unobjectionable, although of course subject to criticism as to its wisdom.

But did the court intend for its statement to be declarative of law despite its omission of “hereby”?  Ostensibly, the court was merely reporting the existence of a “well-recognized four factor test” and reciting part of that test. In this, it was mistaken. Its declaratory powers do not include the power to change facts.

But the Court did more than assert the existence of the test as a fact. It implicitly adopted the test as its own and used it to resolve the case. In doing so, it declared the four-part test to be federal law, even if, as Gergen et. al. have suggested, “accidental” law.

As an “assertive declaration,” the paragraph became not only legally effective but, as a consequence, also became factually true as a description of federal law. In other words, the paragraph became a true assertion about federal law as soon as it was published, as does any successful assertive declaration. Saying it made it so.

Should my hypothetical student then have won the argument over his exam? Technically, his statements were false and misleading when he wrote them but they became true only later with the publication of eBay. Moreover, even after eBay, the non-federal law applicable to the exam hypothetical remained unchanged. I continued to teach subsequent classes the actual tests for permanent injunctions in courts uninfluenced by eBay and that its effect on federal court cases that do not involve patents is still uncertain. There is no sign that the Court itself is inclined to clarify the ruling and that is where things stand.

But I confess, if any of my students had been sharp enough to find the eBay opinion and make that argument in an exam review, he or she would have earned a grade increase for initiative.

Postscript: My brief enumeration of inaccuracies in the eBay paragraph follows. Although Justice Thomas authored the opinion, any blame for its mistakes was equally shared by the entire Court because none of them was challenged or corrected.

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Reefer Brief: Cannabis Dispensary Deploys Illegality Defense to Get Out of Paying Rent!

Today's edition of the Reefer Brief, our occasional series on lawsuits involving the marijuana industry, we bring you a tale of the sort of genius scheme gone awry that could only be inspired by reefer madness . . . or a thorough introduction to affirmative defenses in one's first-year contracts course.  The case is Thor 942 Fulton St., LLC v Future Transactions Holdings, LLC et. al.

According to Keyla Prince of California News, MedMen Enterprises (Medmen), a dispensary, entered into a fifteen-year lease with Thor Equities (Thor) on a warehouse-style building in Chicago in 2019.  The annual rent was to be $800,000/year, rising to $1.2 million after five years.  But MedMen did not pay rent, or utilities, or insurance.  At the time Thor Equities filed its claim for back rent in a federal district court in New York, MedMen owed over $1 million.  

That's when MedMen's attorneys came up with a brilliant solution: they argued that the lease agreement was unenforceable in federal court because it was a contract to engage in activities that are considered criminal under federal law.  Thor responded by seeking voluntary dismissal so that it could refile its claim in state court, a jurisdiction that does not consider dispensing marijuana a criminal act.  MedMen struck back, as William M. X. Wolfe explains here, accusing Thor of forum shopping.  District Court Judge J. Paul Oetken noted that Thor should have anticipated MedMen's defense but also noted that it was still early in the litigation, and so a voluntary dismissal was warranted.

Too bad.  If the district court had heard the case, it would have paired nicely with Carroll v. Beardon.  Readers may recall that Carroll involved the sale of a bordello as a going concern.  The court nonetheless chose to treat the seller as non in pari delicto (not equally culpable) with the buyer and enforced the contract under an exception to the illegality rule.  Here, a court could decide to treat this as an ordinary real estate transaction.  If the lease terms were no different from what Thor would have gotten leasing its premises to a tenant engaged in lawful activities, Thor could argue that it did not benefit from the illegality and thus was non in pari delicto.

 

Quick Notes: A New Promises Promises Episode and a Jotwell

After a long hiatus,  David Hoffman (left) and Tess Wilkinson-Ryan (right) are back with a new episode of their podcast Promises Promises.  Welcome back!  This time, they discuss S.P. Dunham v. Kudra, and they have as their Zoom audience Mitu Gulati's UVA students.  The case illustrates the duress doctrine.  

Professors Hoffman and Wilkinson-Ryan puzzle entertainingly (as always) over how well this case fits into the law of duress and voice their general skepticism about the line-drawing involved in identifying an improper threat, a necessary element of duress.  I don't see it as a hard case, but I agree that the court does not do much to generate confidence in the clarity of the duress doctrine. 

S.P. Dunham (Dunham) was a department store that partnered with another business (Hurwitz) that stored and cleaned fur coats.  Hurwitz, which was in financial difficulties, partnered with Kudra and owed Kudra money when it went under.  With winter coming, Dunham's customers, who apparently did not know anything about Hurwitz, wanted their coats.  Kudra demanded that Dunham cover what Hurwitz owed on the Dunham's customer's coats (about $600) before he would return them.  Fair enough, I suppose, but Kudra then demanded an additional $3200 that Hurwitz owed on other coats that had nothing to do with Dunham.   Dunham paid and then sued to recover the $3200, claiming economic duress.

I don't have any difficulty seeing Kudra's conduct as involving an improper threat that compelled Dunham to do something that it had no reason to do, but Professors Hoffman and Wilkinson-Ryan do make the fine point that Dunham doesn't really seem to be the proper plaintiff here.  Kudra is holding Dunham's customers' property hostage, and the customers, or perhaps Hurwitz's bankruptcy estate, acting on their behalf, should be bringing the challenge to Kudra's extortionate conduct.  Still, I think Sid DeLong's Coasean theory of duress makes sense of the case in a far more direct way and at least points the way towards addressing the line-drawing problem that vexed the Promises, Promises crew.  Kudra threatens to do harm to Dunham's good will value. Knowing that the value that Dunham places on that good will likely exceeds $3200, Kudra extorted payment, leaving him unjustly enriched.  Disgorgement of those ill-gotten gains is the proper remedy.

Also worth noting is Eyal Zamir's short review on Jotwell of Joanna Demaree-Cotton and Roseanna Sommers, Autonomy and the Folk Concept of Valid Consent, 224 Cognition 105065 (2022).  We have featured Roseanna Sommers' work on the blog before, and there seems to be some overlap between  Commonsense Consent, discussed previously and the article that Professor Zamir has reviewed.  But Professor Zamir brings to the topic his own expertise in empirical studies and in behavioral analysis of law, and so his review is an especially valuable contribution.

The Buffalo Billion Case in SCOTUS: Ciminelli v. United States

Once again, Will Baude and Dan Epps' Divided Argument podcast has alerted me to a SCOTUS case with contract implications of which I was previously unaware.  Those of you who are not interested in a listener's phone message featuring a song set to the tune of "Old McDonald" that alleges that Will Baude engages in "unpersuasive scholar trolling" or in the latest news about Justice A-leako (thanks for that one Strict Scrutiny Podcast) can skip to minute 36.  

The SCOTUS case is styled Ciminelli v. United States.  My recitation of the facts is indebted to the Second Circuit opinion in the case, which is styled United States v. Percoco.  The case should be of interest to those of us who cover the bid cases in first-year contracts courses.  The students can really understand those cases only if they understand a little bit about how bids on public construction projects operate.  In order to make it impossible for parties to bid shop, bid chop, or otherwise rig bids on public contracts, subcontractors (subs) are required to submit sealed bids to general contractors (GCs).  The GCs open the bids and often on the same day use the unsealed bids to put together their own bids, which are also sealed.  Bid cases arise when the subs try to retract erroneous bids that the GCs have relied on in putting together their bids.  Following Justice Traynor in Drennan v. Star Paving, unless the bid is obviously the product of a mistake, the Restatement approach treats the subs' bids as irrevocable based on the GC's reliance.  

Did I say that sealed bids make cheating impossible?  Apparently not.  I blogged recently about Victor Goldberg's work, showing that parties can contract around the common law option created by Drennan.  But Ciminelli involves a must more creative (and probably fraudulent) scheme.  Simplifying the facts, the defendants in Ciminelli/Percoco allegedly colluded to rig the bid materials so that preferred contractors would win bids.  The main author of the scheme set up intermediaries that were not a part of the scam.  He then contacted preferred contractors and gathered information about their businesses.  The requests for proposals, (RFPs) one for Syracuse and one for Buffalo (known as the "Buffalo Billion") were then tailored so that only the preferred contractors would qualify.  The scheme worked.  In both Syracuse and Buffalo, the innocent intermediary entity awarded lucrative contracts to the preferred contractors.  

The issue before the Court is whether defendant can be liable for fraud when the state has not proven that it was harmed by the defendant's conduct.  That is, defendants claim that they were indeed the most qualified bidder, and there is no allegation that the state overpaid for the work done or that the work was not competently completed.  The Second Circuit found criminal liability based on defendants' fraudulent interference with the state's "right to control."  Right to control violations occur whenever a scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.

In his Petition for Certiorari, Ciminelli attempts a frontal assault of on the right to control theory:

Whether the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud— states a valid basis for liability under the federal wire fraud statute, 18 U.S.C. § 1343.

In the appeal to the Second Circuit, defendants argued that the issuer of the RFP was not harmed "because the rigged RFPs merely awarded [defendant-controlled entities] preferred developer status, and did not affect the terms of the separate, subsequently negotiated development contracts."  Defendants also claimed that the government had not identified other parties offering "lower prices, better quality, or better value would have applied and been selected for either the Syracuse or the Buffalo contracts."

As to the first argument, the Second Circuit found that being named preferred developers made it much more likely that they would be awarded contracts, and so the fraud was relevant to an "essential element of the bargain."  That element of the fraud claim is thus satisfied.

As to the second argument, the "right to control" theory requires no showing of economic harm.  The deprivation of the right to control itself entails a violation of a property right.  As the Second Circuit held in Lebedev, "Since a defining feature of most property is the right to control the asset in question, . . . property interests protected by the wire fraud statute include the interest of a victim in controlling his or her own assets." In Finazzo, the Second Circuit clarified that the right-to-control theory requires proof only that "misrepresentations or non-disclosures can or do result in tangible economic harm" (emphasis mine).  

According to Will Baude and Dan Epps, nobody is defending the Second Circuit's "right to control" theory of fraud.  The case is likely to be remanded to see if the government can find an alternative basis for a fraud conviction.

I haven't looked into the law or the briefs on the case, but my instinct is to think that's a shame.  Based on the facts below, fraud has clearly occurred.  Determining whether anybody was harmed would require speculation about what might have happened had the RFPs not been rigged.  The state may have been harmed because there might have been lower bidders.  There is no way to prove that.  Other bidders might have been harmed because, but for the rigged RFPs, they might have bid and won.  But none of them bid, so it is unclear how any of them would have legal standing to allege that they were the victims of defendant's fraudulent misconduct. 

In an era less hamstrung by the Court's commitment to blinkered legal formalism, the government could make the case that, absent a "right to control" theory, there will be no remedy for the kind of fraudulent conduct alleged in this case. Perhaps the Court's expansive view of property rights will motivate it to embrace "right to control" theory sua sponte.   This case clearly involves a fraudulent scheme.  It was successful, and the perpetrators profited substantially.  The public likely paid too high a price for the services provided, but the extent of the harm is not provable with reasonable certainty.  Defendants' competitors were harmed, but they cannot prove it because the carefully crafted RFPs deterred them from bidding.  Who cares? Prophylactic rules may be over-inclusive in order to deter bad behavior.  The Court could uphold a broad rule intended to capture intentional cheating in the competition for public contracts.

 

Re-Post: Eric Goldman Reviews Netflix's "Pepsi, Where's My Jet?"

Review of the “Pepsi, Where’s My Jet?” Netflix Documentary
Eric Goldman
Technology and Marketing Law Blog

In the mid-1990s, at the height of the Cola Wars, Pepsi ran an ad to introduce its “Pepsi Stuff” loyalty program, including a featured prize of a Harrier Jet for 7M points–a ridiculously high number that was supposed to signal that it was a joke. Watch the ad. However, Pepsi also sold points for 10 cents each, putting a $700k price tag on a jet that was allegedly worth tens of millions of dollars (assuming it could be acquired at all–the US government frowns on individual citizens owning military equipment).

John Leonard, backed by a rich friend Todd Hoffman (who looks like George Carlin), tendered $700k and ordered 1 Harrier Jet. Pepsico declined; they sent him coupons for a couple of cases of Pepsi instead. Leonard retained a lawyer and made legal threats. Pepsi preemptively sued Leonard in its home court of SDNY. Judge Wood’s opinion concluded that the ad objectively did not communicate an offer due to its humor, so no contract ever formed and Leonard didn’t get his Harrier jet. Wood’s opinion is relatively dry, but it’s become a staple of the contracts law canon because of its fun facts and its precise analysis.

Because this case is so iconic, I was excited to see the new Netflix documentary, “Pepsi, Where’s My Jet?” The documentary interviews key figures in the case, many of whom are still alive, and it’s fabulous to hear them tell their stories in their own words.

Despite that, the documentary was disappointing overall. If you’re a contracts or advertising law nerd like I am, you’re going to watch it no matter what I say. But I had hoped the documentary might become a must-see pedagogical supplement for anyone reading the case, and I don’t think it gets there.

The documentary is framed around the cross-generational bromance between GenXer Leonard and his financial sponsor, Boomer Hoffman. Obviously that relationship is at the story’s heart because there was no case without Hoffman’s largesse. However, the filmmakers repeatedly steered the narrative into the bromance, such as seemingly irrelevant segments showing Leonard and Hoffman recently summitting Mt. Vinson in Antarctica (an impressive, but very expensive, accomplishment).

The documentary was split into four episodes, totaling over 2.5 hours. It would have been much better packed into a single 90 minute episode, but instead it felt like the filmmakers padded the narrative with tangents and dead-ends to reach the target length.

Also, the documentary includes many historical reenactments, many of which were unnecessary and not compelling. I am not a fan of recreations in documentaries.

The actual legal ruling gets surprisingly little airtime in the back half of the fourth episode, and the filmmakers did a poor job of contextualizing it. For example, long-standing contracts law doctrine says that advertisements ordinarily are an invitation to make an offer and not an offer themselves, which the documentary doesn’t mention. The documentary repeatedly mentions that many consumers, especially teens, would have taken the ad seriously, but the documentary only offers Team Pepsi’s rebuttals and a few words from the opinion to counter this view. The filmmakers surely could have interviewed some independent experts in contracts law or the advertising industry to supplement the parties’ self-interested statements, and many of them would have sided emphatically with Team Pepsi. By omitting the independent voice, the filmmakers betrayed their normative agenda.

Similarly, the filmmakers styled the case as a David v. Goliath battle. Indeed, it was, but the filmmakers didn’t aggressively question Leonard’s motives. (Instead, the documentary spent a minute or two indulging in overly speculative conspiratorial theories about Pepsi malfeasance that should have been cut). Sure, Pepsi is the big bad company, and surely Pepsi could have easily made safer legal choices in how it presented the jet. At the same time, it’s impossible not to feel like Leonard was an opportunist who used the law, and then media pressure, to improperly seek something he knew he wasn’t really entitled to. For every story of big companies squashing little consumers, there’s another story of little consumers gaming the legal system to extract undeserved cash from big companies and subtracting social value. Leonard’s story really could be told either way. A different filmmaker might have included some counternarrative material that Leonard’s legal efforts were a wasteful and venal abuse of the legal system, along the lines of Harris v. Time. The documentary suffers by not offering that self-reflective/critical perspective.

Some other details I learned:

• At one point, Pepsi considered sending Leonard a model of a Harrier jet. That reminded me of the Toyota/Toy Yoda case.
• Leonard turned down a $1M settlement offer because he really, really wanted the jet. Ah, youthful exuberance. I was shouting at the screen for him to take the cash.
• The ad designers had initially storyboarded a 700M point price tag for the Harrier jet, but during ad review, someone said that number was too hard to read, so two zeros got dropped to make it less cluttered. Oops.
• Pepsi simultaneously ran the same ad in Canada and put a “just kidding” disclaimer on the 7M point price.
• Now-disgraced lawyer Michael Avenatti was involved in the case, principally as a PR advisor/opposition researcher because he was still in law school at the time. Avenatti advised Leonard to launch an attack ad campaign against Pepsi that sounded similar to the scheme he deployed against Nike that sent him to jail. That part of the video was painful to watch.

Other things the documentary should have addressed but did not:

• How much money Leonard/Hoffman spent on the case and why they repeatedly doubled-down despite the adverse developments.
• Why they didn’t appeal the district court decision.
• What, if any, life lessons Leonard took away from his experiences. Knowing what he knows now, would he have made the same choices? He did say he perhaps regretted not taking the settlement offer, but I would have liked to hear more about his meta-reflections after 25 years of life experience.
• In 2014, a (non-functional) Harrier jet sold at auction for $200k. This datapoint makes Pepsi’s 7M point pricetag seem actually quite reasonable, not like a joke at all. Then again, if Leonard really wanted a Harrier jet, his $700k offer was above-market, and he could have fulfilled his dream at a lower cost. I’m disappointed the documentary filmmakers didn’t raise this development because it puts the case in a whole new light.

Though it was completely irrelevant to the story, the filmmakers had many of their interview subjects take the Pepsi Challenge. I won’t spoil the fun by revealing which soda won this completely nonscientific test, but I will note that both Coke and Pepsi have lost the war as consumer tastes have evolved and consumers now drink less sugary sodas overall.

Mid-Week Frivolity: Dude, Where's My Harrier? The Documentary

I'm trying to abstain from blogging, but Netflix is making it too easy.  

One of my students thinks it should have been called Pepsi Done Me Dirty

I stand by my Limerick:

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

 

Sid DeLong, Warranties Law and the Restatement Second of Contracts

Why Does the Restatement Omit the Law of Warranties?

Sidney W. DeLong

Warranties can be critical elements in the modern business transaction. In real property transactions, courts have long enforced express and implied warranties relating to title and possession. In corporate mergers and acquisitions, contractual warranties, along with covenants, conditions, and representations, are fundamental to a well-designed allocation of information risks and assurances among the parties.

In contracts for the sale of goods, Article 2 is replete with the rules relating to warranty. It contains four sections describing different kinds of warranties (§§ 2-312 (Warranty of Title); § 2-313 (Express warranty); § 2-314 (Implied warranty of Merchantability); and § 2-315 (Implied Warranty of Fitness for a Particular Purpose). In addition, § 2-316 contains rules for disclaiming warranties and § 2-317 says how warranties and disclaimers are to be construed.

One would expect, therefore, to find cognate sections in the Restatement (Second) of the Law: Contracts addressing warranties arising in non-sales transactions. Alas, one would be disappointed. You are about to read virtually everything that the Restatement has to say about warranty, which appears in Comment d to Section 2 (quoted in full as follows):

Promise of event beyond human control, warranty. Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain and may be dealt with as if the warrantor could cause the fact to be as he asserted. It is then immaterial that the actual condition of affairs may be irrevocably fixed before the promises made.

Words of warranty, like other conduct, must be interpreted in the light of the circumstances and the reasonable expectations of the parties. In an insurance contract, a warranty by the insured is usually not a promise at all; It may be merely a representation of fact, or, more commonly, the fact warranted is a condition of the insurer's duty to pay. In the sale of goods, on the other hand, a similar warranty normally also includes a promise to answer for damages.”

And that’s it. One must infer the Restatement’s view of warranty from this fragment. One thing seems clear: by identifying a warranty as a form of promise rather than a representation of fact, the Restatement assimilates warranty to the law of contractual agreement rather than the tort law of misrepresentation. By doing so, it seeks to change the illocutionary force of warranty, as a speech act theorist would say.

Speech act theory differentiates between the illocutionary force of statements of fact and promises. In speech act theory, an “assertive” speech act like a representation of fact makes a true or false statement about the world. A “commissive” speech act, like a promise, commits the speaker to act in some way. An assertion is true or false when it is made, but making an assertion imposes no obligation on the speaker. By contrast, a promise imposes on the speaker an obligation to act, but is neither true nor false because it does not communicate anything factual about the state of the world. To the extent that these speech acts can create legal liability for breach of the legal obligations they create, false assertions can make the speaker liable in tort for fraud while broken promises can make the speaker liable for breach of contract. At common law, this line between fraud and contract was strictly observed.

Because they both make assertions about the world and create legal obligations to act, sales warranties are hybrid speech acts, potentially making the speaker responsible both for having made a truthful representation and committing the speaker to perform a promise. Thus, Prosser called warranty: “a freak hybrid born of the illicit intercourse of tort and contract.”  Perhaps it would be more charitable to call it the duckbilled platypus of sales law, confusing to legal taxonomists who try to police the boundaries between tort and contract but perfectly able to survive and thrive despite their theoretical confusion. (I am assuming that duckbilled platypuses thrive, at least on their better days.) Unfortunately, the failure of warranty to fit comfortably into either the tort or contract family creates enduring problems for courts adjudicating warranty claims.

Problems with considering warranty as a tort: To see a warranty as a tortious misrepresentation raises questions about how the elements of fraud apply. If the warranty is false, the warrantor’s liability does not turn on either its scienter or intent but only its agreement to be liable. Must a warrantee, like the recipient of a misrepresentation of fact, show reasonable reliance on the truth of the warranty in order to recover? In Article 2 warranties, courts generally do not require a buyer to reasonably rely on the warranty for it to become part of the basis of the bargain. But courts differ on whether recovery is barred by a warrantee’s actual knowledge of the falsity of the warranty. See CBS Inc vs. Ziff Davis Pub. Co. 553 N.E.2d 997,1011 (N.Y. 1990) (“This view of reliance, -- i.e., as requiring no more than reliance on the express warranty as being part of the bargain between the parties -- reflects the prevailing perception of an action for breach of express warranty that is no longer grounded in tort, but essentially in contract.”) Farnsworth said that Ziff indicates that tort is being absorbed into contract rather than vice versa. Farnsworth Contracts 4th ed.) section 1.7.

Red Angus, or so Wkipedia warrants

Problems with considering warranty as a contract: If modern warranty law fits poorly with tort law, it fits even less well with contract law. First there is the speech act problem. If contracts are promises and promises are commitments to act in a certain way, what can it mean to “promise” that something is the case? If the warrantor can bring about the warranted condition, an implied promise is clear. A seller who warrants that the cow it promises to sell to the buyer is a pure-blooded Angus is promising to deliver a pure-blooded Angus. But as Comment d confirms, by warranting a condition over which both parties know the promisor has no control, one is not promising to act at all. Instead, the courts construe the warranty to be an implied promise to compensate the warrantee if the warranted facts turn out not to be the case. Thus, a statement of fact is construed to imply a promise.

But to infer an implied promise to indemnify from the mere making of a false statement of fact threatens to turn any tort into a contract to indemnify. For example, a person who makes a materially false statement with the intention that the hearer rely thereby incurs potential liability to indemnify the hearer for loss incurred in reliance on the statement. If both parties are aware of this rule, then should the court infer that the speaker “promised” to indemnify by making the statement?  

But conceptualizing a warranty as a promise raises many collateral questions about non-Article 2 warranty-promises that the Restatement leaves unaddressed and unanswered, to wit:  What exactly is a warranty? Is it always a promise? How is a warranty made? Must the warrantee to whom the warranty is made rely in any way on the warranty as a condition to its enforceability? Does a warranty require consideration in order to be enforceable? Can a warranty be disclaimed, and if so, when and how? What if a warranty is made and disclaimed in the same agreement? How and when is a warranty “breached”? May warranties arise by implication with nothing being said by either party? When is a warranty breached for purposes of the statute of limitations? Can breach of warranty be a repudiation of the contract? Can breach of warranty be a material breach of contract suspending the counterparty’s duty to perform and justifying cancellation of the contract if the warranty is never fulfilled? What is the correct measure of damages when a warranty is breached?

At the time the Restatement (Second) was being drafted, someone must have suggested that these questions be answered by importing Article 2’s warranty provisions wholesale into the Restatement. But that was a temptation that the drafters wisely resisted. To bring the Restatement into conformity with Article 2’s warranty provisions would have threatened the entire Restatement project.  

For it is not often recognized that Article 2’s warranty provisions violate the most fundamental principles of mutual assent intrinsic to contract theory. They represent an overthrow of the common law of express warranty, in which warranties did not arise from mere descriptions of goods being sold but from language that expressly “guaranteed” the accuracy of those descriptions. Chandelor v Lopus  Exchequer Chamber Cro. Jac. 4 (1603) (Seller’s description of bezoar stone did not guarantee its authenticity).

Under Article 2, both implied and express warranties are now recognized to constitute an entirely different sort of legal obligation from the common law of express warranties. An implied warranty of merchantability arises automatically upon any sale of goods from a merchant dealer. § 2-314. Many analysts now consider the implied warranty of merchantability to be a form of product regulation having nothing to do with either mutual assent or reliance. It is an obligation imposed by law, not by agreement, which is the mark of tort, not of contract.

Assent and reliance are also eliminated as necessary to Article 2 express warranties, which abandon Chandelor’s requirement that a seller must expressly assume warranty obligations. Under § 2-313, the mere use of descriptive language by either party, if followed by performance, may create warranty obligations without either party being aware that a warranty was made.  Thus, if buyer orders a shipment of 50,000 20-V-lithium ion batteries and seller ships 50,000 batteries, they are expressly warranted to be 20-V lithium ion batteries. § 2-106 (2) (shipment accepts order for immediate delivery); § 2-313 (1) (b) (express warranty created by any description of the goods that is made part of the basis of the bargain.)

Drafted in the 1970’s, The Second Restatement was notable for the number of provisions that it imported from Article 2, which had become popular with courts and commentators. But despite the view that express warranty was part of contract law and not the tort law of deceit, the drafters saw that incorporation of the Article 2 rules on warranty for non-Article 2 warranties would completely undo the unity of contract law. Since they could not generally acknowledge warranty without extensive reference to Article 2’s novel rules, they left the development of the general principles of non-Article 2 warranty law to the courts, where they are apparently developing smoothly without the guidance of the Restatement. This dodge permitted the Restatement to preserve its illusion of doctrinal coherence in achieving Williston’s great project of rationalizing all of contract law.

The mathematician Kurt Gödel (left) famously demonstrated (in layman’s terms, i.e. so far as I can understand it) that any system of logic that was rich enough to permit all mathematical truths to be deduced would inevitably give rise to contradictions, while any system consistent enough to eliminate all contradictions would inevitably be unable to generate all truthful mathematical propositions. All logical systems are either inconsistent or incomplete. The Restatement appears to have fallen prey to Gödel’s Theorem: it cannot accommodate all the rules of Article 2 warranty law without violating its fundamental premises about mutual assent.

A Unilateral Contract for a Trip to Mars

Image vy ESA & MPS for OSIRIS Team MPS/UPD/LAM/IAA/RSSD/INTA/UPM/DASP/IDA, CC BY-SA IGO 3.0, CC BY-SA 3.0 igo

This is the time of year when my students are obsessed with unilateral contracts, and I am beating them back, pointing to R.2d § 32 and R.2d § 45 and showing how easily what looks like an offer to enter into a unilateral contract becomes a bilateral contract or an option.  It is nice to have a clear example of something that is and only can be an offer to enter into a unilateral contract.

In 1958, Burma shave posted signs along highways that read:

Free Free

A trip to Mars

For 900

Empty Jars

Burma Shave

According to this story by John Kelly of the Washington Post, one Arliss French, the manager of a Red Owl store (yes, small world!), took the offer seriously enough to earn a trip.  Frenchy (as he was called -- oh, those Midwestern wags!) put up a huge display in his store and promoted Burma Shave by encouraging customers to send him to Mars.  

As with many plans for trips to Mars, Frenchy's faced obstacles.  Burma Shave was losing market share, and men take a long time to use up their shaving cream.  In addition, Burma Shave learned of his efforts and warned him that it was only offering a one-way trip.  Frenchy was undeterred.  But Burma Shave didn't work itself into a lather.  Instead, it bargained!  Frenchy and his wife were sent to the German border town, Moers, pronounced Mars.  Close enough, Frenchy cried, and Burma Shave threw in the trip home as a show of good faith.  

See, SpaceX COO Gwynne Shotwell, this is how we will get to Mars! Or at least Moers.

H/T: Elizabeth Winston

Should Contracts Profs Cheer for a Return to the Lochner Era?

Justice Peckham
Author of the majority opinion in Lochner

On the one hand, of course we should.  Law reviews will beg us for submissions.  All of their symposium issues will be dedicated to the fundamental right to freedom of contract, and we will stroke our beards our twirl our locks and consider whether intermediate or strict scrutiny is the best way to safeguard those rights.  All of those fancy public law people will have to listen to us talk about offer, acceptance, consideration, and assent, and they will feel as inadequate as we do when they drone on about, e.g. the differences among original expected application, original public meaning, original methods, and original law.  We will host the Con Law Podcast, and when people ask, "By 'Con Law,' do you mean constitutional law or contracts law?" we will smile roguishly and answer, "Yes!"  

Why do I mention this?  James B. Stewart, the grizzled veteran of The New York Times business pages (his 2005 Disney War was an important source for my article on the business judgment rule), warned on Saturday that we might be returning to the Lochner era.  As I've been writing about the interaction of contracts and constitutional law for the past year (most recently here, with links to the other posts), this caught my eye.  I feel compelled to write a separate opinion concurring in part.

Let me start with areas of agreement between me and Mr. Stewart.  While Lochner itself invalidated a New York state labor regulation, the Lochner era was about the Court invalidating economic regulation generally.  Lochner upheld freedom of contract over state attempts at implementing health and safety regulations, and a separate but related line of cases struck down federal attempts at similar regulation by reading the Commerce Clause narrowly.  I agree with Mr. Stewart, and others cited in his article, that this is an anti-regulatory Court.  However, in my view, the Court is unlikely to revisit Lochner itself, because it can achieve the same effect through other doctrinal routes for which it has already laid the groundwork.  

Mr. Stewart's evidence that a return to Lochner flows from this paragraph:

The case for Lochner is plainly embedded in the Dobbs decision. Writing for the majority, Justice Samuel Alito said that rights not explicitly mentioned in the Constitution had to be “deeply rooted in this Nation’s history and tradition” and “implicit in the concept of ordered liberty.” Unlike a right to abortion, freedom of contract is widely believed to meet that definition.

The problem with that paragraph, in my view, is that the cited test relates to substantive due process protections for unenumerated rights.  Freedom of contract is not an expressly-protected federal right.  Under our jurisprudence, Justice Alito contends, abortion does not meet the test for substantive due process.  Some version of freedom of contract might meet the test.  However, this Court is not in the business of expanding substantive due process rights.  It has to tread cautiously, because of the Second Amendment, which it also protected under substantive due process in McDonald.  It will be very hard for the Court to whittle away, as it will no doubt continue to do, at the right to privacy in the context of its bedroom politics while expanding economic substantive due process protections in other areas.  This is especially true because Justice Thomas (and perhaps Justice Gorsuch based on his concurrence in Timbs), and most originalists now writing on the topic, think that the Fourteenth Amendment's Privileges or Immunities clause, rather than substantive due process, should provide the basis for protections of individual rights vis a vis the states.  Justice Thomas had to do some very fancy tap-dancing to write for the majority this term in Bruen, which applied McDonald, given that he wrote separately in McDonald rejecting the majority's substantive due process justification for making the  Second Amendment applicable as to the states.  So, I only count, at most, four votes for a new embrace of economic substantive due process rights.  Could they get there through Privileges or Immunities?  Anybody's guess, which is why the move to Privileges or Immunities is so unsettling.

As for the Court's animus towards federal regulation, it does not need to rely on Lochner to achieve its goals there.  The anti-regulatory GOP has enough power in the Senate to prevent any significant new regulatory legislation.  In any case, regulation almost always comes from the administrative state, not from the legislature, which lacks the expertise and the ability to respond fluidly to an evolving regulatory context.  For that reason, Congress has traditionally delegated regulatory power to the agencies. 

A few years back, in Gundy, Justice Gorsuch, writing for himself, the Chief, and Justice Thomas, was all for reviving the non-delegation doctrine and reducing Congress's power to delegate.  Justice Alito wrote separately but called for the Court to re-visit the non-delegation doctrine with equal force.  By the logic of the current Court, there could have been six votes to return us to the world of Schechter Poultry. Enter Julian Mortsenson and Nicholas Bagley, who have made extremely compelling originalist arguments that boil down to the following: there was no non-delegation doctrine at the Founding.  And it's not even close.  Using originalism to beat back the administrative state is not as easy as it seemed.  Rather than fighting that battle, Justice Gorsuch, in his concurring opinion in this term's West Virginia v. EPA, declares it a tie because he can cite a bunch of law review articles in a footnote that have different perspectives on the non-delegation doctrine (never mind that half of them pre-date Mortenson & Bagley's sea-changing scholarship and so are unresponsive to their arguments).  Ah for the days of judicial humility, when courts deferred to the political branches on close questions.  

Disarmed of the non-delegation doctrine, the Court's majority has embraced the "major questions doctrine" like Hopper picking up that sword in the final episode of Season 4 of Stranger Things. 

As West Virginia v. EPA and other cases this term illustrate, that's a potent enough weapon if you are looking to dismantle the federal regulatory state.  And so, I concur, in part with Mr. Stewart, that the Court will embrace freedom of contract when it comes to pairing back federal regulation, but it hardly needs to rely on Lochner for that.

But I don't see a full-throated embrace of Lochner, because doing so would force the conservative majority to walk back a great deal of the federalism talk of the Rehnquist Court, and I don't see how they can do so while also singing the praises of the laboratories of democracy in Dobbs.  You may think they just did so with respect to gun regulation in Bruen.  Touché.  But then there are other impediments to prioritizing contracts rights that were not at issue in 1905 (which should be telling if you think this is really an originalist Court).  As my previous posts on this subject indicate, the Court has very little interest in contracts rights when they come up against rights that it cares about more, sometimes free expression rights, but mostly Free Exercise rights, both of which are entirely a product of 20th-century jurisprudence.  

Mr. Stewart gives the last word to Yale's Akhil Amar, who doesn't see a return to Lochner on the horizon.  Professor Amar cautions that, even though this last term was an earthquake, it was an originalist earthquake, not a libertarian earthquake.  I'm more inclined to reverse that, but for me the main takeaways from this term are that this is a Court that has a legislative agenda, and the members of the conservative majority are ticking things off their to-do list.  And as Bruen, West Virginia, Dobbs, and other cases illustrate, they are going to decide the issues they want to decide whether or not those issues arrive at the Court in the appropriate procedural posture.  Abortion, guns, the administrative state, voting rights, Free Exercise, and the Establishment Clause all got their check marks this term.  Protections for LGBTQ+, affirmative action, and the independent state legislature theory are already cued up for next term.  If you are a litigant who wants to pare back the Commerce Clause, this is your moment!

Here's to the Court that can't pass the marshmallow test!

Thanks to the Strict Scrutiny podcast for the perfect analogy.