Playing Defense Against A-Rod’s Incomplete Contract

Dave Hoffman

Dave Hoffman is the Murray Shusterman Professor of Transactional and Business Law at Temple Law School. He specializes in law and psychology, contracts, and quantitative analysis of civil procedure. He currently teaches contracts, civil procedure, corporations, and law and economics.

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16 Responses

  1. Jeff Lipshaw says:

    Dave, I think you’ve missed at least two possibilities:

    #1: Yankees: “Alex, we want a provision in here about steroid use.”

    Alex: “No.”

    #2: There is a “moral turpitude” or “embarrassing activities” clause but it doesn’t mention steroids, in which case the issue would be interpretation, not extra-contractual defenses.

    On the broader issue of trying to reconstruct “what went wrong? in complex contracts, see this post.

  2. AF says:

    I’m having trouble assuming away the “potential labor law implications,” given that A-Rod’s 2003 steroid test was the result of a negotiated agreement between the union and the owners. Any attempt by the Yankees to penalize A-Rod would be resolved by an arbitrator under the collective bargaining agreement, and would surely be struck down as the 2003 testing agreement provided that players testing positive would not be identified, let alone punished.

    Without a union contract, A-Rod’s 2003 steroid use would have come to light in a different way, with different contractual implications.

  3. dave hoffman says:

    Jeff: You are misreading the story, which states that the Yankees believe that there is no language on point. The moral turpitude clause would (it seems to me) clearly at least be arguably on point (with the interpretation issues you note). Therefore, I assumed, and thought I was clear in assuming, that no such clause existed.

    W/r/t the possibility that the Yankees asked A-Rod for a clause and were turned down, that seems legally the same as possibility #2 that I mentioned.

    Since you mentioned that I missed “at least” two possibilities, perhaps you could lay them out?

  4. dave hoffman says:

    AF: That’s right. It’s just a thought exercise.

  5. Jeff Lipshaw says:

    Dave, I only thought of two as I was sitting there.

    1. All I read was your quote: “no language about steroids in the contract.” That says literally to me there is no language about steroids in the contract. That means we’re dealing in two levels of hearsay about what the contract actually says. The remainder of the sentence says “that would put Rodriguez at risk of losing money.” From that, arguably, we can infer that somebody looked at the whole contract and thinks there’s nothing at all that puts him at risk of losing money, but presently all we know is that there’s nothing about STEROIDS that put him at risk. Pardon my anality. I’ve just been around a long time and don’t take this stuff at face value until I have seen the whole contract.

    2. I’m not sure I understand how #2 fits my alternative. If the Yankees say: “Alex, we want a provision in here that says you warrant you never used steroids.” Alex responds, “no, I refuse to make such a legal warranty, nor will I discuss the issue with you. You will simply have to take your chances on that one.” That’s not a frustration issue – the parties have explicitly bargained the issue out of the legal domain. Nor is there any fraud or misrepresentation. Hence, in this scenario, the Yankees have done as much as they can to create the legal model they want in the contract, realize there’s nothing more they can do, and make a business decision to accept the risk. It is what it is.

    The point of the linked sufficient reason post is that we as lawyers seem to have a hard-wired teleology about contracts, beginning with the rational actor inspired notion that there is some notionally complete contract, revised post Herbert Simon into the view that boundedly rational actors turn complete contracts into incomplete contracts as a result of their inability to see all the possibilities.

    I start with the idea that all contracts are incomplete by their nature as models of complex reality, just as all models are incomplete. Some are more incomplete than others. I thereby arrive at the same fundamental conclusion as you: there is indeed an irreducibility to the exercise. I think I feel less inclined, however, to justify, within the law, why the contract failed to address ALL contingencies, because I start with the assumption that there are only so many it will catch to begin with.

    Or more succinctly: not every failure to cover a contingency is a screw-up.

  6. A.J. Sutter says:

    As usual, I agree with Jeff. I too don’t see frustration in the “Alex says no” scenario. It’s always easy to second-guess a contract that you didn’t negotiate (and sometimes easy to get a queasy stomach reading one that you yourself negotiated in the dimly-remembered past), but in real life negotiation you can’t always get what you want — it’s as simple as that.

    On the available facts, there’s no justification for assuming that the steroids point wasn’t negotiated, so no need to invoke economistic jargon concepts such as in the expression “negotiating on this term would raise the transactional costs of completing the agreement.” In fact, the transactional costs model begs the question of how to quantify the “costs” of having the opposite side think ever after that you are a jerk, even if you do succeed in your negotiation. Relationships and reputation have a way of persisting long beyond negotiating a deal, and the repercussions of pressing your case too obnoxiously in a negotiation can quickly enter the realm of counterfactuals (e.g., deals or concessions that are never offered to you in the future).

    Another way in which it can be misleading to judge the “completeness” of contracts from reading the text alone (and, a fortiori, from reading hearsay about the text) is that a decontextualized reading often ignores factors that may influence a party not to enforce the contract, even when it’s entitled to. Sometimes these factors are already evident during the negotiation phase. E.g., as we used to remind ourselves at one of my former companies, “it’s not nice to sue your customer.” When there isn’t even bargaining power, you put some provisions in only because you hope that the other side will comply with them, not because you think you’ll have any leverage if there’s a breach. That may not be apposite in the A-Rod case, I admit.

  7. AF says:

    It’s a thought exercise that assumes away the central fact.

    Through his union, A-Rod has already negotiated an explicit and specific agreement as to the effect of failing the 2003 steroid test.

    This is not a case of an incomplete contract. The consequences of this exact contingency have already been resolved in a separate agreement.

  8. Jeff Lipshaw says:

    For the record, I think it’s a good thought exercise! Just assume no union contract. I’ve been thinking about using it in a class as another example of the practical limits of contract in the complex business context.

  9. Gabe Feldman says:

    Two additional points, both of which I realize fundamentally change the thought exercise, but address your initial question regarding the failure of the Yankees to allocate the risk of a postitive steroid test. First, the collective bargaining agreement contains a standard player contract. With limited exception, the terms of that contract (other than salary, length of contract, etc.) cannot be modified by the player or the team. Second, the standard player contract does contain a morals clause. A team may terminate a player contract if the player “shall at any time…fail, refuse or neglect to conform his personal conduct to the standards of good citizenship and good sportsmanship or to keep himself in first-class physical condition or to obey the Club’s training rules.”

    So, the risks of the contingency were allocated through the (heavily negotiated) collective bargaining agreement and standard player contract.

  10. Jeff Lipshaw says:

    Hi Gabe! You are as always too modest in not indicating that you are the Director of the Sports Law Program at Tulane.

    I read that as saying there would be legal risk to A-Rod if the Yankees really seriously wanted to lose his services, which I doubt.

  11. Gabe Feldman says:

    Greetings, Jeff. You have always been my best PR person (though my mother will likely pass you as soon as she learns how to blog). I did not intend to suggest a conclusion either way about the ability of the Yankees to terminate A-Rod’s contract. I was only pointing out that the Yankees were not in a position to allocate the risk of a positive steroid test (or the discovery of a past positive test) in their contract with A-Rod. That said, for a variety of reasons I don’t have time to list, I think it would be very difficult for the Yankees to argue that anything A-Rod did during the term of his contract (even lying to Katie Couric!) constituted a failure to “conform his personal conduct to the standards of good citizenship.”

  12. dave hoffman says:

    Gabe, thanks for highlighting the morals clause. The problem with the caluse, from the team’s perspective, is presumably that it isn’t a warranty against past bad conduct. So, assume that A-Rod did something that ordinarily would trigger the morals out – for instance, gambling? – wouldn’t the timing be crucial? Pre-formation misconduct can’t be punished under the clause. Assuming that’s true, I’m a little confused as to how the morals clause does, in fact, allocate the risk of past steroids use? A-Rod didn’t control the release of this information, and, in fact, had a contractual interest in it not being released. (One that he might, in some implausible counterfactual scenario, have a right to sue the leaker on).

  13. Gabe Feldman says:

    Dave—

    You’re exactly right—the morals clause seems to permit a team to terminate a player only for misconduct committed during the term of the contract. Assuming that’s true, hasn’t the risk of undisclosed past steroid use (or any past, undisclosed misconduct that might rise to the level of termination if committed during the term of the contract) been allocated to the team? And, as AF notes, isn’t that conclusion particularly strong here, where the league agreed that the positive steroid test in question would not be disclosed and would not result in any disciplinary action? The team, of course, is free to investigate any possible pre-contract misconduct and act accordingly (ie, not sign the player).

  14. Is it possible that the Yankees accepted the risk because they really wanted A-Rod to break the record and knew that it would probably take steroid use to break the record? They were willing to accept the risk of “revelation of steroid use” and didn’t really want to discourage steroid use? Is that too cynical?

  15. Ed Unneland says:

    I guess we’re a long way away from when Walter Alston had, what, thirty straight one-year handshake oral agreements to manage the Dodgers; both when they were at home in Brooklyn, and during their, ahem, temporary sojourn someplace west of the Rockies where there is no there there. (Just kidding about L.A.; consider it on the same level of jocularity as a Norwegian politician promising to get Jaemtland back from the terrible Swedes.)

  16. Jeff Lipshaw says:

    Christine, I would have thought that was too cynical, but then again I would have never believed in this day and age somebody would spend $1,000,000 decorating an office. Could John Thain spell “K-O-Z-L-O-W-S-K-I”?

    My sense is that nobody running baseball wants steroids, largely because there is no team sport in which individual records mean so much. 61. 714. 104. 56.