Category: Contract Law & Beyond

1

Prosecutors, Gambling and Dead Horses

Should federal prosecutors who settled a tax fraud case with the New York Racing Association back in 2003 (amended in 2005) be kicking themselves? Besides commitments typical of criminal settlement agreements (called deferred prosecution agreements), to improve internal control and governance, this one required the NYRA to continue its best efforts to install gambling machines at the track. It finally did so last year and the results have included the deaths of 21 horses during the winter meet.

Gambling is a controversial topic and New York State politicians had in 2003 just begun a push to expand the kinds of gambling that are legal in the state, starting with video gaming machines at horse racetracks. Why federal prosecutors settling a criminal tax suit should have anything to say about the NYRA’s role in advancing this agenda is not clear. Prosecutors did not explain their reasoning when signing the DPA.

In any event, the NYRA worked earnestly to move its gambling program along amid growing political and legal controversy in the state over gambling. It finally prevailed, opening a gambling emporium at the Aqueduct track in Queens in October 2011. In the ensuing season, an astonishingly high number of horses — 21 — died while racing.

In March, Governor Andrew Cuomo formed a task force to investigate and in May took state control over the track from the NYRA. The task force released its report last week identifying numerous causes for the deaths and prescribing extensive reforms of the NYRA and Aqueduct operations. Among the culprits: casino funding was allocated to massively increase awards to owners of winning horses in lower-level claiming races. Read More

Lochner Boo Boo: Free Self-Exploitation?

American legal history has featured many battles over “freedom of contract,” often interpreted as the “right” of workers to sell their labor at any price, under any terms. Given the recent resurgence of extreme freedom of contract views, I thought this reflection on the reality TV show “Here Comes Honey Boo Boo” might interest readers:

Americans, it turns out, can’t get enough of Honey Boo Boo, mom June, and the rest of the clan . . . some of whom come with nicknames that seem straight out of a quaint novel about those colorful southerners, like Sugar Bear. That Here Comes Honey Boo Boo trafficked in and showcased the grossest of gross stereotypes about lower middle class southern white folk was deemed inconsequential. The family, led by matriarch June, was in on the joke. How could the family be exploited if they actively wanted to be exploited?

Read More

11

The Unenforceability of Contracts to Abort

TMZ has a scoop.  (Yes, I read TMZ.  Every day.)  Tagg Romney (son of Mitt) and his wife Jen entered into a surrogacy contract which contained a clause purporting to require the surrogate to abort on demand given a particular set of contingencies:

We’ve learned Tagg and his wife Jen, along with the surrogate and her husband, signed a Gestational Carrier Agreement dated July 28, 2011.  Paragraph 13 of the agreement reads as follows:

“If in the opinion of the treating physician or her independent obstetrician there is potential physical harm to the surrogate, the decision to abort or not abort is to be made by the surrogate . . . In the event the child is determined to be physiologically, genetically or chromosomally abnormal, the decision to abort or not to abort is to be made by the intended parents.  In such a case the surrogate agrees to abort, or not to abort, in accordance with the intended parents’ decision . . . Any decision to abort because of potential harm to the child, or to reduce the number of fetuses, is to be made by the intended parents.”

It is a common error to think that contract terms are specifically enforceable as written.  I believe that there is literally not one judge in the country who would require a surrogate to abort on demand against her wishes notwithstanding this clause.  In part, this results from the law’s traditional reluctance to enforce specific performance of personal services contracts.  Here, that’s coupled with the constitutional interests in bodily integrity that the Baby M court discussed.  Thus, while TMZ translates the agreement as “Tagg and his wife, Jen, had the right to abort the fetuses if they felt they would not be healthy,” the better line would be “Tagg and his wife, Jen, have an exit right which they can exercise if the surrogate fails to abort.”

That is, failure to abort on demand would be a material breach by the surrogate, relieving the Romneys from their duty to pay.  Whether it would additionally then lead the Romneys to be able to sue – for costs incurred, probably – is unclear to me, as I think some judges would find an abort-on-demand clause against public policy.

2

Welcome Contracts Students!

As new 1Ls begin to immerse themselves in the wonderful world of law, we welcomed them here on this blog recently with an overview of the first-year curriculum that has been in place for ages. It concluded with a particular reference to the course on Contracts, about which I’ve recently published a new book connecting its classic cases and doctrines to contemporary contract disputes in popular culture and covered in the media.

From that book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, the following continues to provide a gateway into that field by introducing two legends whose venerable work on the subject continues to define the boundaries of recognized debate on most of the issues. The legends are Samuel Williston and Arthur Corbin.

In 1920, Williston, a Harvard professor, published a monumental treatise on the entire law of contracts, and updated it until his death in 1963. In 1950, Arthur Corbin, a professor at Yale, promulgated an equally magisterial and comprehensive treatise, based on earlier writings throughout his career.

These works—still kept up-to-date by successor editors—influenced generations of lawyers and judges addressing contract disputes. Williston’s philosophy dovetailed with that of the eminent jurist, Oliver Wendell Holmes, Jr., and Corbin’s resonated with that of the esteemed judge, Benjamin N. Cardozo.

Williston epitomized a formalist approach to law and reflected what some call the “classical” school of contract. It looks to whether parties in a transaction were giving and getting something, emphasizing a concept called “consideration” as the signal of an enforceable contract. This school of thought held unenforceable not only promises to make gifts or attend dinner but promises merely inducing another party to take some action.

In this view, the remedy for breach of a bargain is to pay the injured party money to put them in the same economic position they would have enjoyed had the other performed. This classical conception of contract law dominated well into the twentieth century, and remains a force today.

Corbin took a realist approach to law and offered a more pragmatic conception of contract. Though agreeing with Williston on many points, Corbin recognized, as courts increasingly did in the twentieth century, a wider range of circumstances that create contractual obligations. Williston’s bargain model of consideration remained, but loosened so that even some promises to make gifts could be enforced, so long as there was an identifiable return, like naming a college endowment. It recognized reliance on a promise as a basis of contractual liability, in a novel doctrine commonly called “promissory estoppel.”

Compensation for disappointed expectations remains the primary measure of remedy. But recognizing promissory estoppel gave equal dignity to measuring remedies by out-of-pocket costs incurred relying on a promise.

These twentieth century developments that Corbin captured, and helped to shape, reflected broader social developments as well, moving law’s orientation from a formalist to a realist conception. For example, classical contract’s relative strictness, limiting the scope of contractual obligation, was accompanied by an equivalent strictness of enforcement: if a contract was hard to get into, it was also hard to get out of. People could be bound to contracts that were made based on mutually mistaken assumptions or even where performance became impossible.

But as the ambit of contractual obligation expanded, so did grounds for excusing it, like mutual mistake about the terms of a trade, or impossibility of performance, such as a power outage in a rented banquet hall. Similarly, classical contract law venerated written records, limiting the scope of obligation to what was plainly meant within a document’s four corners. Corbin and his realist descendants were more willing to consider evidence supplementing these written expressions. Read More

Crowdsourcing the Interpretation of Terms of Service Agreements

This is an interesting project:

“I have read and agree to the Terms” is the biggest lie on the web. We aim to fix that. We are a user rights initiative to rate and label website terms & privacy policies, from very good Class A to very bad Class E.

ToS;DR is a young project started in June 2012. The data is subject to important changes. This is your opportunity to help us fix the “biggest lie on the web”: join us if you have information to contribute related to specific terms or if you have a comment!

ToS;DR aims at creating a transparent and peer-reviewed process to rate and analyse Terms of Service and Privacy Policies in order to create a rating from Class A to Class E. We need more legal expertise, please also join the working-group. We also need people to contribute source code. Everything is JavaScript and JSON. The data is freely available (CC-BY-SA) and ready to be used for other tools, like browser extensions.

I think aspects of this could succeed, and others will not. I will be following it closely. Hey, if Intex can work, why not this? [Via Jane Hu]

0

Welcoming All 1Ls Across America!

Welcome all first-year law students to the wonderful world of law!  I teach Contracts at George Washington University (though I’m visiting at Fordham University this fall).  My students find it useful to begin our journey into that subject–which many find can be difficult–with a step back to look at the shape of the first-year law school curriculum.

It has not changed much in a century and does not vary widely among law schools today, from Cooley to Columbia.  I also try to be sure to connect the topics and examples appearing in today’s casesbooks (which have also not changed much over time and do not vary from school to school) to current topics in the news.  Students at other schools can share in these stories by obtaining a copy of my book, a fun supplement to the Contracts course,  Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

Some thoughts about the shape of today’s 1L curriculum appear in the beginning of the book, including the following excerpt.  I summarize this for my students on our first day of class to give a sense of why today’s curriculum looks as it does and where contract law fits within it.

The curriculum dates to a legendary figure of nearly a century and a half ago.  In the 1870s, C. C. Langdell, as Dean of Harvard Law School, designed a simple way to organize the vast field of law still used to this day. He thought that underlying law’s complexity were a handful of basic ideas. Examining leading cases organized around these ideas would reveal law’s elements and rhythms.

Common law actions, meaning those courts resolve one by one, were of greatest interest to Langdell and dominate many 1L courses, including Contracts.  In the United States, following English traditions, common law is developed by state courts as disputes arise. Originally referring to law “common” to all citizens, today this system yields some variation among states, but general principles tend to prevail. Though the common law evolves as society and the economy change, judges draw on precedents when evaluating new cases—under the principle of stare decisis.

Langdell organized the welter of cases on numerous topics according to basic questions: how, what, and why. The question of how isolates the procedures private parties follow when resolving disputes using civil litigation. This is the practice of the lawsuit, arranged into the sub-field of study called civil procedure. Read More

2

Do Deferred Prosecution Agreements Create Third Party Beneficiaries?

In the field of corporate criminal liability, no subject is hotter than deferred prosecution agreements (DPAs).   In these, prosecutors agree with target corporations to defer or refrain from prosecution in exchange for the target admitting allegations and committing to various reforms. Reforms invariably include enhanced internal compliance programs, and sometimes top-level governance changes.   Terms provide that if the government determines that the corporation breached, it can prosecute. Given the admissions, conviction then is almost certain.

Several rationales support these functional settlement agreements. These include avoiding the risk of collateral consequences of corporate convictions (such as customer defection and investor withdraws that could ruin a firm, as happened with Arthur Andersen in 2005).  They may also be valuable alternatives to straight-up criminal convictions or civil regulation when investigations give prosecutors firm-specific information about corporate defects that the agreements can cure.  There are thus both public law enforcement (deterrence) rationales and private corporate rationales (reducing agency costs when managers act against the interests of shareholders).

DPAs are age-old devices but have become popular in the US only the past decade: only a couple dozen were ever used before 2003, but nearly 200 have been formed since.  This summer alone, federal prosecutors around the country have entered into a dozen of them with various corporate targets.  England is now considering whether to follow this American development.

Many open questions exist. For example, suppose a company breaches the agreement, as Wright Medical was alleged to have done this week.  The contracts state the rights of prosecutors clearly–they may proceed with prosecution.  Many contracts, including the Wright Medical deal, are silent on another question: are there any third party beneficiaries as a matter of contract law?  Are shareholders intended third party beneficaries of DPAs?  The issue is the government’s intention in exacting the corporation’s promise.  If the rationale is general deterrence, probably not; but if the rationale is reducing agency costs, probably so.  Any opinions?

 

16

Nominal Consideration at the Olympics

This is just bizarre:

“London Olympic organizers tell the Associated Press that the former Beatle [Paul McCartney] and other famous acts who participated basically “donated their time — receiving a mere pound ($1.57) — for their performances.” And that nominal fee was offered to make the Olympics contracts binding.”

If true, I take it that British law takes the position that nominal consideration can bind obligees, but that “false” nominal consideration can’t.  Thus, the organizers had to both promise to pay McCartney a pound and actually pay it before the ex-Beatle was bound to perform.

To my  mind, this is the least good resolution of the consideration problem possible.  Look: either consideration should mean something – bargained for exchange motivating actual counter-promising – or parties should be free to dispose of the requirement of consideration entirely.  In the United States, only Pennsylvania has taken that sensible latter position.  The rest generally tend to require actual bargained for exchange, excepting only charitable subscriptions, which the Olympics are not.  The Brits, who handed us this mess in the first instance, have apparently now embraced the unfortunate, mumbo-jumbo, hybrid, which reduces the sensible formality of consideration to a bit of a magical contract theatre.  Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?

3

Party Choice of Procedure & Specific Performance

I’ve been reading Robert Bone’s excellent new Texas Law Review article, Party Rulemaking: Making Procedural Rules Through Party Choice.  The paper makes several moves, which together make me question my long-held belief that preemption is impossible.  (He says many, many of the things I’ve been planning to write about in an article which was to’ve been submitted in August.)1

One footnote caught my attention, since I’ve been wondering about it too. The paper is about contracts intended to tailor procedural rules in discrete cases (e.g., in a contract, providing that any disputes will be tried in federal court in Missouri, governed by Maryland law, with limited discovery).  Bone writes, in note 35:

“This Article assumes specific enforcement of agreements to choose procedural rules or actions in advance. It is only through specific enforcement that parties can directly shape procedure for their cases.”

This is true. But why would it be that the default enforcement mechanism for procedural contract terms be specific performance, when the default enforcement mechanism for all other performance terms is damages? Putting aside potential stipulated remedy concerns, isn’t the idea of private procedure putting the cart (enforcement) before the horse?  It’s not as if parties can contract into specific performance, at least under traditional common law rule.

One idea I’ve noodled over distinguishes terms that deal with the contract’s  enforcement from terms that deal with the contract’s performance.  That is, we tend to “specifically enforce” liquidated damages clauses.  But that doesn’t quite work, because liquidated damage clauses are directed largely at the court system itself, and so we’re consequently not as worried about the classic specific performance objections of failed monitoring and weak  legitimacy.  By contrast, terms which purport to control procedure largely, though not exclusively, tell the parties what to do.  Go arbitrate! Don’t take a deposition! File your complaint within a certain number of days following injury!  Don’t join with others!  Wouldn’t the ordinary response to such contract terms be the usual one in contract law: that is, comply or pay damages? By contrast, under Bone’s approach (which is the standard one in court, I take it), if a party wanted to change its mind, we’d have to actually order them to act, or to fail to act, putting at risk the exact institutional capital that do not hazard when performance is at issue. I’m thus left pretty confused as to why we treat procedural terms the way we do.  Has anyone thought about this?

1Among those things: there appears to only be one published opinion in the history of our great Republic, Elliott-McGowan Productions v. Republic Productions, Inc., 145 F. Supp. 48 (S.D.N.Y. 1956), in which a court agreed to enforce a contract term which limited the scope of discovery. Yet on that slender reed a dozen law review articles rest. 

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“I Am The Chief Photographer”, and Other Contract Terms By Laypeople

Letters of Note is a great blog, devoted to publicizing good correspondence. The newest entry will be fun fodder for contract law professors and lawyers.  It’s between Annie Leibovitz and Rolling Stone’s Jann Wenner, and concerned Leibovitz’s new contract:

Here’s how it starts:

“March 1, 1982

To: Jann Wenner
From: Annie Leibovitz

This document will serve as a letter of understanding between us for the next 20-25 covers over the next year.

Rolling Stone assignments will have priority commitment.

Rules of the cover will be discussed and fought over with each issue.

I will try to act as promptly and as reasonable as possible.

I will try to act on my best behavior.

And I will discourage the use of my photographs in any publications other than Rolling Stone on any regular basis.

am the Chief Photographer.

Annie Leibovitz”

Read Wenner’s slightly more legalistic response after the jump.

Read More