Friday, February 29, 2008

Standardized Contract Terms and Wartime Sales

I read with interest Marie Reilly’s post on Vindication for the Contract of Adhesion, as I’ve been thinking about the issues related to standardized terms in my work on wartime contracts. Through the Federal Acquisition Regulations and the Defense Federal Acquisition Regulation Supplement (DFARS), the federal government has made government contracting a field dominated by standard contract clauses. For instance, the DFARS mandate inclusion of a contract clause whereby contractors accept much of the risk associated with contract performance in a warzone. Applying Judge Easterbrook's analysis in IFC Credit Corp. v. United Business & Industrial Federal Credit Union, it would seem that onerous terms mandated by the government buyer for wartime contracts will lead to higher prices imposed by the wartime sellers in return. No wonder the war in Iraq is costing the taxpayers so much.

Joes S.’ comment observed that “[j]udicial intervention into contracts does no good” in specific types of cases. With respect to wartime sales, perhaps some judicial intervention will ultimately do some good. Using Joe S.’ categories, I would argue that perhaps none of them absolutely satisfied for wartime sales in Iraq. Moreover, determining what particular risks are actually assumed by sellers under the government's standardized terms is not without debate. Lack of clear understanding of the obligations allocated to each party under the DFARS paves the way for needed judicial resolution at some later date. Wartime sales have presented unique challenges to contracting parties that test the ability of the government’s default rules to manage a wide array of sales under changing circumstances. As such, I agree that concepts of “fairness” survive, particularly when both parties may have “fail[ed] to consider the full consequences of [their] legal decisions.” Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., (Posner, J. 1992).

Vindication for the Contract of Adhesion

This past week my Contracts class examined mass market transactions, the contract of adhesion and the doctrine of unconscionability. Yesterday, Overlawyered featured a post on Judge Easterbrook's opinion in IFC Credit Corp. v. United Business & Industrial Federal Credit Union. The case is jammed with scintillating issues of commercial law-- a veritable bag of chips with no diminishing marginal returns. Of note for Contracts students is this excerpt on the enforceability of non-negotiated terms in a standard form agreement (citation omitted):

Ever since Carnival Cruise Lines, Inc. v. Shute enforced a forum-selection clause printed in tiny type on the back of a cruise-ship ticket, it has been hard to find decisions holding terms invalid on the ground that something is wrong with non-negotiable terms in form contracts. As long as the market is competitive, sellers must adopt terms that buyers find acceptable; onerous terms just lead to lower prices. If buyers prefer juries, then an agreement waiving a jury comes with a lower price to compensate buyers for the loss-though if bench trials reduce the cost of litigation, then sellers may be better off even at the lower price, for they may save more in legal expenses than they forego in receipts from customers.

There is no difference in principle between the content of a seller's form contract and the content of that seller's products. The judiciary does not monitor the content of the products, demanding that a telecom switch provide 50 circuits even though the seller promised (and delivered) 40 circuits. It does not matter that the seller's offer was non-negotiable (if, say, it offered 40-circuit boxes and 100-circuit boxes, but nothing in between); just so with procedural clauses, such as jury waivers. As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention. Making the institution of contract unreliable by trying to adjust matters ex post in favor of the weaker party will just make weaker parties worse off in the long run.

For the last statement, Judge Easterbrook cites to the court's opinion in Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., (Posner, J. 1992):

The idea that favoring one side or the other in a class of contract disputes can redistribute wealth is one of the most persistent illusions of judicial power. It comes from failing to consider the full consequences of legal decisions. Courts deciding contract cases cannot durably shift the balance of advantages to the weaker side of the market; they can only make contracts more costly to that side in the future, because [the other side] will demand compensation for bearing onerous terms.

All true. Yet, I doubt that the next edition of Farnsworth, et al, Contracts will omit the section on contract "fairness."

Cross posted at Red Lion Reports.

Of belts and suspenders

I am happy to announce that we have mail already:

Dear Department of Incidental and Consequential Information:

I am a teacher at a perfectly respectable law school in the New York City Area. In teaching Commercial Law subjects -- and in particular in Secured Transactions -- I always introduce my students to the concept of the "belt and suspenders" approach when practicing in the Commercial Law area. While my female students do not seem to have any difficultly picking up on the concept once explained, I have not been able to come up with a gender-neutral phrase that conveys the same idea. In this era when more than half of all law students are women, shouldn't we be able to come up with a phrase that has the same connotation but which isn't reflective of the time, not so long ago, when being a lawyer was only a man's job?

Politically Correct in Manhattan

Dear Politically Correct in Manhattan:

I have to admit that being female, I, too, had to pause and think this one through. Must be the never having been faced with the decision of the belts and suspenders. I typically wear neither. But upon reflection, I laughed to myself and thought "girdle and pantyhose." That would likely not resonate with most of your male audience as it also fails in gender neutrality. I also came up with "seat belt and airbag," but that may fail in its lack to amuse in the way that belt and suspenders does. Perhaps the blog readership will have some suggestions on this one?

Of course, the other lurking open question is why anyone in their right mind would choose to wear both? Is a belt and suspenders approach to commercial law the best regulatory choice? I might suggest that preservation of party autonomy and having a identifiable set of default rules is a compelling justification. After all, wouldn't it be tragic if one wore neither the belt nor the suspenders? Parties who fail to plan are at least forced into a default system when they forget to wear their belt. But then again, perhaps this is just a trust issue. Neither the belt nor the suspenders are trusted to do their job properly, so one wears them both.



Thursday, February 28, 2008

The Morality of Trade

I can think of nothing truer to Commercial Law than to offer as my first post a rejoinder to Paul who added this comment to An Ode to Mercury: "Merchants were considered little better than thieves for much of the history of western civilization. . . . Until modern economic thinking, and general liberalization of religion, emerged during the enlightenment, gains from trade were commonly viewed with skepticism at best."

If merchants "were [ever] considered" no better than thieves, I say, consider who's doing the considering. The possibility of gains from trade in the hands of "merchants" was and is the key driver for social and economic mobility and the political instability that comes with it. Feudal lords had much to fear and loathe at the possibility that by trading among themselves serfs might drag themselves out of hunger and ignorance. And so too the Church. Trade is possible only when people assert property rights. Assertion and exploitation of property rights by political subordinates is the beginning of the end of a social order based on birthright and violence.

On the same day I read Paul's comment, I saw that the California Court of Appeals had confronted and laid to rest an argument based on the skepticism about commerce that Paul observed,--that gains from trading property are morally inferior and, in this case, unworthy of protection by specific relief. In Real Estate Analytics LLC v. Vallas, a seller agreed to sell 14 acres of coastal California real proeprty to Real Estate Analytics, a developer, who planned to develop and resell it. The seller backed out and Analytics sued for specific performance. The seller wheeled out a steaming stack of equitable maxims before the trial court as to why the equities against specific performance tipped in his favor. The trial court agreed. The buyer was unworthy of an extraordinary remedy because to it the contract for the property "was nothing more than a vehicle to make money." (Analytics got a check for $.5 million instead). The court of appeals reversed. The buyer's purpose in entering the contract — to sell the property for a profit (gasp!) rather than holding it for the pleasure and privilege of the estate was as noble and deserving of equity as any other purpose.

Pardon my ardor. Commerce is not a cuss word.

UCC Revised Article 1 Enactment Status

As of January 1, 2008, Revised UCC Article 1 was in effect in 28 states -- Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. Kansas's version of Revised Article 1, enacted last year, will take effect on July 1. Of the 29 state enactments to date, 0 of 29 include the uniform Revised 1-301 choice of law provision -- each of the 29 enacting state legislatures having opted instead for some variation of its state's pre-revised 1-105 -- and only 20 of 29 include the uniform 1-201(b)(20) definition of "good faith" -- 9 state legislatures opting to retain the pre-revised "honesty in fact" definition in Article 1 and reserve "the observance of reasonable commercial standards of fair dealing" requirement for parties and transactions subject to that standard under another Article.

As of February 28, 2008, bills proposing to enact Revised Article 1 were pending in five states: Massachusetts, Pennsylvania, South Dakota, Tennessee, and Vermont. Massachusetts HB 4302, which succeeds the previously unsuccessful HB 3731, is currently awaiting a third reading in the Massachusetts House. Pennsylvania HB 1152, which was tabled last fall after passing the Pennsylvania House, was removed from the table on February 12 and awaits a third reading in the Pennsylvania Senate. South Dakota SB 93 unanimously passed the South Dakota Senate on January 29, unanimously passed the South Dakota House yesterday, and now awaits Governor Mike Rounds's approval (or lack of disapproval, as the case may be). Tennessee HB 3949 and SB 3993 were both introduced on January 31 and are currently before their first committees in their respective introducing chambers. Vermont HB 563 passed the Vermont House on January 24 and is now before the Vermont Senate Economic Development, Housing & General Affairs Committee. All five currently-pending bills reject the uniform Revised 1-301 choice of law provision (opting instead for some variation of pre-revised 1-105) and embrace the unitary good faith standard of uniform Revised 1-201(b)(20).

Wednesday, February 27, 2008

Starbucks' "perfect" coffee pledge

Well, I was thinking about this one as soon as I saw it on the news. But, it now seems to be getting even better from a sales point of view. For those of you who haven't heard, Starbucks has been concerned with dropping sales for its designer coffees. So, it shut down the stores yesterday for three hours to retrain 135,000 coffee sellers to uphold "the uncompromising standards and quality that have made Starbucks the world's coffee leader." This made me wonder initially if companies like Starbucks that recognize publicly a failing in quality are potentially setting themselves up for claims of breach of warranty of quality on previously sold coffees. After all, folks are spending quite a bit of money on the Starbucks label and arguably have a right to expect the quality to be high. Closing the stores to retrain seems to me to open Starbucks up to claims that it has not been providing the coffee as "warranted."

This initial mind-teaser was not quite enough. Now, apparently Starbucks (reopened after training) has pledged: "Your drink should be perfect, every time. If not, let us know and we'll make it right." What if the drink is not "perfect?" What if the barristas do not "make it right." The Starbucks press release also promises the "best" customer experience. Express warranty under U.C.C. section 2-313 or puffery?

Having just read a new case Hoyte v. Yum! Brands, Inc., 489 F. Supp 2d 24 (D.D.C. 2007), I had to give this some thought. Hoyte involved a physician's claims that KFC's statements that its restaurants served the "best" food was a breach of warranty. The Hoyte court concluded that it was only puffery. Perfect would seem to be different from best, at least to me perfect implied subjective perfection whereas best might be judged on an objective basis for purposes of warranties. The second part of the Starbucks obligation here is a bit easier as they pledge to "make it right." Again, this might be tricky for Starbucks in some cases when faced by the consumer with particularly high expectations. But that seems to be exactly what Starbucks might be bargaining for here. How do you like your coffee?

Tuesday, February 26, 2008

An ode to Mercury . . . or at least a mention

For my first blog entry, a little history about commerce might just be great. So, at this moment of the launching of the commercial law blog, a mention of Mercury, the Roman god of commerce. Mercury . . . to whom commercial law professors (though not necessarily our students) are thankful for words such as market, merchandise, and merchant. Apparently, Mercury, was the patron of travelers and merchants (he was the deity of commerce after all), but also to rogues and thieves. The tie-in between merchants and rogues and thieves brings to mind a recent case involving Big Lots Stores, Inc. and one of its distributors, Luv N’ Care. For those who want to read the case see, Big Lots Stores, Inc. v. Luv N' Care, 62 U.C.C. Rep. Serv. 2d (CBC) 522 (S.D. Ohio 2007). The case involves a less litigated provision of the U.C.C. Article 2, 2-312(3) requiring merchants to warrant that goods sold are free of claims regarding infringement. Of course, the basic idea here is that a buyer should receive a good, clean title to goods.

Luv N’ Care sold Big Lots Beatrix Potter products after the expiration of its license from Frederick Warne & Co., Inc. Beatrice Potter as many will remember created the world of Peter Rabbit and his friends and family (Flopsy, Mopsy and Cottontail among them). Big Lots brought suit for breach of warranty and Luv N’ Care counterclaimed to recover on unpaid invoices. While there is a much made in the case about when a contract arose and the like in an effort by Luv N’ Care to try to cast the sale as within the license period, the court grants summary judgment to Big Lots on the issue of infringement and is required to indemnify Big Lots on any damages from the sale of the infringed Beatrice Potter products. The seller Luv N’ Care, though, does in the end receive payment on its invoices (after the damages from infringement are subtracted, of course). Big Lots in the end becomes a good case about both merchants and rogues (if I might not be too harsh here, perhaps a thief as well)? It would seem that Mercury would be the patron of both.