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Archive for the ‘Contracts’ Category

Problems of language and meaning are part of the everyday diet of law students, legal educators and legal practitioners.  In contracts, folk generally don’t care about what they meant until there’s a dispute about what they meant that has financial significance.  Once a dispute arises, the task of discerning meaning is pathological and often endowed with a strangely fictional quality.  We try to figure out “the intention of the parties” by reference to the language the parties (or their lawyers) used and the context in which they used it.  And the result is that one party wins and the other party is left saying “but that’s not what I meant!”

There are some that think that language is so inherently unstable that disputed contract terms can only safely be interpreted by reference to material outside the “four corners” of a written contract.  In the U.S., the high priest of this brand of legal postmodernism is the late Roger Traynor, former Chief Justice of the California Supreme Court.  In his classic Pacific Gas & Electric Co.opinion on the meaning of the word “indemnify,” Traynor expressed skepticism about the notion that judges can ever determine the meaning of contract terms by studying only the language of the written contract.  Judges read contracts in the light of their education and experience.  Language that has a clear, fixed meaning to a lawyer or a judge may have different meanings to others.  Traynor’s purpose was to attack judicial supporters of the “plain meaning” rule who refuse to admit extrinsic evidence of party intention where the language in the contract appears clear and unambiguous on its face.  This rule, according to Traynor, denies “the relevance of the intention of the parties or presuppose[s] a degree of verbal precision and stability our language has not attained.”  Essentially, he trades off judicial economy and efficient trial management in favour of a wide ranging inquiry into meaning and truth.

I’m inclined, however, to think that the “plain meaning” rule has had something of a bad press.  For a start, it serves a useful case management purpose.  If we presumptively admit very likely conflicting testimony of party intention (the parties are in dispute after all!), it will lengthen trials, increase costs and achieve nothing more than a further muddying of already muddy waters.  When Traynor writes that “[w]ords…do not have absolute and constant referents” I can go along with him insofar as I am happy to acknowledge that there are homonyms, i.e single words spelled and pronounced exactly the same way, that have multiple meanings.

Take the word “date”.  Am I talking about the fruit or the calendar?  Or the word “right”.  Legal right?  Right as opposed to wrong?  Right as opposed to left?  If we add a few more words, though, the meaning becomes tolerably clear.  I think most of you understand me when I say “I take my wife on a date about once a year” or “my wife is always right” (statements that are both meaningful and true).  The point is that ambiguity can often be cured by reading the troublesome words by reference to the other words in the document.  In the context of statutory interpretation, we apply the legal Latin tag noscitur a sociis (“a word is known by the company it keeps”) to this interpretive technique.

Fast forwarding to the 21st century, we now have all kinds of new languages in which to communicate and possibly even to write contracts.  As with all language systems, there are ambiguities and there are shared understandings.  Abbreviated forms of speech such as “textspeak” are a case in point.

I recently had my first encounter with the term #ftw.  According to the urban dictionary, an online work of which I am now something of a devotee, “ftw” can mean “for the win – an enthusiastic emphasis to the end of a comment, message or post; sometimes genuine, but often sarcastic” but it can also mean “f**k the world,” a wholly transparent expression of existential angst.

Armed with this new learning, I did something that you could construe as a desperate, middle-aged attempt to appear hip.  I tweeted about what I was going to be teaching in a contracts class.  Here is the tweet:

If you agree with me that it’s clear from the language as a whole that #contractsftw here denotes enthusiasm rather than sarcasm or angst then perhaps I can persuade you of my thesis that the “plain meaning” rule is serviceable as well as sensible.  Similarly, were one of you to tweet “Walters totally sucked in class again today #contractsftw” I think we can figure out from the “four corners of the tweet” which urban dictionary meaning of #ftw you intended.

Needless to say, I’m not saying anything very new or original.  Many others are dismissive of Traynor’s views on the indeterminacy of (contract) language.  For two entertaining examples see here and here.  Philosophy majors will no doubt be interested in the notion that Traynor may have misread Wittgenstein (see the comments in the first example).  So perhaps, Traynor notwithstanding, there is a consensus that the “plain meaning” rule is a useful place to start in our attempts to figure out just #wtf the parties to the contract were on about.

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Only the other day, I had the displeasure of having to share with my Fall 2012 Contracts class, the sad tale of the Peevyhouses, the plaintiffs in the well-known Oklahoma case of Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962).

Ostensibly, the case is about measure of damages.  Plaintiffs’ farm in Stigler, Oklahoma contained coal deposits.  They leased the farm to Defendant for five years to allow strip-mining on part of their land in return for royalty payments at a rate of 20 cents per ton of coal extracted.  Defendant agreed to carry out certain stipulated remedial and restorative works at the end of the five-year period.  This work it failed to carry out.

The cost of putting things right in accordance with the lease terms was around $29,000 (although Plaintiffs claimed only $25,000).  However, the impact on the value of the parcel of land was minimal.  Experts testified that the value of the farm after completion of the remedial works would only be worth around $300 more than the farm in the state that Defendant had left it.   At trial, the jury awarded Plaintiffs $5,000, a figure well below the full costs of restoration but higher than the value differential.  By 5-4 majority, a sharply divided Oklahoma Supreme Court modified the trial court determination, reducing the award to the meagre $300 value differential.

The legal problem in Peevyhouse is easy to see.  To give Plaintiffs the economic equivalent of what they bargained for we could apply either a “cost of repair” or a “value differential” measure of damages.  But $25,000 to put things right would only add $300 to the value of the land.  The worry is that there may be circumstances where the “cost of repair” measure will overcompensate plaintiffs and waste resources.  Precisely this concern animates the majority holding in Peevyhouse that “where the economic benefit which would result to the lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of the non-performance.”

One point to emerge from our class discussion was that the Peevyhouses might not have been interested in “economic benefit” in the sense of the sale value of the farm.  This was a family farm.  It was their home.  They may have been more interested in having usable land.  So what if what was really at stake in Peevyhouse from Plaintiffs’ perspective was the “use” or “amenity” value of the land rather than its market value?  Moreover, shouldn’t we worry about undercompensation because doesn’t a $300 award create perverse incentives for faithless contractors to welch on their promises?

Professor Judith Maute’s wonderful work on the case, which can be accessed here and here, offers powerful support for these intuitions.   Crucially, Maute’s work uncovers that the record omitted important background evidence regarding the terms of the deal and how it was negotiated.  It turns out that mining companies like Garland commonly paid $50 per acre up front to reflect surface damage caused by strip-mining.  In the Peevyhouses case, this amounted to $3,000 for their sixty acres.  But the Peevyhouses waived the $3,000 and instead negotiated express remediation provisions, which were added to Garland’s standard lease terms.   This indicates that the Peevyhouses specifically bargained to have the land restored at the end of the lease and that this was more valuable to them than getting $3,000 up front.  As Maute compellingly puts it:

“In resorting to the diminution measure, the court ignored strong indications in the record of plaintiffs’ higher subjective value for the land.  Despite deficiencies in the official record, it was obvious that the leased parcel joined land on which plaintiffs lived.  By definition, homestead property embodies personal, moral, and aesthetic concerns distinguishing it from real estate held for commercial purposes. The court should have inferred that the mining impaired both the going concern value of the entire farm and the plaintiffs’ personal valuation of their homestead.  The record showed the plaintiff-landowners rejected the standard or “off the rack” agreement, giving valuable consideration to obtain the promised remedial work in order to protect their idiosyncratic moral and aesthetic values.”

Perhaps then it is no surprise that in a poll conducted by PrawfsBlawg in April 2008 an overwhelming majority voted the Peevyhouses The Most Screwed Victims in Case-Law History!!

hat tip to Contracts Prof Blog for this image

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You’d be forgiven for thinking that contract disputes arising out of marketing and promotional campaigns were the stuff of ancient history.  All terribly nineteenth century.  Remember that weird English case about the carbolic smoke ball “quack” flu remedy?  However, The Walters Way can assure you that all those “advertisement or offer” hypos we do in class do serve some useful twenty-first century purpose and, as Exhibit A, I direct your attention to a current controversy recently reported in the New York Times and The Huffington Post surrounding a Gold Peak Tea “Take the Year Off” promotion.

In outline, the promotion worked something like this.  The grand prize was $100,000 cash and a year’s supply of tea.  To win the prize, eligible participants had to jump through a number of hoops.  First, participants were required to submit a brief essay online with a 1,500 character limit explaining what they would do with $100,000 and a year off work (“the Submission”).  The Submission was governed by detailed guidelines and content restrictions.  I would be tempted to write “you are never alone with a hundred grand” and leave it at that.  But I digress.

Second, participants whose Submissions were determined to be among the “top” Submissions, were invited to submit a short video (“the Video”), also subject to detailed content restrictions, by a stipulated deadline.

Third, the rules provided for a judging panel to decide the best five Submissions and Videos with these then being posted on the internet for public voting.  The finalist whose Submission and Video “received the greatest number of valid votes” would win the grand prize.

So here’s where the trouble began.  Theodore Scott, a Georgia attorney no less, was declared the winner.  But it turns out that he used a crowdsourcing site to encourage folk to vote for him and Gold Peak Tea said that this violated the rules of the promotion.  Mr. Scott was promptly disqualified and a new winner declared.  The relevant rule stated that “[f]inalists are prohibited from obtaining votes for any Submission and Video by any fraudulent or inappropriate means, including, without limitation, offering prizes or other inducements to members of the public, vote farming, or any other activity that artificially inflates such Finalists’ votes as determined by the Sponsor, in its sole discretion.”  You can read the full text of the Official Rules here.

Mr. Scott has attracted considerable support among the Facebook community and has launched his own campaign for justice via Twitter (82 followers when I last looked… ).  However, not everyone is sympathetic.

Let’s assume this ends up with a lawsuit in federal court in Michigan (please see Official Rules, rule 12 headed “Disputes”).  What are Mr. Scott’s prospects of success?  I’d welcome your opinions.  The best analysis IMHO posted as a comment on this blog wins a cup of tea (or coffee) from the Starbucks at the corner of Adams and Clinton in the fair city of Chicago.  Entries restricted to current 1L Contracts students in Walters’s Fall 2012 class.  Word limit: 500 words.  Offer lapses 6:00pm, Friday 12th October 2012.  Walters’s decision final.  And please, no crowdsourcing.

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Wear the jersey, dude

Hard on the heels of my recent revisitation of Lucy v. Zehmer, comes the news that Green Bay Packer quarterback Aaron Rodgers welched on a “deal” with R&B group Boyz II Men in connection with the Packers 2012 opening day NFL match up with the San Francisco 49ers at Lambeau Field.  The alleged deal?  Boyz II Men would sing the national anthem before the game if Aaron Rodgers agreed to wear a 49ers jersey in the event that the Packers lost.  And guess what?  Boyz II Men sang, the Packers slumped to a 30-22 defeat… but Rodgers is yet to don the red and gold.  A “joke between friends” that has been “blown out of all proportion” says Rodgers.  Sound familiar?

It surely looks like a contract to us reasonable football-watching folk, and, in that regard, I can do better than refer you to the tongue-in-cheek legal analysis of the matter over at the ContractsProf blog.

Back in the real world, it is hard to see how one goes about putting a value on performance of a promise to wear a football jersey on the happening of a contingent event (though no doubt someone somewhere would argue that the promise at the time Rodgers made it was worth to Boyz II Men whatever they would usually charge to sing a song to an NFL football crowd discounted for the contingency…).

But lest you think I am taking all of this celebrity nonsense a little too seriously, contract or not, for me, the legal latin maxim, “de minimis non curat lex” (the law is not concerned with trifles) applies with full force!

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Lucy v Zehmer revisited

Two guys sit down in a bar in Virginia one evening, just before Christmas 1952. They share a few drinks. Quite a few drinks, or so we are led to believe. One guy (Hardy Zehmer) owns a farm that the other (William Lucy) has tried to buy from him before. Their conversation turns once more to the farm… and the events that subsequently unfolded on that December evening would become part of American legal folklore…

The case that arose from this seemingly mundane social interaction, Lucy v. Zehmer, 84 S.E.2d 516 (1954), is a terrific teaching case: a great story that provides wannabe lawyers with lessons on several levels.

Lucy claimed that Zehmer had agreed to sell him the farm while they were down drinking at the bar. He sought specific performance of the agreement. Lucy could point to a proverbial “smoking gun”. Zehmer had written on a bar check the words, “[w]e hereby agree to sell to W.O. Lucy the Ferguson Farm complete for $50,000, title satisfactory to buyer” and he and his co-defendant wife had both signed the writing. The language could not have been clearer. It left nothing open to negotiation. On its face, it manifested the Zehmers’ unequivocal present commitment to sell the farm.

The Zehmers main line of defence was that the whole thing was a joke gone wrong. Hardy Zehmer had never intended to sell and had said as much to his wife when, out of earshot of Lucy, he had got her to sign the “agreement”. His testimony was colourful. He didn’t believe that Lucy could raise $50,000 and so the “agreement” had been nothing more than an attempt to call Lucy’s bluff. “I was as high as a Georgia Pine”, he said, and the “agreement”… well that was “just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.”

So the issue the court had to decide was whether there was an enforceable agreement even though, as far as one party was concerned, he had never intended to enter into an enforceable agreement.

As my students now know, the Lucy v. Zehmer court ruled that the parties had entered into an enforceable agreement. In so doing, the court adopted what is sometimes referred to as the “objective theory” of contractual intent. If a reasonable observer would conclude from what you say and do that you intend to enter into an agreement, then what’s going on inside your head is irrelevant.

For me, the big learning points from Lucy v. Zehmer are: (i) the critical and pervasive importance of language and context in the law; and (ii) how skillful lawyers can manipulate language and context in practical ways that can affect real world outcomes. If you don’t intend to be bound, use less committing language (in the UK simply writing the phrase “subject to formal contract” at the top of the bar check would have done the trick). If you want to win at trial – though I emphasize repeatedly to students that cases that go to trial and end up in law reports are a drop in the ocean – you need to tell a story that will persuade the court to draw the inferences that are most favourable to your client’s case. This year my students seemed to grasp that the concept of the “reasonable observer” raises some interesting philosophical questions. Who is this reasonable observer? Was he or she in the bar? What characteristics and attributes does he or she possess? Hopefully, they also grasped that, for practical purposes, the “reasonable observer” is the tribunal of fact (the trial court, the jury) and the game is to persuade the fact finder that “our” version of the story – the version that best dictates a legal outcome favourable to our client – is the one that should stick.

There’s little doubt that Zehmer had a pretty good story. His story was that drunks just don’t do major real estate deals in bars. But the court wasn’t convinced. The court bought a different story. And that story was that Lucy and Zehmer weren’t so drunk that they couldn’t get down to serious business…and, that if you sign a piece of paper saying in clear language that you agree to something, you shouldn’t be too surprised if other folk (the folk we refer to as “reasonable observers”) believe that you weren’t joking and meant what you said.

There are other stories that could have been told in Lucy v. Zehmer as a recent article in the Duke Law Journal co-authored by Barak D. Richman and Dennis Schmelzer superbly illustrates. Richman and Schmelzer write about a wider context that is invisible to those of us that have only read the account provided by the Virginia Supreme Court of Appeals. For Richman and Schmelzer, the deal in Lucy v. Zehmer was part of a series of aggressive and predatory land grabs by middlemen seeking to acquire timber reserves for southern Virginia’s thriving pulp and paper industry. Those of my students who worry about whether $50,000 was a fair price for the Ferguson farm may be onto something if Richman and Schmelzer are to be believed. But as I say in class – and I underscore again now – the court was happy that $50,000 was a fair price. And for us as lawyers, what counts is predicting what courts will do, and influencing what courts will do, by the way we tell the story.

Finally, here is yet another retelling of Lucy v. Zehmer. In this version, instead of getting drunk together, Messrs Lucy and Zehmer get high on a brand of marijuana, known as “the Georgia Pine”, with hilarious results…

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