Contracts : Week of October 29

Reading for 29 October

Midterm next Sunday. You need an exam number. Look at the old midterms. If you want a bad grade, pick one side and argue it. Be really sure to mention both sides. Open book. Bring outlines, checklists, etc. Burden of proof is on the student, so leave no stone unturned. Note that the grading key is for him, not for us: there's more in it than would ever be expected from us-- he's trying to predict all possible pathways. There is not enough time to write a perfect answer. There's a rough curve, but it won't be bell shaped.
So. Does a firm have to follow its own employment manuals? The first cases (e.g., Tussaint) suggest that an employee doesn't even have to prove that he relied on the manual. Then in Pine River, it was softened: there can be internal rules that differ from the ones published. Basically, be sure to rig your employment manuals to make things easy on yourself (i.e., "these are the rules, but we may not follow them in an emergency," etc.). States differ on whether employee rules can be rewritten on the fly, or if rights are vested at the time of employment (CA vs AZ).
It is asserted that non-contractual sanctions will save the day. People, for example, still apply for jobs at Circuit City, even though they are notorious for always sending people to (allegedly rigged) arbitration. Note, however, that it is unwise to anger secretaries and assistant clerks of course, or street-level bureaucrats.
Note that all these things can be negotiated, if you've got a strong enough bargaining positions. (Golden Parachute clauses, etc.)
So, we like to have cause. This means procedures and record-keeping. Note that Americans do not generally like to say bad things about one another. This is what employment lawyers live on: they discover all the stuff in the file that says this employee was a good person.
The longer you work, the more you rely, and the more you have invested, so the more it hurts if you lose your job. [note: most of us, by definition, are not stars-- if everybody were, nobody would be] So maybe it would be easier to target a specific offense, and fire for cause. But that can be tricky too, given the elaborate non-discrimination policies at both state and federal levels.
Ironic that Easterbrook (a notoriously mean and hard judge to argue in front of) argues for the benefit of the incentive to work hard: he's been a tenured law professor, and is not a lifetime judge.
Linzer argues that trust is valuable, and should be considered. Firing for no cause disincents trust. But is judicial intervention the right way to fix this problem? We give employees a cause of action, but require that they pay their own lawyers. So maybe the ideal would be to have just enough threat to employers that they buy out more people than they fire.
So we've substituted procedures for hire-and-fire behaviors that we used to see. This changes things somewhat, by reducing the "at will" discretion of line managers. So at least some of the more outrageous cases get oversight.
Exceptions to employment-at-will rules don't bite very often.
Formal Rationality: rules we can administer. Vs. Substantive rationality. The rule that if you're under 18, you can repudiate a contract. That doesn't mean all minors are incompetent, but we will assume it to be the case in the interests of having a form on which we can deliver. But a minor has been allowed to make a contract for "necessaries." What are "necessaries?" Now we're back to substantive considerations. We tend to oscillate between high formality, and then creation of exceptions because we can't tolerate the results of strict applications of the forms. Then we get reforms that empower discretion (see all of Article II of the UCC). And then, because we want to lower transaction costs, we tend back to formalism: we'll be better off overall if we ignore the relatively few cases that come out the wrong way. It's a cycle, though, so expect exceptions to crop up.
We actually have a great deal of freedom from contract law (all kinds of dispute resolution options). The CPR pledge (500 largest corporations and 100 largest law firms): we all agree on ADR prior to litigation. Basically CEOs are trying to get the lawyer's out of disputes. But really, the result is that the dispute is taken away from professional disputers, and put into the hands of people who have business at stake. It works some. CPR can appoint mediators (mediation works because essentially the parties want the mediator to think they are smart and reasonable), and they have-- through the pledge-- enough clout to bring in a mediator who will be respected by both sides.
Types of arbitration
1. Umpire: the expert who is presumed to know (generally a loser-pays system to discourage frivolity). A quick-and-dirty decision by an informed person is the best thing most of the time.
2. Adversary: we create our own little court system. This is generally being sabotaged because we bring more and more legal procedures into it, and this drives costs up. Unfortunately this can result in sort of kangaroo courts (you have the form, but no substance, and someone gets railroaded).
3. Investigatory: Not really discussed.
Incentives for arbitration: let's not send lawyers from the central office to litigate each and every claim in each jurisdiction. Let's get out of the costly courts, and being people into arbitration.
Note that arbitrators don't have to write a decision, so we never really learn what rules (if any) they applied. Also note who hires the arbitrators: the repeat player (i.e., Sears, and not the individual appliance consumer). Now, there's the chance that the arbitrator will tend to produce results that satisfy the repeat player whose business they want? Note that just about everything about arbitration is kept secret.
There are some interesting areas where arbitration clauses are regulated against: auto dealers, stuff near military bases, automobile leases, etc.
Doctor's Associates, Inc. v. Casarotto
Commentary in class
Montana wants to protect its citizens from sneaky arbitration clauses: notice regulation. It's unclear whether putting THINGS IN UNDERLINED CAPS ON THE FRONT PAGE really protects anybody, but that was the law.
But the FAA says arbitration provisions are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equite for the revocation of any contract."
Note that Thomas dissents-- he is consistent on this issue: states should be allowed to regulate arbitration as much as they feel like.
The courts were very high on ADR because it got "garbage cases" out of the courts (except for drug cases, "garbage" includes anything involving ordinary people). This is not too different from the reasoning in Hadley. So they worked hard to channel things towards arbitration (inlcuding Ginsburg, so it's not just a conservative thing).
Note also that the ruling leaves open the possibility for state requirements governing all contracts. So now you start seeing attacks on arbitration clauses saying that they're unconscionable. Still the basic policy is that if you can get people to agree to arbitration, that's a good thing.
But what does "agree" mean here, if the clause is buried, or if you have few other options? And can we just de-regulate the US by sending everything off to arbitration, where whoever hires the arbitrator wins? Wouldn't this be equivalent to repealing consumer protection laws? In a way, we're de-regulating without any politician having to stand up and take responsibility for it.
So, for example, could I go to court and claim that my signature on a contract with an arbitration was forged? Or would the arbitrator have to decide whether or not it was forged? This hasn't been addressed yet.
And remember, standard form contracts almost never get read. And when they do get read, they don't get understood. Also, note that this eliminates the possibility of class actions: each unit has to go and be arbitrated, by contract.
Part of the argument is that we'll keep costs down if we keep things out of the courts, and therefore most people will be better off. So would you pay $0.05 more for your goods in order to get the courts instead of arbitration? What about $0.10? $1? What is the limit? Perhaps it is $0. If that's the case, though, is Ralph Nader just a historical footnote, then?
Feingold, incidentally, wants to amend the FAA to regulate arbitration some.
The classic series of NY cases seems to suggest that the courts have less powers than the arbitrators. Specific performance all over the place. But they draw the line at punitive damages: it would be a trap for the unwary. Reformation of documents might be OK, however: the arbitrators claim you can be bound to a contract you never agreed to. Note that most arbitration takes place under NY jurisdiction.

Reading for October 31

The exam is in rrom 2260. It is about contracts
A contract to do an illegal act is not just unenforceable, it is probably a crime in itself. Even strong libertarians don't want this enforced. Extra-legal contracts may not need the courts, because they have their own sanctions. Largely, though, this is symbolic: we don't want the courts to be party to criminal transactions, because that would look bad.
But you wind up with situations in which the bad guys win if the contract is not enforced, and different bad guys win if it is ("windfalls to the wicked").
The "Highwayman's Case": the court is insulted that anyone would bring this to them. It's not a direct contract to do anything illegal, but it's a parnership to facilitate criminal business. But this raises questions. I can go and buy prybars: does the store have a duty to figure out what I will use them for? I buy a gun and use it to kill someone, but haven't fully paid for it yet-- can the store owner sue me? Should the test be whether or not one party knows what the other is up to?
Carrol v. Beardon
Commentary in class
The town is way too small for anyone not to have known what is going on.
The transaction is question is just a sale of real estate. At an inflated price, of course, because it's a going business. The contract is too favorable to the seller (i.e., buyer defaults on payments).
So, should the court look at the form of the transaction, or the substance? It's just one person buying property from another, according to the documents and the lawyers.
Why is this different from the Highwayman's Case? The court didn't stand for that for a moment. By enforcing the contract, doesn't the court force (economically) the buyer into continuing the business? Should the Supreme Court decide the local policing practices in Montana (i.e., a county can remain dry, even though prohibition can be repealed)? But discretionary enforcement of the law can quickly become a commodity as well. If this were a crack house and not a brothel, the decision might go differently.
Maybe a little hypocracy is part of how we keep society running (difference between normative values and empirical actions).
The authority cited is based on precedent from prohibition-- the courts would decline to look behind the form of the transaction.
Partly, this is a capability problem: there's a limit on what the court can determine about buyers' and sellers' intents, and also a limit on how small a matter the supreme court wants to deal with. Basically, the ruling says that prostitution is for the local authorities to deal with, and it's up to them to determine if they have too much or any at all. Would we really want to pay for enough police to make Dane County a drug-free area?
So basically here, we're saying that we don't want to go crazy working as hard as we can to avoid enforcing all contracts that have a hint of illegality about them.
Note also that real estate is our area of greatest formality: this is the context in which form is most important, and least likely to be violated. We want real estate transactions to be as certain as possible: introducing questions of motive would make people nervous, because it's an informality. People would wonder, "what else is going on here that I don't know about, that might wreck this deal?"
Gates v. Rivers Construction Co., Inc.
Commentary in class
Statute says only US citizens (and properly documented aliens) can work on this job.
So, this is an illegal contract. Why not just say "illegal contract" and go home? Because that would mean the baddest guy in the situation would win. Here, the court asks "what result would carry out the policy of the statute?"
Of course, the whole concept of "legislative intent" is pretty funny here. Congress isn't a unanimously agreeing body. There are all sorts of motives for supporting a piece of legislation. And this is a type of problem not contemplated by the statute, so can we fairly say that the legislature intended a certain result here?
Anyway, we declare that the parties are not in pari delicto, and we try to act to the disadvantage of whoever is worse.
Greenberg v. Evening Post Association: repudiation of illegal contract. There was still time for the contest to run legally when he blew the whistle. We acknowledge his repentance, because it happened before the crime was completed, so he can get his bribe money back. We want to avoid a situation where we create an incentive to allow the crime to complete-- we want to incent repentant crime-stopping. Note that this doesn't cover crimes of moral turpitude (e.g., kidnapping): those we will handle under criminal law, and you can maybe make a deal to avoid prosecution, but on the books this isn't a defense at all. On the other hand, you don't convict people w/o testimony, and insiders have the best testimony, so sometimes prosecutors make deals.
The Mikado policy: "my object all sublime / I shall achieve in time / to make the punishment fit the crime." We seem to be tailoring things so our sense of justice is satisfied.
Karpinski v. Collins
Commentary in class
Jack Doyle is the bad guy here: he's a con man who starts the whole mess rolling. But there's a classic legal problem: the bad guy leaves! (well, he comes back in the last act, but without money). So he can't be made to pay. So of the less bad guys, or innocent guys, who gets the shaft?
Bottles and routes are the two major assets of a creamery. But about this time, you start being able to get fresh milk, cheaper, in disposable containers at the supermarkets. So if you run a creamery, can you get your stuff into a supermarket? It's an uphill battle. Little operations get squeezed.
Silent partner = sucker. Nobody has to pay any attention to your interests, because you are unseen.
Usury defense: this is an illegal interest rate, so I don't have to pay. Defense against the usury defense: who set this deal up? You can't propose illegal loan terms, and then cry usury when a lender accepts you.
Substantive due process: the feds can't interfere with state commerce when it would be irrational to do so. But, in order to meddle, the feds invent the health idea that there's a difference between Grade B and Grade A milk (there's no difference between the real milk, but you can only use Grade B for certain things). So now you've got a scarce thing (Grade A contracts) that can be sold. Nevermind that it's sort of illegal to sell them, in the sense that it's a bribe.
Deadbeat problem for lawyers: is it a good idea to sue clients? If you have time to sue your clients, shouldn't you be working on something more productive?
Did the Production Credit Association know that the loan they gave was being spent on kickbacks?
How much do we know here? It's possible, given the complexity here, that we don't really have very good information here about what is going on. That is the capability problem: the court is asked to resolve a situation with radically incomplete information and artificially narrow definition.
So the court gives money to Karpinski because he's less bad: if we go after the people who create the problem, then there's a deterrant. It's a surprisingly short and simple decision: parties not in pari delicto, judgment for the plaintiff. A one-hour trial barely leaves time for anything after you go through the form of swearing folks in, etc.
But is there one good person in the whole thing? Maybe Gene Collins's mom.
But do we even know who suggested the kickbacks? Karpinski was happy to pay them while things were going well. Collins accepted the kickbacks. Which is more bad?
So who should get paid? What about the doctors with outstanding bills? What about the ex wife's tort claim for assault? Why should Karpinski's claim come before those? What about lawyer Shostak's bills?
We know more about this situation than the court did: they had only 1 hour, and we've read the results of painstaking research. And we can tell that there's plenty we don't know. So aren't we asking the courts to do something they can't do? How can we trust that judges can do the right thing, if they'll never get the information they need? Do we want substantive or formal justice? Maybe sometimes we want one and sometimes the other... Any way you slice it, modern legal realism is scarcely more rational than classical idealism: we are lost no matter what. So does this undermine our faith in case law in general? Is the end of the story so horrible? After all, the losers only have to pay back some money, and not that much because they don't have much to give. Maybe this story is about pressure to make change, and change did indeed come about.
The UCC actually is a set of rules, but also a grant of discretion: if justice can be avoided..., unconscionable, etc...
The cycle:

Formal rules, strictly applied

We need exceptions to the rules

Too many exceptions... grant discretion to the judges

Judges have too much discretion-- lather, rinse, repeat

The function of trials is to avoid other future trials: they are a deterrant. The chance we could overturn this contract for illegality is balanced against the chance we could escape the in pari delicto doctrine, so we'd better just settle. Part of the unpleasantness of trials serves their strength as an encouragement to settle matters without them.