The Unilateral Contract is still Relevant and Enforceable

This is an unusual case, especially where the party making the offer decides he doesn't want to pay after another person satisfied the requirement stated in the offer. The Contracts Professor blog brought this case to my attention.

What happens when you lose something valuable? You promise to pay something for the return. You see it all the time. If the item is very valuable, you offer a lot.

In the present case Mr. Leslie's laptop and an external hard drive were allegedly stolen while he was on a trip to Cologne. Leslie offered a $1,000,000 reward for the return of the laptop and the external hard drive via a YouTube Video. Armin Augstein claimed to have found the laptop and hard drive while walking his dog, and returned it to the police. When Augstein was notified of the reward, he made the claim.

Leslie offered two reasons for failing to pay. One, Augstein could have been the thief; and two, Leslie claimed that his obligation to pay was contingent upon his being able to recover some music tracks, which he was unable to do. Clearly there was no contingency in the offer for the reward.

According to the report, the jury deliberated for three hours before returning a verdict in Augstein's favor for $1,000,000.

The lesson is clear, if your going to offer a reward (a unilateral contract) be sure to clearly state any contingencies, and most of all, be prepared to pay the reward.
 

When Party A Agrees to Provide Work to Party B for no Money, but Instead For Exposure to Others That see the Work, can Party A Collect the Value of the Work When Party B is Bought by Party C.

This is the outline of a recent case in the US District Court, Southern District of New York, where writers and Bloggers provided work to the Huffington Post Blog (also "Huffpo"), with an agreement that they would not by paid, but instead their work would be attributed to them and available to anyone that read the Huffpo. The decision was the response to a motion to dismiss brought by the defendants.

The Plaintiffs apparently felt that their deal was with the original Huffington Post - not the new Huffpo what was purchased by AOL. There was no question but that the writers that contributed to the Huffpo without payment contributed to the tremendous success of the enterprise. However, it is hard to see how anyone benefited at the plaintiffs expense. As noted in the ContractProf Blog, the plaintiffs entered into the arrangement with no expectation of compensation, so they already received exactly what they bargained for. In other words, a deal is a deal. The plaintiffs offered their products in exchange for the defendants offer of exposure.

The court evaluated the claim for unjust enrichment and dismissed the case. This is an interesting case, not only because of the high profile name, but also because the claim would require the court to ignore the terms under which the submissions were made. There was no basis to believe that the plaintiffs expected compensation, and the plaintiff admit they did not. The bottom line is that for an unjust enrichment claim to succeed, the plaintiff must have an expectation of compensation, even if the exact terms of the compensation are not clear. But when there are clearly no expectations of compensation, there is no claim.

Lawyer Sanctioned for Bringing Frivolous Cases Against Mortgage Holders.

US District Court Judge Patrick J. Schiltz issued a sever sanction against an attorney for bring numerous frivolous acts against mortgage holders to prevent foreclosures. The law in Minnesota is clear that the holder of the mortgage can foreclose on the property, even if the mortgage holder does not hold the promissory note.

The attorney, William Butler, has been ordered to pay the court $50,000, plus pay the attorney fees for several mortgage companies that he has sued. According to sources for the story on the Minnesota Public Radio (MPR) web site, the total sanction could be well into six figures.

I look at this as a good sign for the legal profession. Lawyers need to be held accountable when they misuse the courts, by bring numerous claims that are clearly not grounded in well established law. This is different than bring a claim that is arguably meritorious, and ask the court to rule, maybe on issues for which there is no prior decision. But this case is very different. The article is good reading for all attorneys in every state.
 

Can one Party to a Contract to Divide Assets in a Divorce, Claim a Mutual Mistake to Avoid Obligations, When the Value of Some of the Assets used Allocate the Division Between the Parties Were Then Held by Bernard Madoff and the Account Reports were Frau

This case is based upon a divorce settlement agreement. It is an interesting case, just because one party - in this case the ex-husband - now discovers that the value of his share is worth considerable less than his ex-wife's share, because the value of some accounts (he claims) was really zero, and not what Madoff had represented. If they had divided the Madoff accounts evenly - there would be no a case (they both would lose the same amount). But they didn't.

The court rejected the claim of mutual mistake, but the facts are really amazing. How many other people have entered into agreements based at least in part on what they believed was the real value of an investment. There must be a number of parties in similar situations. None of those parties had any knowledge of the fraud (I am presuming), and they were all victims of the Madoff fraud.

According to the opinion, the Husband agreed to pay the wife $6,250,000, and there were a number of other agreements about dividing certain properties. The husband alleged that the intent was to equally divide the assets between them. Importantly, the agreement said nothing about an equal distribution, or any attempt to divide the assets equally.

As part of the agreement, the Husband took the Madoff accounts which were apparently in his name, and as a result, his portion of the division of the assets was reduced significantly when the Madoff fraud was discovered 2 1/2 years after the divorce. He brought the action against his wife for restoration of some of the amounts paid, using a theory of unjust enrichment and mutual mistake. The wife undoubtedly claimed that she made no mistake, and it was at best a unilateral mistake of her ex-husbands. These facts do not really fall under a mutual mistake analysis. And clearly the accounts had some value at the time of the divorce because the husband was able to withdraw some of the funds in the account to pay part of the divorce settlement. So at least at the time there didn't appear to be any problem.

The court didn't buy it. What would have happened if the contract had said that the intent was to divide the couples assets equally (or approximately equally)? If the contract had covered this contingency (and it is hard to imagine that the parties would have even thought to cover this subject) maybe there would be a remedy - but it would be a contractual remedy.

Thanks to ContractsProf Blog for reporting this case. 

Does the Risk Of Frivolous Law Suits Justify Shifting the Risk of Paying the Other Parties Legal Fees?

The Wall Street Journal has an interesting article in today’s edition - May 24, 2011, by Ashby Jones, about the Texas Legislature and a bill that appears destine to pass, that requires the loser in some cases to pay the attorney fees of the other party. Apparently the proposed law would require the loser to pay when a case is "kicked out of court" at a motion to dismiss stage of the proceedings.

In a very simplistic analysis this seems to be a good idea. A more thoughtful analysis raises a lot of questions. First of all, some cases are dismissed on a motion to dismiss, but many times these cases are dismissed on procedural and pleading grounds, and not the merits of the case. Also, these dismissals are many times without prejudice to allow the plaintiff to refile a new case, to repair some defect in the pleading.

Secondly, Texas will undoubtedly see a great surge in filings of motions to dismiss. The courts will need to deal with a surge in these motions, since the defendant has little to lose in bring the motion (which in most cases will be a frivolous motion). When the Plaintiff wins the motion and the case is not dismissed, does the defendant need to pay the Plaintiff's attorney fees? I am confident that this is not the intent. If a plaintiff wins a judgment against a corporate defendant, will the corporate defendant be responsible to the Plaintiff's fees.

While I think there are times when a loser pays system is appropriate, and sometimes there are frivolous lawsuits filed, I would like to think there is a better way to determine when to make the loser pay. If a claimant has no legal or factual basis for a claim, then the Plaintiff should pay for the Defendants legal costs. Fortunately, most cases are not frivolous.

If Texas would enact a pure loser pays system, then we would be able to see how it works. Maybe enact it for a trial period. Make the system fair and equal for everyone. Sure, it should make people think twice before bring an action - something they should do anyway. However, I expect that corporate America would oppose this proposal.

I will predict that only a small minority of cases will be dismissed on a motion to dismiss. However, some cases will certainly be decided by a summary judgment motion, which is different than a motion to dismiss. A summary judgment is a decision on the merits, where there are no material facts in dispute.

Finally, people who have no money will not care if they are responsible for a defendant's legal fees, since they will likely be judgment proof.

I will be interested to see the law when it is enacted, and to watch to see how it plays out. Laws which try to shift an advantage to one side to the other, are usually doomed to fail. To make it fair the loser pays system should apply to everyone, both plaintiff and defendant.
 

Contract Language is Always the Issue. What did the Parties Agree to do or, in this Case, Waive?

The Koncise Drafter Blog has an interesting post concerning the interpretation of certain disclaimer contract language. The aggrieved party - a lessee, claimed fraud when the landlord failed to disclose that there was a bad odor in the premises where the lessee planned to operate a restaurant. Clearly this problem would have defeated the objective of using the space for a restaurant. To make things worse, the property manager knew about the problem, but had naturally failed to disclose this issue to the new lessee. (This sounds a lot like a Seinfeld episode.)

The lease language provided that:

14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …

Not surprisingly, the lessee sued the landlord for fraud, among other things. The Landlord took the predictable position that the lessee had waived any claims for fraud.

The trial court found for the lessee, the Texas Court of Appeals reversed, and the Texas Supreme Court reversed the Court of Appeals. The question that the court was grappling with is whether the parties effectively disclaimed reliance on the representations by the lessor, thereby negating any claim of fraud. I am sure that when the lease was drafted that was likely the intent, this is very standard language (or some version of this language). The Blog correctly points out that when a drafter clearly states that the other party waives any claims for fraud, it is unlikely that the parties will sign the contract. So the language by necessity needs to be a little more subtle.

I think it is also the case when reviewing commercial lease contracts, most reviewers will probably skim the standard boilerplate language such as the term at issue in this case. After all, what owner wants to pay a lawyer to analyze and research language that is considered standard boilerplate language that has, in one form or another, been around for a long time.

In my career I've only once been presented with a lease for a client where the other party wanted my client to disclaim any claim for fraud. We did not agree to that language.

Another issue is whether the lessor had a duty to inform the lessee of the problem knowing that it would interfere with the lessee's intended use of the building. The lesson is clear, if you want the other party to waive any an all rights against your client, you had better say so.
 

Third Party Wins Case Against the USG as a Third Party Beneficiary.

It is very unusual for a third party to a contract to be able to enforce the terms of a contract. The first hurdle is that the parties must have specifically intended that the third party benefit from the contract. Usually claims of a third-party beneficiary are defeated at this point because there is no language in the contract to show specific intent to benefit the third party.

Claims against the Government are equally as difficult, if not more so. So the recent case of FloorPro Inc. v. United States is unusual. The facts of the case are simple enough. GM&W was awarded a government contract install new floor coatings in some warehouse bays. GM&W sub-contracted with FloorPro and the latter was to be paid about ninety percent of the contract price -- $37,500 out of $42,000. FloorPro completed the work but was not paid. FloorPro complained to the Government contracting officer.

The Government then made an agreement with the parties that provided that a joint check was to be issued to both FloorPro and GM&W. In consideration for the amendment GM&W released the government from any claims. So far so good for FloorPro.

However, the government being the government made a mistake and issued the check to GM&W, who presumable cashed it promptly and of course did not pay FloorPro. FloorPro brought an action against the Government claiming that it was aThird-Party Beneficiary of the contract modification.

The court agreed. The contract modification was specifically intended to benefit FloorPro. While it is unusual to find a successful third party claimant to contract funds, in this case the result is certainly fair and predictable. The parties clearly intended to benefit FloorPro. Since the the law is clear on when a 3rd party can succeed with a claim, and the facts clearly show that FloorPro was the intended beneficiary, why would the government fight the claim instead of negotiating a settlement. This was not a large claim, and the government made the mistake.
 

Thanks to the Contracts Prof Blog for reporting this unusual case. 

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Can I Make All My Employees Managers To Avoid Overtime Pay; and Other Myths. Two Ways to Make Long Term Bad Decisions.

The Minnesota Labor and Employment law Blog has an interesting article on another large company failing to pay it’s employees for overtime work as required by the law. The company in this instance was Levi Strauss and Company. The end result cost them well over a million dollars and of course their incurred attorney fees. Most of these cases are arguments over classifications – is an employee exempt, or not. Companies have been found to classify employees as managers, even though they don’t manage much, to avoid the overtime requirement.

Several years ago a contractor approached me and asked if he could make all of his employees independent contractors, thereby avoiding the requirement to pay the employers portion of social security. His competitors, he told me, were all doing it. This is another bad idea that will eventually subject a company, and owners, to significant costs and penalties.

Companies are sometimes operating under significant cost pressures, and they are looking for ways to reduce costs. However, ignoring the law is not the solution to a cost problem. While a company ignoring the law might gain a slight cost advantage in the short run, the cost in the end is bound to be much higher.

In the Levi Strauss case, since the employer failed to pay the required overtime (at least they agreed to make payment to the tune of over a million dollars,) the employer will also have a significant payment due the government for their portion of the social security payment.

While I have not seen this case yet, I am sure that there are companies that are treating employees as independent contractors and failing to pay the employees the required overtime wages, and the employer is also failing to pay the employers portion of the social security payments. These employers are just as likely to be caught by the government as by an unhappy employee or ex-employee.

Follow the law, and life is easier in the long run. When in doubt, ask an attorney to review the situation and provide advise. It’s far less expensive to get good legal advice than to defend these charges in court. Thanks to the Minnesota Labor and Employment Law Blog for their article on Levi Strauss.
 

Should I Put an Attorney Fee Clause in My Contracts?

When preparing contract documents for clients I am occasionally asked if we should include a clause to award attorney fees in case the other party breaches the agreement. When a client brings me a contract and wants to bring an action against the other side, that is one of the first things I look for.  That provision change the analysis of the case.
 

In considering this issue, I think there are two things to remember:

First: A provision allowing only one party to recover attorney fees is not usually a good idea since some courts will read these as giving the prevailing party, whichever side this is, the award; and Secondly: Prevailing party attorney fee provisions are an incentive to sue, since the plaintiff always believes that they are right.

One way attorney fee agreements essentially provide that if “Joe,” brings an action to enforce this agreement, the other side must pay his attorney fees. If Joe wants to enforce the agreement because of some perceived breach of contract, he will assume that he will recover all of his attorney fees. So Joe wants to sue without regard to the cost, or in some cases without regard to the actual merits of the case.

California has a statutory scheme in contract actions that in many cases awards fees and costs to the prevailing party.  You only need to read some of the cases to see the significant number of cases and appeals over who was the prevailing party and what the reasonable fees were.

I confess that at one time I thought the opposite was probably true, because of the additional risk an attorney fee provision brought to any action. However, on the positive side I believe that once an action is brought, the risk of attorney fees sometimes bring the parties together for a settlement.

Joe may or may not be able to recover his fees. Most courts will make a determination based on success in the action. Many courts will read the attorney fee provision as a prevailing party attorney fee provision. However, most cases settle, and I have yet to see a settlement that included an agreement to pay the other parties attorney fees. (I am sure it happens, but usually both parties cover their own fees.)

Some cases start out and the possibility of an award of attorney fees keeps a case from settling. If a substantial amount of money has been spent on attorney fees, will parties settle at a price that covers all of the contract damages only?

A provision that provides that each party is responsible for their own attorney fees and costs in the event of a dispute might very well be a better way to go. It is worth considering.
 

 

Can I Read my Employees E-mail, or Tap His Telephone?

This is a fairly common question, but it raises a lot of concerns. Each state has slightly different wire taping laws - by which I mean recording telephone conversations. TheWork Place Privacy Counsel Blog has a very interesting article concerning wiretapping and the Federal Wiretap Act. This act effects interception of telephone calls and e-mails.

The article covers the effect of diverting or intercepting e-mails, and what it means to intercept a communication. Employers beware. Employees beware!

After reading this article, how would you advise an employer that wanted to read all of their employees e-mails.  One thing is that you would not want the act to be an interception of the e-mails.