Contracts
Class Notes
I think that
Personal service contracts
and specific performance
Say one of your employees breaches
a contract with you and goes to work with someone else. There are really two promises that have been
broken:
1.
There
is a positive covenant which says that your employee promises to work for you
for a certain amount of time.
2.
There
is also a negative covenant (in some contracts) which says that you won’t work
for any other employer for a certain amount of time.
Courts will never enforce the
positive covenant, basically because we won’t force people that don’t
like each other to work together.
Courts will only
enforce the negative covenant when the person who repudiated your
employment contract is unique. If
you can hire someone who is just about as good for a comparable salary, you
haven’t suffered an irreparable injury.
That is, you haven’t suffered an injury for which relief at law (money
damages) is inadequate. She’s replaceable. Your loss is measurable. There’s no need for an equitable remedy.
“Law school is a place you
go when you don’t have much talent.”
“If you want to look at a
treatise on contracts, Farnsworth’s is far and away the best.”
If you have a person of great
talent who can’t be replaced, then you may suffer an irreparable harm. The leading case in this area is Lumley v. Wagner,
which involved two promoters competing over an opera singer. The Court of Chancery would not compel the
singer to sing. However, since the contract
was for a three-month exclusive engagement, there was an implicit negative
covenant. That is, the Court of Chancery
was willing to enjoin the opera singer from singing for anyone else, at least
in
Why would Lumley want to
restrain Wagner from singing for anybody else?
Well, it’s a considerable arm-twister that might help Lumley get her
back. In fact, it didn’t work. As a tactic, this does not tend to work very
well in that the employee almost never comes back.
We don’t want to compel
an employee to work, but we will put pressure on the employee such that
they may choose to work. You always have
the legal power to quit. But if we
enjoin you from working for a competitor, that puts a lot of pressure on you to
go back to the employer from whom you jumped.
When will we grant this
kind of an injunction? We’ll grant it when the remedy at law is inadequate. Typically, this is because the employee is
uniquely talented in such a way that they are made irreplaceable.
The court will not grant an
injunction if the talented performer bolts for a different market.
The most famous of the sports
cases is the case of Nap
Lajoie, who jumped from the Philadelphia Phillies to the Philadelphia Athletics. This is a breach of contract, and he is
enjoined from playing baseball for any other team in
This case reflects a minority
position that courts will not enforce implicit negative covenants. Most courts won’t rule this way.
In this case, the matter is
at trial during the contract period.
Why weren’t money damages an
adequate remedy against Nap Lajoie? He didn’t really make that much money. It would be different today.
In the sports and
entertainment market, it’s not too bad to have unwilling employees. They have an interest in performing and
maintaining their reputation whether they like their employer or not.
One way this problem is
handled in major league sports is the fact that the major leagues have
monopolies over their sports. For
example, if you jump to another baseball league, MLB will have nothing to do
with you.
“Generally speaking, it is
not a breach to die.”
Let’s say the employment contract
has come to an end. When the employee
runs off and works for another company during the term of the contract,
the employer will have a remedy. But
what if, on the other hand, the employee contract is over and the person goes
and works for a competitor?
If you don’t have a
non-competition clause in the original employment contract, you can’t do
anything about it, except maybe to file a tort claim based on a theory of
conversion of trade secrets or customers.
Tort law is rather unreliable for the protection of the employer. Instead, employers consistently include
non-competition clauses in their employment contracts.
Non-competition clauses are
subject to possible abuse, and therefore they are policed by the courts. Employees ought to be free to make a living,
and employers should not restrain competition.
Fullerton Lumber Co. v. Torborg
The old
Data Management, Inc. v. Greene
If the clause was drafted in
good faith, yet a court finds it to be overly broad, the court will cut it down
to a reasonable size. If, on the other
hand, the court finds it was written in bad faith, it will strike down the
entire clause.
The “Blue Pencil” approach is
used in some states.[1] In reaction to it, employment contracts are
written with lots of different sort of “telescoping” non-competition
clauses. If the contract is fought over
at trial, the court will “cross out” the clauses that it thinks are overly
broad.
What’s the big deal about
these clauses? It’s one of those things
that an employee doesn’t think about much when he signs. They also may come out of unequal bargaining
power between the employer and employee.
Courts are much more willing
to enforce non-competition agreements in the case of the sale of a business. If Bill sells “Bill’s Barber Shop”, Bill will
typically promise Bob, the buyer, that Bill will not open up another barber
shop across the street. This is more
defensible on public policy grounds and thus will be more “gently” policed because:
1.
Bill
received consideration for his promise, and
2.
Both
parties probably really thought about the clause and had more equal bargaining
power.
Courts will be more likely to
grant specific performance in cases like this when damages at law are
inadequate.
Northern Delaware Indus. Dev.
Corp. v. E.W. Bliss Co.
We’re in the Court of
Chancery in
Here we have a big
construction project. We’re expanding
and modernizing a steel mill. The court
basically says that it won’t grant specific performance because supervision of
this project is too difficult.
This is an important
consideration, but it could be easily exaggerated. In school busing cases that were decided near
the same time, the courts supervised stuff that was arguably a lot more
complicated and difficult than modernizing a steel mill.
On the other hand, here we
have a private contract that doesn’t impact social policy matters. Considerations of supervision are going to
cut against an equitable remedy. We want
to preserve some of the court’s resources for other important work.
What’s the problem
here? The contractor is slow. What
kind of lateness damages might there be?
There could be lost profits.
But it may be hard to determine exactly what kind of money the mill
would have lost. Once the mill is up and
running, they may be able to get a better idea of what kind of profits they
lost by opening late.
For these reasons, it’s
highly unlikely that you’ll get specific performance in construction contracts
like this. Money damages are going to do
just fine in most cases.
Another barrier to enforcing specific
performance is the vagueness of the contract.
The court says that if they’re going to be called upon to enforce an equitable
remedy, it ought to be clear just what the parties are supposed to be
doing. It’s not terribly clear here. This is a problem of enforcement either at
law or in equity. Was there a promise of
putting on a second shift, as the plaintiffs claim?
The injured party can’t get
what they need – a store in Tyson’s Corner – without equitable relief.
A promise to build on the
owner’s land is less likely to be specifically enforced.
He said “squiddley-squat”!
Tomorrow: what does
arbitration add to the mix? There will
be a clash of two policies: one in favor of arbitration, and one advocating a
strong equity system. Also, what promises
ought to be enforced? The law’s
answer is “most of them but not all of them”.