Contracts Class Notes 10/1/03


I think that Clovis is in a good mood.


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 London.


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 Pennsylvania.  He is traded to the Indians.  He doesn’t travel through the state of Pennsylvania or play in Philadelphia for about a year until the AL and NL kiss and make up.


Pingley v. Brunson


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 Wisconsin law in this case was that if a non-competition clause is overbroad, it will be cut out of contract entirely.  The court in Fullerton says we just need to trim the agreement down to a reasonable size.


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.


Sale of a business


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 Delaware, and the judge is called a “vice chancellor”.


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?


City Stores Co. v. Ammerman


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”.


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[1] It’s weird!