Tag Archive for 'contract'

Can Pay-What-You-Want Businesses Sue Non-Paying Customers?

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With the ever omnipresent ghost of Christmas commercialization turning the Season of Giving into the time of year where corporate fat cats can get their poorly run companies back into the black just enough to justify taking their huge bonuses, it nice to see that some businesses still know what it means to give back to their community.

Not only is Curtis Masters’s benevolence, in the form of his pay-what-you-want plumbing services, a much needed lifeline for poor Texans with a plumbing problem or two, but Masters’s kindness is also doing wonders to repair the stereotypical image of the shady plumber.  That kind of PR is priceless.  Masters has apparently been operating his business this way for over 15 years.  But according the 63-year-old plumber, the move to a pay-what-you-want operation wasn’t so much a strategic marketing move, but rather a call from God.  Masters states that he was told by God to use his master (ba-dum-bump) plumbing skills to help people in need and that he believes as long as he functions like this, God will provide for him.  Regardless of your views on religion, you have got to admire Masters’s commitment to his beliefs and his customers.

Now what Masters is doing is obvious very generous, especially in this current economic recession of ours; but what caught my eye about the story was the more obvious fact that there are probably a lot of people out there who would be perfectly happy letting Masters walk away with nothing for his work.  In fact, in the new report Masters even states that he has had some customers who seemed like they could pay more, but instead paid nothing for very complex work he did for them.  Of course this is to be expected when one functions on a pay-what-you-want business model.  Healthy fast food chain Panera Bread learned this the hard way after it had to shutter its third pay-what-you-want experiment in Portland, Oregon after it was getting too many non-paying customers and local homeless shelters started sending their hungry clientele its way.

But still, it seems a little wrong that people could easily take advantage of Masters’ kindness.  One of my friends asked me after reading this story if Masters could opt to take any legal action against any customers who he felt paid him less than what he should have gotten.  This is a question that seems like it should have an easy answer, but it turns out that like most things in law, the answer is a little more complicated and ultimately unclear.

When parties decide to exchange promises to perform duties in exchange for money or something in return, a contract is formed.  In legal terms, this contract formation process is called offer, acceptance and consideration.  If any of those factors are missing, a contract isn’t formed.  In addition, even when a contract is not clearly laid out, courts can infer that an implied-in-fact contract was created and award damages for a breach of contract.  An implied-in-fact contract usually arises in situations where services are exchanged for pay, as in Masters’ plumbing work.  These types of contracts occur when a party is unjustly enriched by receiving a benefit that they didn’t pay for, but knowingly accepted.  In these cases, a court can award the party that gave the benefit the fair market value for his or her work.

So it would seem that under an implied-in-fact contract theory, Masters and other do-gooders could possibly recover payment from entitled deadbeats too cheap to cough up some dough.  Masters provided a plumbing service, his customers authorize and allow him to work on their pipes, and they are obviously enriched by the services he offers because their plumbing is fixed.  All this appears to be grounds for a court to infer the formation of an implied-in-fact contract.  But the problem comes in when you factor in how Masters and other pay-what-you-want businesses functions.

Masters tells his customers up front in person and in writing that they are allowed to pay whatever they can afford for the work he provides.  Courts have long held that parties are free to contract in whatever way they wish as long as the parties both enter their contract knowingly without undue influence and that the agreement itself is legal.  From this perspective, an argument can easily be made that Masters, and other businesses like his, entered into the contract fully aware that he could come out of the other end with nothing, and that furthermore he expected that it could happen.  So in this sense, Masters wouldn’t have any recourse against non-payers.

What’s the answer?  Like I said, it’s not clear.  But it definitely would be an interesting case for a court to decide since there are good arguments to be made on both sides.

What do you guys think of pay-as-you-go business models?  Should cheapskates be forced to pay if they can afford it and how much?

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Kidnapper Sues Hostages For Breach Of Contract

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It’s probably true that we’d all like to think that people are inherently honest and good, especially when it comes to business.  It would be so much easier to make deals in our society if everyone just did what they promised to do.  But man, you can’t trust anyone anymore.  Call me old-fashioned, but I think that if you cut an agreement to hide your kidnapper from the police, you’d dang well better keep.  Unfortunately though, a pair of Kansas hostages just didn’t seem to get that memo.

Seriously though, despite the sarcasm in that last paragraph, the headline and story is actually true.  A Denver native by the name of Jesse Dimmick (AKA “The Stupidest and Possibly Nicest Kidnapper Ever”) broke into the house of Jared and Lindsay Rowley.  Dimmick told the Kansas couple that he was being pursued by someone trying to kill him and conjectured that it was most likely cops.  The fuzz was on his tail, but just wanted to interrogate him over a death that occurred.  Dimmick then tried to strike a deal with the couple where he’d give them some cash if they would agree to let him hide out in their home until the heat was off.  And like any person whose home was just intruded upon by a man wanted for questioning in a murder, the Rowleys let Dimmick stay in their home and fed him until he fell asleep before calling the cops.

Dimmick was picked up by police and was eventually convicted of two counts of felony kidnapping among other things.  But in a twist, Dimmick is now suing the Rowleys for breaching the alleged oral contract he claims they made with him.  He wants $235,000 for his emotional distress and to cover his hospital bills since he was shot by police during his apprehension.

As you can see, this story is interesting on so, SO many levels.  The capper would have been if Dimmick actually found a lawyer to represent him in this insanity; then this lawsuit would have gone down in history as terrible lawyer joke number 101.  But alas he appears to be going at his lawsuit pro se.  Surprisingly, Dimmick appears to know at least basic contract law.  Dimmick claims in short that the three contract requirements of mutual assent, offer and acceptance, and consideration were met since he proposed money for sanctuary.  However the prison law library books must have had their contract defenses section pulled out since he completely missed that illegal contracts are unenforceable.

We’ve talked about breach of contract nightmares before, but not the illegality exception to contracts since, well, I just figured everyone probably already knew that a contract to commit a crime is illegal and thus unenforceable as a matter of law.  But Dimmick didn’t seem to get that memo.

Even if the Rowleys had agreed completely in good faith to Dimmick’s offer, Dimmick still wouldn’t have a leg to stand on because last time I checked, harboring a wanted criminal isn’t something done on the up and up.  Not to mention the fact that the reality of the situation was one in which it would be hard to argue that the Rowleys were in any other position other than duress.  A crazed guy breaks into my house, oh sure, I’ll agree to whatever you say man, just don’t go Mel Gibson or worst yet, Jerry Sandusky on me.

The Rowleys’ attorney has motioned for Dimmick’s case to be dismissed, but is also arguing that even if the case goes forward, a contract still doesn’t exist because the essential terms, like the amount of money Dimmick promised to give, were never specified.  Laying out the essential terms of a contract, as many of you already know, is a requirement before any contract can become binding.

But you know what the biggest irony is in this case?  It’s the fact that it’s actually a dispute over contract formation.  Many lawyers in practice will tell you that arguments over whether a contract exists or not are usually nowhere to be found in the real world.  Most contract cases are over the terms of a contract since that’s where the trouble usually starts.  In the words of Oscar Wilde, “Life is not complex.  [People] are complex.”  Dimmick’s formation, if it actually goes forward, would’ve probably thrown the court in a tizzy, not to mention the hilarious media circus that would undoubtedly surround it.  However, we’ll probably never get to see any of this.

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Why You Should Always Write Out Your Contract No Matter What

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There are a lot of adages in the world.  Some useful, many are nonsensical.  “What goes around, come around” is one that has been a particular thorn in my side, not because I keep getting screwed over from all the bad stuff I do, thank God, but because as the Occupy Wall Street protesters will tell you, bad guys (especially the white-collar ones) seem to get away with everything.  But of all the sayings in the world, the most useful one is “You have nothing until you get it in writing.”

Why is that such an important saying?  Because, as anyone who is in business or has otherwise dealt with life will tell you, people have a funny way of not doing what they promised to do.  Yeah, I know, you might be saying that the people you work with are honest people and that you’ve known them for years and that they would never cheat you just to gain a temporary monetary gain.

Well, you may be right about the first two, but not the last.  Now I’m not trying to be an untrusting cynic or anything; rather I’m just saying that one should be cautious.  Because even the most honest people, when pushed to a point where it’s a matter of survival, can do some pretty unpredictable things.  I say this because recently a situation just like this one occurred to a close friend of mine.

Let’s call him Bob.  Bob is a dealer in wholesale goods.  He buys and sells various knick-knacks and other things like comic books, and he’s pretty successful at it.  My friend Bob has been doing this for at least 10 years.  He knows his trade well and certainly is no stranger to the importance of proper contract drafting.  He stresses the essential nature of contracts in business to all his friends, including me.  Like he says, “It’s the only thing that will keep you away from court.”

Anyway, a couple of weeks ago, Bob’s friend, let’s call him Mike, was in a bit of a pickle.  Mike bit off a little more than he could chew in terms of debt.  You see, Mike bought a house and secured a pretty hefty loan to pay for it.  Everyone has probably heard the rest of his story before: a couple of years ago Mike lost his job and hasn’t been able to find another one.  He’s been living off his savings ever since and has been using it to continue to pay off his mortgage.  Recently though, Mike was getting really far behind on his payments and was facing foreclosure.  That was when he went to Bob.  Mike had a really big and valuable comic book collection worth well over $20,000.  But he needed the money and agreed to sell it to Bob for only $10,000.  Bob, knowing his friend was in need, agreed to do the deal for $15,000.  Bob knew he’d probably only break even on the deal, but he wanted to help Mike out.

Since Bob knew Mike for many years, he decided to do the whole thing on a handshake.  There was no contract, no emails, and for that matter no paper trail whatsoever.  Mike asked for the money in cash first and told Bob he could come by in a couple of days with a truck to pick up the comics.  Bob agreed thinking nothing of it and gave Mike the money.  However, when Bob went by to pick up the comics, Mike reneged and refused to give the money back.  Now Bob is out $15,000.

Pretty bad situation, huh?  Certainly, the law of contracts tells us that a breach in contract would obviously mean that Bob deserves his comics or at the very least, his money back.  An oral contract is considered just as binding as one that is written.  And there is certainly an oral contract here since there was an offer, acceptance, and consideration.  Bob agreed to give $15,000 to Mike for his comic books, they both agreed on the terms, and Bob held up his end of the deal.  Though Mike can raise a defense called statute of frauds, which states that any sale of goods for a price of $500 or more must be put into writing, Bob can always fight this by showing that he performed by paying Mike in reliance upon Mike holding up his own end.  So it would still seem like Bob would win his case in court.  The problem is that Bob would actually have to sue Mike.

You see, in law school, they don’t really do a good job of showing you the expense of legal representation.  Though the law is obviously on Bob’s side, to win it would be a very long and costly process.  Mike is claiming he got the money from a reserve of cash savings he’s had since he was a kid, and the lack of any paper trail makes it very difficult to prove otherwise.  However, the worst of this is that Bob considered Mike to be a really good friend and doesn’t want to take him to court and make both of their debts worst than it already is.

So what’s the lesson here?  You have nothing until you get it in writing, even when it comes to dealing with friends or family.  I was sad to hear Bob’s story because it not only ended with him being out $15,000, but it may also lead to him being out of a friend.

Any of you have a nightmare contract story to tell?  As always, share your tale of woe in the comments section below.

Thanks to the Internet, We Are All Now Criminals

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How many contracts did you enter into this year? Can you count off the top of your head? If you signed a car purchase agreement, a lease, or a mortgage, I’m sure you remember those. Maybe you joined some type of club or organization, or started a new job, which required you to enter into formal agreements with another party.

But if you’re a computer user, the contracts whose terms you bothered to learn, or even remember entering, are almost certainly a small fraction of the total number of legally-binding agreements you entered.

Here’s a better question: how many times did you click “I agree” when visiting a website or installing a piece of software? I’m going to guess it’s more than you can count. And how many times did you read the entire agreement you purportedly just agreed to? If you’re anything like me, and the vast majority of people, you probably read none of them. After all, if you did, it’s what you’d spend most of your life doing.

An example: the simple act of buying music, which once upon a time involved walking into a store, picking the CD you want, and exchanging it for money with the clerk behind the counter. You might have gone through the whole process without saying a word, let alone signing a contract (though, technically, you’re still entering one, it just happens that the whole thing is performed as quickly as it’s formed). The fact is, we probably enter into more formal legal agreements in a year than our grandparents did in their lifetimes.

A very interesting article in the Wall Street Journal talks about some of the issues associated with the fact that we enter hundreds of legal agreements each year without bothering to familiarize ourselves with their terms. And thanks to the Computer Fraud and Abuse Act, which makes it a crime to access any computer system without the authorization of the owner, and the expansive interpretation of that law that the Justice Department and federal courts have settled on, breaking any one of these agreements could, in theory, be a criminal act.

This happened a few years ago. You may remember the “MySpace suicide” case, in which a woman set up a fake MySpace account, posing as a teenage boy. She then befriended a teenage girl who her daughter considered to be an enemy. The girl fell in love with this fictional boy. The woman then revealed the whole thing to be a ruse. Tragically, the victim of this sick prank took her own life.

Because the state in which this occurred, as well as the federal government, had no laws against so-called “cyber-bullying” at the time, a clever federal prosecutor charged her with a violation of the Computer Fraud and Abuse Act. His argument was that setting up a fake account violated MySpace’s terms of service, and in accessing a website in violation of its terms, the woman was accessing a computer system “without authorization,” which amounted to a criminal violation of the CFAA.

She was actually convicted, though her conviction was later overturned on appeal.

Since then, there have been many other cases of people being charged with crimes after they accessed a work computer after being fired, set up fake Facebook accounts, and other things that most of us wouldn’t consider to be the stuff of criminal liability.

Now, most of the conduct that gave rise to these cases was bad, and the law shouldn’t completely ignore it, when it causes actual harm. But that’s why we have civil lawsuits. By criminalizing such a wide range of conduct, we’re actually trivializing crime.

I should also note that I’m not terribly worried that the FBI is going to start arresting married people who join dating sites (that’s against most dating sites’ terms of service), or teenagers who use Google (that site’s terms of service say that you can’t use it unless you’re of the legal age to enter a contract – 18 in most jurisdictions).

What I am worried about is that the CFAA might become a catch-all criminal statute for federal prosecutors to use when they don’t have any real evidence against a defendant, but they “just know” that the defendant did something wrong.

One of the many running themes of my blogging over the last couple years has been the need to avoid vague criminal statutes. Imagine if there were a law on the books which made a crime “punishable by whatever sentence the Court sees fit” to do “anything the government doesn’t like.”

Obviously, I’m not saying that this is likely to happen anytime soon, but with infinitely-elastic laws like the CFAA in existence, I’m not saying that it couldn’t ever happen, either.

For that reason, I agree with Orin Kerr of the Volokh Conspiracy, on his argument that the CFAA needs a serious re-work. Obviously, we want to punish legitimate crimes that can be committed through computers, like identity theft and espionage; but the CFAA, or another law altogether, could accomplish that goal while being much narrower in scope.

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Can You Sue Over a Credit Card Fee?

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Over the last few years, the Supreme Court, under Chief Justice John Roberts has, without question, taken a hard turn to the right. This is not a condemnation or commendation; it’s simply a statement of fact. Whether you view this as a good or a bad thing depends largely on your political views.

However, critics of the current court have plenty to complain about lately, with some arguing that the Court is tripping over itself to make it as easy as possible for large corporations to ride roughshod over the rights of consumers. The court has held, in a few cases, that corporations can essentially contract themselves into immunity from certain consumer lawsuits, essentially by putting a provision saying “you can’t sue us” into their standard contracts or terms of use.

This case at issue involved a consumer lawsuit against a credit repair organization, which issued its customers a low-limit Visa card, as part of its strategy to help them rebuild a credit rating. However, the lawsuit alleged that the company charged hidden fees, which actually made their customers’ credit ratings worse than they were before, in some cases.

Under the terms of the 1996 Credit Repair Organizations Act, a federal law designed to protect consumers from fraud and/or exploitation by credit repair companies, consumers have a right to sue credit repair services that engage in deceptive practices. The law clearly states that the right to sue under those circumstances cannot be waived by the consumer, even if they sign an agreement purporting to waive that right.

However, the contract that consumers entered with the credit repair organization stated that consumers could not sue in court, and that any disputes arising from the contract would be resolved in private arbitration. Arbitration is a process by which two parties to a dispute agree to have a private entity (usually a professional arbitrator) resolve their dispute, as opposed to taking it through the judicial system. Arbitration is sometimes cheaper and less time-consuming than litigation in the courts. However, arbitration agreements often call for arbitration in a location that’s likely to be very inconvenient for the weaker party (in this case, the consumer) to get to. For example, if most of a company’s customers are in big cities on the West and East coasts, it might set the location for arbitration somewhere in the Midwest.

Furthermore, there are some concerns that arbitrators might be biased against consumers.

In this case, the credit repair company argued before the Supreme Court that their arbitration clause satisfied consumers’ right to sue for deceptive practices.

Judging by the oral arguments (summarized and linked to in the HuffPo article linked above), and the questions that the Justices asked the attorneys, it appears that a majority have already made up their mind, and they’re going to come out the side of the company, not the consumers.

Justice Ginsburg, long known as one of the more liberal Justices on the current Supreme Court, seemed to be the only one who indicated any sympathy to the arguments of the lawyer representing the consumers.

Recently, I blogged about another recent Supreme Court decision that would also seem to limit the rights of consumers who think they’ve been wronged by corporations to seek redress. In that case, the Court held that companies, through so-called “adhesion contracts,” can draft their way out of a class action lawsuit.

“Adhesion contracts” are contracts, generally between large companies and individual consumers, which are drafted by the party with the most bargaining power (usually the company), and presented to the consumer on a take-it-or-leave-it basis, with no real opportunity to negotiate the terms. Contracts for cellphone coverage are a prime example. The court held that a provision in such a contract that bars consumers from suing the company in a class action lawsuit, and instead directs them to individual arbitration, which would be far more expensive for an individual consumer.

The Supreme Court held that these provisions are perfectly valid.

In all of these cases, the court was not involved in constitutional interpretation. Instead, it was interpreting statutes that were passed by Congress. This means that if Congress disagrees with these rulings, it could change the law. And if they’re not inclined to do so, we can elect members of Congress who are.

Of course, whether or not that will actually happen depends largely on the willingness of consumers to educate themselves about these issues, and form informed opinions about them.