Category Archives: contracts

She-Hulk #2

Today’s post is a short one based on the second issue of Charles Soule’s run of She-Hulk.  Soule continues to do great work, though this issue doesn’t have quite as many legal issues to discuss.  A big one is revealed at the end of the issue, but I don’t want to spoil it.  Instead I’m going to talk about attorneys and non-compete agreements.

When Jennifer Walters left her job with the firm of Paine & Luckberg, she was told that all of her outstanding cases would be assigned to other associates, except for “the blue file.”  As a partner explains, “we took that case as a courtesy to you.  If you go, it goes too.”  We learn a little more about the mysterious blue file in issue #2, but not enough to discuss yet.  What we do see in issue #2 is Walters trying (and failing) to drum up business from clients for whom she did work while she was at Paine & Luckberg.  But wait: is it legal for an attorney to attempt to poach clients from her former employer?  Perhaps surprisingly, the answer is yes.

Non-competition and non-solicitation agreements are a common feature of many employment contracts, especially in industries that are dependent on sales relationships with specific customers or which involve employees learning a lot of not-quite-trade-secrets-but-still-important information.  The specifics vary from industry to industry, employer to employer, employee to employee, and (most importantly) state to state, but basically they seek to prohibit the employee from competing with the employer for a certain amount of time after the employment relationship is terminated.  This can include working for a competitor, working in the same industry, or trying to solicit the employer’s clients.  A few states basically ban the practice outright, and those that allow it do so with significant restrictions.  This usually takes the form of limitations on the geographic, temporal, and industry scope of such agreements.

For example, an employee might be forbidden from working in the same (relatively narrowly defined) industry, for a year or two, within the same city.  This means the employee could find similar work in another part of the country, or work in a related but distinct field, or just wait it out.

New York, where She-Hulk works, is a state that allows such restrictive covenants, but only to the extent that they are reasonable and necessary to protect valid business interests.  The general rule is that they are allowed if they are “reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.”  BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999).  But there is a special rule for attorneys.

In every state that I am aware of (including New York) there is an ethical rule similar to ABA Model Rule 5.6, which states:

A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement;

The justification for the rule is found in the comments, which state that

An agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer.

One might observe that this is equally true of every other profession and its clients, but there is not necessarily any hypocrisy here.  Remember that this is an ethical rule created by the legal profession, not an exception to the law.  Without this rule it is entirely possible that law firms could impose non-compete agreements on their employees and partners, although one could imagine a court carving out an exception for criminal defendants on the basis of the Sixth Amendment right to counsel.

The bottom line is that, although the firm intended to keep its clients, Walters was almost certainly free to try to poach them.

Lois Lane’s Employment Contract

This will probably be our last post on Man of Steel.  No spoiler warning on this one, as I can set up the issue without giving anything of consequence away.

In Man of Steel, Lois Lane works as a reporter for the Daily Planet (no surprise there).  At one point in the movie, she has a disagreement with her boss, Perry White, over whether to run a certain story, and she threatens to quit.  White tells her that she can’t do that because she’s under contract, and Lois concedes the argument.

Wait, what?

I. Employment Contracts

How can Lane’s employment contract prevent her from quitting her job?  Surely the Planet can’t literally force her to work.  Doesn’t the Thirteenth Amendment have something to say about that?

And it does.  The Planet can’t force Lane to work, and a court can’t order her to work if she breaches her employment contract.  But that doesn’t mean an employment contract is completely toothless from the employer’s point of view.  There are two major techniques that the Planet might have used when drafting the contract to make it in Lane’s best interest to keep working for the Planet rather than quit: damages and a non-compete agreement.

II. Damages

Ordinarily in a breach of employment contract case it’s the employee who seeks damages from the employer, typically arguing that the employer owes them whatever they were due under the contract in the form of salary or other compensation.  Of course, that only works if it’s the employer that broke the contract.  If it’s the employee that reneged on the deal, then things could go the other way.

In cases where the employee is the breaching party, employers don’t often sue for damages because a) employees usually don’t have a lot of money and b) it’s difficult to say how much the employee’s work would have been worth.  This is different from the reverse situation, where the employer typically has deep pockets and it’s very clear what the employee was owed in terms of salary.

One possible solution to this problem is a liquidated damages clause, which says something like “if Lane breaches the contract then she must pay the Planet $X.”  Basically it’s an upfront agreement regarding the damages in the event of a breach of contract.  There are some limits and restrictions on such clauses, but they are, in principle, allowed in employment contracts as long as they are reasonable and not punitive.  See, e.g., Kozlik v. Emelco, Inc., 240 Neb. 525 (1992).

Faced with the prospect of having to pay the Planet the approximate value of her services to them, Lane would probably conclude that it was better to keep working.

III. Non-Compete Agreements

As the name suggests, these clauses bar the employee from competing with the employer after they quit working for the employer.  Usually this means that the employee can’t work for a competitor or in the same industry for a certain period of time, typically no more than a few years.  The agreement may also be limited geographically (e.g. only apply to the city where the employee was working).

Some states strongly disfavor non-compete agreements, whereas others are generally okay with them as long as they are reasonably narrow in scope.  We don’t know where Metropolis is, but it’s likely that it’s in a state that accepts non-compete agreements.  If Lois Lane was subject to a non-compete, then quitting the Planet would mean quitting being a journalist, at least in the Metropolis area.  That’s a powerful incentive not to quit.

IV. Conclusion

Although the Planet might not have literally been able to force Lane to keep working, her employment contract may have effectively done so anyway.

R.I.P.D.

R.I.P.D. is the Dark Horse comic about divine law enforcement officers which is being made into a movie starring Jeff Bridges and Ryan Reynolds and scheduled for release on June 19.  The trailer was just released today, in fact.  The basic premise is that Nick Cruz (Reynolds’ character) is a cop who is killed at the beginning of the story. But upon awaking in the afterlife, he finds himself confronted by a figure claiming to be. . . well God’s lawyer, basically. Turns out the Almighty has a bit of a special program for law enforcement officers killed in the line of duty: in exchange for the opportunity to bring their killers to justice, and a shot at heaven, deceased cops spend a century of service working for the R.I.P.D., the Rest In Peace Department, which has the divine mandate to seek out and deal with ne’er-do-wells from the netherworld who don’t stay where they’re supposed to.

So what can we say about this? If we’re to take the story at face value, not questioning its theological assumptions (which are basically a version of Christianity with your standard artistic license), it’s not as if the US legal system–or any mortal legal system–has anything to say to God. Or Satan for that matter. Indeed, the Western District of Pennsylvania basically dismissed a suit against Satan because he could not be served with process. U.S. ex rel Gerald Mayo v. Satan and His Staff, 54 F.R.D. 282 (W.D. Pa. 1971).

But we can talk about the general issues of the contract. We’ve already discussed deals with the devil in two posts (Reaper and Ghost Rider respectively), but what about deals with God? Continue reading

The Hobbit Contract, Part 6

It’s been a long series, but we’re finally at the end of the contract, or at least of interesting parts to write about.  If you’re just joining us, here are links to parts one, two, three, four, and five.  In today’s concluding installment we’ll be talking about a few miscellaneous provisions and giving some thoughts on the contract as a whole.

I. A Security Interest

In an unusual change of tone, the contract contains a clause that is not in the Dwarves’ favor but rather in Bilbo’s:

If, however, Company does not make good on payment herein set forth, Company becomes liable for the whole amount, to give to Burglar, making the stipulation, the penalty of the double of the said amount, the aforesaid conditions remaining as settled.  Furthermore, Company pledges to Burglar as security for the aforesaid promises all its goods existing and future.

This is a remarkable clause for two reasons (and not counting the semi-incomprehensible middle section).  First, apparently the Dwarves have volunteered to be liable for a total of a 3/14ths share if they fail to pay Bilbo a 1/14th share in the proper way (in gold of correct weight or in other payment of good quality and correct and proper measure) and in the proper time (within one year of the completion of the Adventure).  Second, the Dwarves pledge the entirety of their assets (or at least their tangible goods) as a security interest not just for the payment but for all of the promises made in the contract (e.g. provision of a pony, meals, etc).  Given how lop-sided the rest of the contract is, this is a most generous set of terms.

Or is it?  It could be that the Dwarves realize that if they fail to pay Bilbo it’s probably because they didn’t realize any significant profits.  And it’s not clear that the Company (as opposed to the Dwarves individually) has any substantial assets at the outset of the venture.  Each member of the Company seems to have brought their own tools, weapons, etc.  It’s also possible that the Company already pledged its assets as security in an earlier transaction, giving another party priority over Bilbo.  So this could be a hollow promise in more ways than one.

II. A Survival Clause

There is a curious clause that is repeated throughout the document, both in the main text and in the addenda and margins:

All conditions imposed herein are deemed to survive loss or destruction of this document, whether by accidental of wilful mishap, fair means or foul, and any reconstruction, re-wording, updating or improvements or additions made shall include a condition similar to this condition, notwithstanding any repetition  redundancy, overstatement or implication hereby recognized or disclosed.

This is an odd clause because the loss or destruction of a writing does not void the contract.  In fact, not only is the contract still valid, but “The loss or destruction of a memorandum does not deprive it of effect under the Statute [of Frauds].”  Restatement (Second) of Contracts § 137.  If the original is lost then the contents of the contract can be proven via an unsigned copy or by oral evidence.  I suspect, then, that this clause is really included for humor rather than for (fictional) legal effect.

III. Ownership of the Ring

Given the clauses describing ownership of the recovered goods, one might wonder whether the Company has a claim to the One Ring.  After all, Bilbo has expressly agreed that he has only a right to 1/14th of the profits, to be paid in a form determined by the Company, and no right to the treasure itself.  So could it be that the One Ring merely forms part of the treasure?  The contract seems to indicate otherwise.

First, the contract describes the extraction of goods from the Lonely Mountain as being the subject of the Adventure, whereas the One Ring was found underneath the Misty Mountains.  Second, the contract includes this clause:

Specialist equipment required in the execution of duties in his professional role as Burglar shall be purchased, procured, purlioned [sic] or obtained by Burglar, by whatsoever method Burglar sees fit.

The One Ring is definitely “specialist equipment” and it turns out to be required in the execution of Bilbo’s duties in his professional role as Burglar.  Certainly he could not have defeated the spiders, evaded the Wood Elves, or snuck past Smaug without it (possibly only the last counts as proper burgling, but the point stands).  So the Dwarves would not appear to have any claim to the One Ring.

I probably would have left out the “purloined” part, though.  That comes dangerously close to making the contract unenforceable on the grounds that the subject matter of the contract is illegal.

IV. Closing Thoughts

One the whole the contract is pretty well written.  There are some anachronisms, unnecessary clauses, typos, and a small number of clear drafting errors, but given the contract’s length and its role in the film (which is to say not a huge one, especially in the particulars) it’s an impressive piece of work.  I do wish there had been less material obviously taken from a modern film contract*, but I can understand cutting a few corners here and there, and at least the filler is more-or-less apropos.  I congratulate prop-maker and artist Daniel Reeve on a strong piece of work.  A lesser studio or artist might have been tempted to go with several pages of lorum ipsum written in Cirth.  If you’d like an even more accurate replica of the contract, Weta’s online store has a version with hand-made touches by Mr. Reeve.

* If you have a copy, check out the larger of the two fold-outs.  Almost all of it could have come straight out of a film contract.

The Hobbit Contract, Part 5

After the first four parts of our ongoing series about the contract in The Hobbit movie we’re finally entering the home stretch.  Today we’ll take a look at a group of clauses dealing with disputes arising under the contract.  This is an important part of many contracts.  If you’re going to the trouble of creating a formal legal agreement, then you might as well contemplate what might happen if the deal goes bad.

I. Mandatory Binding Arbitration

Somewhat anachronistically, the contract contains an arbitration clause:

Disputes arising between the Contract Parties shall be heard and judged by an arbitrator of the Company’s choosing

I say “somewhat anachronistically” because although arbitration has a long history in the common law—going back at least as far as 1609—it was for centuries frowned upon by the courts.  One early case, Vynior’s Case, held that mandatory arbitration clauses (i.e. requiring a party to a contract to submit to arbitration) were revocable.  In other words, parties could submit to arbitration but only by ongoing, mutual agreement.  It was not until the 1800s that mandatory arbitration really became acceptable in either England or the US.  See, e.g., Burchell v. Marsh, 58 U.S. 344 (1854).

The other issue is that the clause allows the Company to choose the arbitrator.  This is highly unusual and may actually invalidate the arbitration clause.  In order  to comport with due process, a mandatory arbitration agreement must, among other things, provide a neutral, impartial decision maker.  Typically this is done by allowing the parties to jointly select an arbitrator or to have an impartial third party (such as an arbitration agency) select one.

II. Choice of Language

The next part of the arbitration paragraph is a rarity for an American lawyer:

… and all pleas shall be pleaded, shrewed [sic], defended, answered, debated and judged in the Dwarvish Tongue

Obviously this is a significant disadvantage for Bilbo, as he evidently cannot read (and presumably cannot speak) Dwarvish.  Choice of language clauses like this one are much more common in international contracts than in contracts between parties in the United States.  They are also much more common in contracts that contain arbitration agreements rather than forum selection clauses (e.g. “any disputes arising under this contract will be heard in the courts of Capital City, State X”) because in most many countries the courts only deal in one official language, making a choice of language clause redundant.  But when the case will go to arbitration, the chosen arbitrator could potentially speak multiple languages.

However, the most common reason for a choice of language clause is when the contract itself is translated into multiple languages for the benefit of the parties.  In that case it is common for the contract to specify that one version is the “authoritative” version

III. The (Non-Existent) Choice of Law Clause

The one thing that leaps out at me about this contract is that it doesn’t contain a choice of law clause.  Such a clause allows the parties to specify what jurisdiction’s law will govern the contract.  This is particularly useful when multiple jurisdictions may potentially apply.  The area of the law that deals with figuring out which court has jurisdiction and which law applies is known as conflict of laws.  Conflict of laws is a complex subject.  Typically it is a stand-alone course in law school.  So we won’t go into too much detail here, but suffice to say that arguably both the law of the Shire and the law of the Dwarven Kingdom could conceivably apply to this contract.  Some of the factors that a court might consider include:

  • The parties are a Hobbit of the Shire and a group of Dwarves.
  • The contract was signed in the Shire.
  • The contract concerns services to be performed in the Dwarven Kingdom.
  • The most likely source of the breach of the contract occurs in the Dwarven Kingdom.

Since the applicable law is debatable, this is precisely the kind of case in which a choice of law clause makes sense, so its absence is notable.

IV. Attorneys’ Fees

Finally, the contract includes a clause regarding attorneys’ fees*:

In the event of a dispute arising in relation to the terms of this agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable fees and costs resulting therefrom.

This clause is notable because it tells us something about the (actual, non-fictional) writer of the contract.  They were very likely either been an American or at least were copying from an American contract.  In essentially every other Western country, the default rule is that the losing side pays (or at least contributes to) the winning side’s costs.  This is commonly called the English Rule, in contrast to the American Rule in which each side bears its own costs by default.  There’s nothing unusual about a clause like this in an American contract; in fact, they are pretty common.  But I think it would be unusual elsewhere.

* The precise spelling of “attorneys’ fees” is a matter of some dispute.  See Communities for Equity v. Michigan High School Athletic Assoc., 2008 WL 906031, n.1 (W.D. Mich. 2008).

We’ve probably only got one or two more posts about the contract to go.  If any of our readers have questions about the contract (maybe you bought a copy or read about it elsewhere) please let us know before we wrap up the series and we’ll try to include it.

The Hobbit Contract, Part 4

The first three parts of our ongoing series about the contract in The Hobbit movie have already taken us through a variety of contract law topics.  At this point, unless there’s a strong call to go through the entirety of the contract, we are going to start skipping less interesting clauses in favor of ones that present new or more complex issues.

I. Signatures and Witnesses

At the beginning of the second ‘page’ of the contract we have this paragraph:

The principles [sic] agreeing to this contract, namely the Company [as represented by Thorin Oakenshield] and the Burglar, and known collectively henceforth as the Parties, shall signify their agreement to all clauses contained herein [the Conditions of Engagement] by signing or making their marks in the spaces provided for so doing, and affixing seals if applicable.  The Witnesses to this Contract, being those others whose signatures, marks or seals are affixed hereto, affirm, state and declare their understanding and unbiased agreement to all that is contained herein.

This language is a little unusual.  Contracts—at least modern ones—do not normally specify the signature process in such detail.  But there’s nothing inherently wrong with it, either, apart from the misspelling of ‘principal.’

The signature clause states that the parties may “sign or make their mark.”  This is correct.  There is no legal requirement that a signature be the signer’s name, much less the signer’s name handwritten in cursive.  Instead, “the signature to a memorandum may be any symbol made or adopted with an intention, actual or apparent, to authenticate the writing as that of the signer.”  Restatement (Second) of Contracts § 134.  A mark or even an affixed seal could suffice.

Most legal documents do not require witnesses unless they require them by their own terms.  One notable exception is a will.  The exact requirements vary by jurisdiction, but most require that wills be witnessed, typically by disinterested parties.  In this case a witness signature does not seem to be required in order for the contract to be valid, but it’s not a bad idea in case there is a dispute later.  It is curious, however, that the witnesses (in reality the witness, since only Balin appears as witness) “affirm, state and declare their understanding and unbiased agreement” to the contract.  It’s unclear what, if anything, the contract requires a witness to agree to.  The role of a witness is usually not to understand and agree to the contract but rather to witness the signing by the parties: did the parties sign, were they the correct people, were they mentally competent, etc.  So this paragraph is a little odd but probably harmless.

II. Written Contract Required?

Relatedly, one might ask if a written and signed contract was necessary at all.  Some types of contracts must be in writing.  The Statute of Frauds refers collectively to laws that list the kinds of contracts that must be in writing.  Although the Statute of Frauds got its start in England in 1677, it has since been almost entirely repealed there while it has grown more influential in the US.    But the most substantial repeal of the Statute of Frauds in England didn’t occur until 1954, well after The Hobbit was written, and so Tolkien may have contemplated some sort of Statute of Frauds existing in Middle Earth.

However, none of the traditional Statute of Frauds categories likely apply in this case.  The closest category would be contracts that cannot be performed in one year, but the adventure was complete within the year 2941, not counting the return trip.  Thus, the contract could be performed within a year.  Note that it’s not contracts that might not be performed in a year but rather contracts that cannot be performed in a year.  An example would be if the contract said something like “the Parties shall leave for the Lonely Mountain two years from the signing of this contract.”

III. Non-disclosure Agreements

Next we have a non-disclosure or confidentiality clause:

Confidentiality is of utmost importance and must be strictly maintained at all times.  During the course of his employment with the Company, Burglar will hear, see, learn, apprehend, comprehend, and, in short, gain knowledge of particular facts, ideas, plans, strategies, theories, geography, cartography, iconography, means, tactics and/or policies, whether actual, tangible, conceptual, historical or fanciful.  Burglar undertakes and agrees to maintain this knowledge in utmost secrecy and confidentiality, and to neither divulge nor make known said knowledge by any means, including but not limited to speech, writing, demonstration, re-enactment, mime, or storage and retrieval within means or apparatus currently known or unknown or as yet unthought of.

(It is a plain drafting error to refer to “the course of [the Burglar's] employment with the company”, since a later clause specifies in no uncertain terms that “Burglar is in all respects an independent contractor, and not an employee … of the Company.”)

This confidentiality agreement is a little overbroad, since by its strict terms it requires Bilbo to keep confident anything he learns on the journey, not just things he learns in confidence.  The fact that information is already publicly known is usually a defense to a breach of confidentiality, since the information wasn’t actually secret.  Overbreadth probably isn’t fatal to the clause, however.

What’s really unusual about this part of the contract is that it doesn’t appear to include a clause acknowledging that monetary damages alone would be inadequate compensation in the event of a breach of confidentiality.  The purpose of such a clause is to make it easier to obtain an injunction ordering the breaching party to stop disclosing the confidential information.  Ordinarily breach of contract results in a payment of monetary damages, and getting an injunction usually requires showing, among other things, that those damages are insufficient to remedy the harm done.

What’s doubly weird about this is that the contract does have this clause later on:

Burglar acknowledges that monetary damages alone will be adequate compensation for a breach of this contract by the Company.

We’ll talk more about this clause in a later post, but it’s curious that the contract only contemplates injunctions defensively (i.e. protecting the Company from them) and not offensively (i.e. making it easier to enjoin Bilbo).

The Hobbit Contract, Part 3

Our first two posts about the contract in The Hobbit movie brought us through some boilerplate and into the substance of the contract, namely some of Bilbo’s obligations and the nature of the Adventure.  From a legal standpoint we’ve discussed integration clauses, amendments, severability clauses, consideration, defined terms, contract interpretation, and liability waivers.  And we’ve still only begun!

I. More Waivers

The next section is yet another waiver

Burglar holds harmless and without blame in perpetuity the Company and its successors for any notoriety, incarceration, or proceedings brought against, in regard to or as a result of the adventure or any activities related thereto.

Also includes slander, libel, loss of face or of social standing in country of Burglar’s origin.

Remedies shall similarly not be sought for any unlooked-for misfortune befalling Burglar’s home during his absence.

The smaller text is written in the margin or otherwise in smaller writing.  There’s a lot of that kind of writing in the margins that we’ll be referring to as we go through the contract.  For the most part the size of the print doesn’t matter, but there are some contract terms, such as warranty disclaimers, that must be printed conspicuously, which usually means large print or all caps.  UCC §§ 2-316(2),  1-201(b)(10).  At common law we suspect the rules were even looser.

This set of waivers is not particularly objectionable.  As discussed in the prior post, the actual scope of the waiver may not be as broad as the language suggests.  For example, if the Dwarves intentionally burned down Bag End, this waiver would not prevent Bilbo from suing them for the damage.

It may bear mentioning that the slander waiver only protects the Company.  Bilbo could still sue the actual slanderer, of course.  Traditionally this has been easier to do in England than the United States.  At common law, for example, truth was no defense to criminal libel (also known as seditious libel).  Garrison v. Louisiana, 379 U.S. 64, 67-68 (1964).

II. Payment

Now we come to some terms of the contract actually described in the book:

Cash on delivery, up to and not exceeding one fourteenth of the total profit [if any]. Not including any of the gross paid to other parties in lieu of royalties or help and provisions given or loaned.

All traveling expenses guaranteed in any event. But refer to attached and appended conditions, clauses and riders regarding any Return Journey. ‘Traveling expenses’ shall be understood to mean basic fare as seen fit by the Company. ‘Luxury’ catering or accomodation over and above this standard shall be enjoyed only at Burglar’s considerable [but justifiable] expense.

Funeral expenses to be defrayed by us or our representatives if occasion arises and the matter is not otherwise arranged for. Basic funeral to ‘commoner’ or peasant standard is allowed for only. Lavish ceremonies and jewelled (sic) or gilded coffins not provided. Plain pine box is the normal standard. Transport of any remains, in whole or in part, back to the country of Burglar’s origin is not included.

Most of these clauses are fairly straightforward.  In terms of the plot, the more important clause is the one regarding profits.  Already we see part of the definition: it excludes royalties paid to others and anything given or loaned to Bilbo counts against it.  In the margins we see some more relevant terms:

Burglar acknowledges and agrees that each item of the Company’s valuables, goods, money or merchandise which he recovers from the Lonely Mountain [the 'Recovered Goods'] during the term of his engagement with the Company, shall remain the Property of the Company at all times, and in all respects, without limitation.

Furthermore, the company shall retain any and all Recovered Goods until such a time as a full and final reckoning can be made, from which the Total Profits can then be established.  Then, and only then, will the Burglar’s fourteenth share be calculated and decided.

So Bilbo can’t just pick up some treasure that he likes and decide that it’s part of (or the entirety of) his share.  Instead, as provided by yet another clause, he will be paid in gold or its equivalent, in correct weight or of good quality, respectively.  So Bilbo really can’t lay claim to any particular article of treasure.  Indeed, the Dwarves could conceivably purchase gold from somewhere else and pay him with that.  He’s not entitled to any part of the treasure itself as such.

III. Spoilers and Conclusion

In this section we’ll discuss how these contract terms could affect the plot.  The book has been out for about eighty years, but nonetheless, spoiler alert:

Continue reading

The Hobbit Contract, Part 2

In the first part of our analysis of the contract in The Hobbit movie, we discussed several of its more standard clauses, including the entire agreement clauses and severability clause.  Today we’re going to get into the substance of the contract.

I. The Adventure and Consideration

Two clauses describe Bilbo’s primary obligations:

I, the undersigned, [referred to hereinafter as Burglar,] agree to travel to the Lonely Mountain, path to be determined by Thorin Oakenshield, who has a right to alter the course of the journey at his so choosing, without prior notification and/or liability for accident or injury incurred.

The aforementioned journey and subsequent extraction from the Lonely Mountain of any and all goods, valuables and chattels [which activities are described collectively herein as the Adventure] shall proceed in a timely manner and with all due care and consideration as seen fit by said Thorin Oakenshield and companions, numbering thirteen more or less, to wit, the Company.

All contracts require some consideration from all parties to the contract.  Consideration, in the contract sense, means a bargained-for performance or promise.  Restatement (Second) of Contracts § 71(1).  Basically, this is something of value given or promised as part of the agreement.  This can be anything that the parties agree is valuable; the classic example is a single peppercorn.  Whitney v. Stearns, 16 Me. 394, 397 (1839).

Here, Bilbo is promising to go with the Company to the Lonely Mountain and performing various services there, including extracting the treasure, plus a few more services we’ll get to later.  In turn, as we shall see, the Company promises to pay Bilbo one fourteenth of the profits, plus a few other obligations.  Thus we have “a promise for a promise,” otherwise known as a bilateral contract.

II. Defined Terms and Illegal Contracts

There are some other details to notice in these clauses.  One is the use of defined terms (e.g. “referred to hereinafter as Burglar”).  The parties to a contract may define terms however they wish, even in ways that contradict the definition used in statutes or regulations.  Restatement (Second) of Contracts § 201(1) and comment c.

The objective of interpretation in the general law of contracts is to carry out the understanding of the parties rather than to impose obligations on them contrary to their understanding: “the courts do not make a contract for the parties.” Ordinarily, therefore, the mutual understanding of the parties prevails even where the contractual term has been defined differently by statute or administrative regulation.

Id. comment c.  This is important in this case because of the use of the defined term “Burglar.”  As some commenters on the last post noted, contracts to do something illegal are ordinarily unenforceable (e.g. collecting on an illegal gambling debt).  But here what matters is not that the parties used the word ‘burglar’ but rather what sort of meaning they assigned to that defined term.  As we shall see, the contract doesn’t require Bilbo to do anything illegal (or at least not obviously illegal), and so the contract will probably not fail for use of a questionable term.

III. Contract Interpretation and the Limits of Liability Waivers

These two clauses also pose something of a contradiction.  On the one hand we see the first of many liability waivers: “[Thorin has] a right to alter the course of the journey at his so choosing, without prior notification and/or liability for accident or injury incurred.”  But on the other hand we see this explicit obligation of care: “[the Adventure] shall proceed in a timely manner and with all due care and consideration.”

Ordinarily “due care and consideration” signifies taking on liability for negligence, so this conflicts with the earlier liability waiver.  Perhaps the two can be reconciled by the phrase “as seen fit by said Thorin Oakenshield and companions.”  Thorin and Co. could always claim that the amount of care and consideration they saw fit was extremely minimal, though that runs the risk of making the clause meaningless, which courts usually don’t like to do.  ”As a general proposition, whenever possible, the law favors reconciliation of clauses within a contract which appear contradictory.”  City of Columbia v. Paul N. Howard Co., 707 F.2d 338, 340 (8th Cir. 1983).  Taken together with the numerous other waivers and disclaimers, I think a court would probably conclude that Thorin & Co. were not taking on any particular duty of care.  ”A writing is interpreted as a whole.”  Restatement (Second) of Contracts § 202(2).

Waivers or disclaimers of liability are an important part of many contracts.  These can include waivers of a product warranty (seen all the time in software license agreements) and waivers for liability due to negligence (often required before doing something dangerous like skydiving).  But there are limits to liability waivers.  While a party to a contract can ordinarily waive liability for negligence (although not in every jurisdiction), one cannot waive liability for gross negligence, recklessness, or intentional misconduct.  So the numerous (and sweeping!) waivers and disclaimers may not be as effective as they appear at first glance.

IV. Conclusion

We aren’t quite done with the substance of the contract, but before we get there we have some more boilerplate to cover.  There is a lot of standard language in this contract, and this is similar to real-world contracts, particularly form contracts, which tend to have a lot of standardized language surrounding a handful of fill-in-the-blanks.  So far the Dwarves haven’t committed any unsalvageable drafting errors or done anything that might jeopardize the validity of the contract.  We’ll see if that keeps up!

The Hobbit Contract

Ordinarily we don’t discuss legal issues relating to fictional settings that are dramatically different from the real world in terms of their legal system.  Thus, Star Wars, Star Trek, Tolkien’s Middle Earth, etc are usually off-limits because we can’t meaningfully apply real world law to them.  But the contract featured in  The Hobbit: An Unexpected Journey (which comes out this next weekend!) was just too good a topic to pass up, especially since you can buy a high quality replica of it, which is what I’m using for these posts.  The contract is over 5 feet long unfolded and is fairly dense with text, so there will probably be multiple posts about it.

There are a couple of reasons why I’ve decided to break our rule and write about the contract.  First, it seems fairly clear (to me, anyway) that Tolkien wrote the Shire (where hobbits live) as a close analog to pastoral England, with its similar  legal and political structures.  For example, the Shire has a mayor and sheriffs, and there is a system of inheritance similar to the common law.  The common law fundamentals of contract law have not changed significantly since the time that the Shire is meant to evoke, so it makes sense that the contract would be broadly similar to a modern contract (and likewise that we could apply modern contract law to it).  Second, reading the contract it seems likely that a lawyer (or at least someone who had read a lot of contracts or did some research) had a hand in writing it.  We will not have to struggle to find legal issues to discuss here; they pretty well leap off the page.

So, without further ado it, let’s get to it.

I. The Contract in General

As mentioned, the contract is quite long.  This is in contrast with the contract as described in the book, which is very terse.  Its terms amounted to this:

For your hospitality our sincerest thanks, and for your offer of professional assistance our grateful acceptance. Terms: cash on delivery, up to and not exceeding one fourteenth of total profits (if any); all travelling expenses guaranteed in any event; funeral expenses to be defrayed by us or our representatives, if occasion arises and the matter is not otherwise arranged for.

Even in the book’s version we see an issue: the dwarves accept Bilbo’s “offer” but then proceed to give terms.  This is not actually an acceptance but rather a counter-offer, since they’re adding terms.  In the end it doesn’t matter because Bilbo effectively accepts the counter-offer by showing up and rendering his services as a burglar, but the basic point is that the words of a contract do not always have the legal effect that they claim to have.  Sometimes you have to look past the form to the substance.

But back to the movie version.  It has at least 40 major sections and numerous footnotes and digressions in smaller type.  We will begin at the beginning, go on till we reach the end, and then stop, except where the form of the contract requires some jumping around.

II. Entire Agreement Clauses and the Parol Evidence Rule

The contract (titled “Conditions of Engagement”) begins thus:

Agreed hereto, freely and under neither duress nor force nor coercion nor extortion nor threat to life and/or limb and superceding any prior contract, agreement or undertaking, survivable clauses notwithstanding, signed and witnessed below, as set forth hereunder:

This section has two major parts.  First, there is a recital that the contract is entered into voluntarily.  Mutual assent is required for any contract, and although duress would make a contract voidable, the recital isn’t terribly meaningful.  After all, one can just as easily be forced to sign a contract that has such a recital as one that doesn’t, so it doesn’t really prove anything.  However, it’s the sort of “can’t hurt”, boilerplate legalese that sets the style for the rest of the contract.

Next, there is a kind of “entire agreement clause” or integration clause.  This is a very common and important part of many contracts.  The purpose of an integration clause is to make it clear that the contract constitutes the entire agreement between the parties (hence the term).  That is, that all other prior versions of the contract, oral or written negotiations, etc are immaterial.  What matters is only what’s on this particular written contract.  Why is this important?  Because otherwise one party or the other might try to import terms or definitions into the contract from earlier versions or from prior negotiations or discussions.

For example, suppose the contract defines the term “profits” in a certain way, and further suppose that Bilbo and the Dwarves discussed profits at the party before signing the contract.  If there is a disagreement about the meaning of the term, can Bilbo or the Dwarves bring up the prior discussion?  Not if there is a valid integration clause.  This is what’s known as the parol evidence rule.

The integration clause at the beginning of the contract is backed up by another one later on in the contract:

This agreement constitutes the entire agreement between the parties, and replaces and supercedes all prior understandings and agreements, whether written or oral, with respect to the subject matter described and set forth herein.

Now that clause could have been lifted directly from a modern contract (and probably was).

III. Additions and Changes

Next we see a few different places in the contract that refer to changes to or amendments to the contract:

(And as appended to from time to time at the sole discretion of the Director, with the new material being read as if originally included herein)

Conditions subsequently appended or added to this Contract are automatically assumed to be agreed upon, as if they were present, read and understood at the signing and witnessing thereof.

Burglar may not modify or charge this Contract in any way except by a writing signed and agreed to by both parties hereto.

As you might guess, the first two clauses are highly suspect.  The parties to a contract can always agree to modify a contract or substitute a new contract, but there is still the requirement of mutual assent, and one can’t assent to something that one hasn’t seen.  The third clause is much closer to what one sees in modern contracts, particularly the requirement of a signed writing for any modifications (as opposed to allowing modification by oral agreement).

Since the contract has a couple of blatantly unenforceable terms, does that make the whole thing unenforceable?  Ordinarily it might, but not in this case, thanks to…

IV. The Severability Clause

The contract contains a couple of severability clauses, which allow unenforceable parts of the contract to be severed from the contract without affecting the rest:

If any provision of this Contract is held unenforceable, then such provision shall be modified to reflect the parties’ intention. All remaining provisions of this Contract shall remain in full force and effect.

If any part of this Contract is found to be invalid, the remainder of the contract will continue in full force and effect as if the defective and invalid provision or clause or condition had been deleted, provided that the parties to this contract are entitled to negotiate a valid and enforceable provision in replacement of the invalid provision.

Severability clauses (also sometimes called savings clauses) are a common part of modern contracts.  They’re also sometimes included in new laws, so that if part of the law is struck down then the rest of it remains in force.

V. Conclusion

So far the contract is reasonably well written, although it contains a few suspect terms.  We’ve only just scratched the surface, so look forward to more coverage of the contract in the coming weeks!

Rewards, Unilateral Contracts, and Bat Family # 19

A reader named Richard recently emailed with an interesting situation from Batman Family # 19, a short-lived series from the late 1970s, just before the DC Implosion. Here are the facts: Man-Bat, a sometime villain who occasionally does a good turn, hands in a villain (Snafu) to the cops and inquires about the possibility of a reward. The police captain refuses to pay, saying that Man-Bat wasn’t going to get paid until he had paid for property he damaged during the apprehension of the villain.

So can the captain do that? Continue reading