Monthly Archives: January 2013

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

On 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.

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 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).