Breach of Contract, Oral Agreements, Statute of Frauds, UCC
In the middle of the 48th anniversary of the Woodstock music festival, we pause to remember legendary guitarist Jimi Hendrix – and a recent lawsuit involving a dispute over ownership of two of Jimi’s guitars. The outcome of the suit is a reminder that when you loan out $400,000 worth of Jimi Hendrix guitars, you really should have a written agreement.
In Aleem v. Experience Hendrix, L.L.C., 16 cv 9206, 2017 WL 3105870 (S.D.N.Y. Jul. 20, 2017), plaintiffs alleged that, in Fall 1968, Jimi Hendrix gifted two guitars to the twin Aleem brothers, who occasionally performed and recorded with Hendrix. By 1995, the Aleem brothers needed money and agreed to sell one of the guitars, valued at $200,000, at auction. The Estate of Jimi Hendrix became aware of the potential sale and approached the Aleem brothers about allowing the Estate to display the guitars at the Rock and Roll Hall of Fame. The parties allegedly orally agreed that in exchange for $30,000, the Aleem brothers would license both guitars to the Estate for public display and upon repayment of the $30,000, the Estate would return the guitars to plaintiffs. In 2015, the Aleem brothers said they would repay the $30,000 and demanded the Estate return the guitars. The Estate never responded and plaintiffs filed suit.
The Estate asked the Federal Court sitting in Manhattan to dismiss the lawsuit, arguing that the New York Uniform Commercial Code (“UCC”), which governs many commercial transactions, barred enforcement of the alleged oral agreement, regardless of whether it was a license agreement or an agreement for the sale of goods. Under the UCC, both a license agreement for personal property worth $5,000 or more and an agreement to actually sell goods worth $500 or more require a signed writing indicating that the parties agreed to a contract. UCC section 1-207 also requires that a license agreement state the price and define the subject matter, while UCC section 2-201 requires that a sale agreement specify the quantity of goods. The Court agreed with the Estate and dismissed the suit, holding that plaintiffs did not allege the Estate signed a writing indicating the parties agreed to a contract.
Whatever their reasons, the Aleem brothers neglected to get a signed writing from the Estate memorializing their agreement. Now, instead of jointly owning one Jimi Hendrix guitar and splitting the potential $200,000 proceeds from the auction of the other guitar, the Aleem brothers are left with no guitars and a brief mention of their names on a Rock and Roll Hall of Fame plaque.
If you have any questions about an oral or partially documented agreement, please do not hesitate to contact us.
Breach of Contract, Contracts, Modification, UCC
Oftentimes businesspeople sign a contract and put it in a drawer never to see the light of day again – unless a dispute arises. Especially with long-term contracts, trying to informally work things out might be efficient from a business perspective at the time, but it can lead to waiver of important legal rights in the end.
A 2017 decision by a New York appellate court, Kamco Supply Corp. v. On the Right Track, LLC , 149 A.D.3d 275, 49 N.Y.S.3d 721 (2d Dep’t 2017), certainly provided a wake-up call to anyone who believed in the casual administration of a contract. Kamco Supply Corp.concerned disputes arising out an approximately 18 month long distribution agreement. The intermediate appellate court held that the seller, by accommodating the underperforming purchaser, waived the right to enforce minimum purchase requirements for the construction product under the contract. The parties entered into the distribution agreement in mid-2005. The agreement required the purchase of 15 million feet of the product during the remainder of 2005 and ramped up dramatically to require purchase of 164 million feet in 2006 with a monthly minimum of 8 million feet. The purchaser agreed to use its “best efforts” to market, sell and distribute the product.
From the start, the purchaser failed to meet the 2005 purchase requirements, let alone the tenfold increased requirements in 2006. The seller did not default the purchaser, but instead tried to work with the purchaser. By May 2006, the purchaser opened discussions with the seller to end the relationship and, by July 2006, the seller recognized the purchaser would miss all purchase requirements. Regardless, the seller decided to stick with the purchaser as the seller’s best hope to increase sales of the product. By the end of 2006, in an act that surely stung, the nonperforming purchaser sued the seller for breach of contract in failing to refund $17,500. The seller countered with claims of breach of the purchase requirements seeking $71 million in damages.
The court focused on the importance of “course of performance” in “relational” contracts (i.e., contracts involving continuing relationships) in determining not only whether a party committed a retrospective waiver of a prior obligation, but also whether a party prospectively waived an executory, or future, obligation of the other party. The court held that where a contracting party waives an ongoing obligation, it may retract the waiver on reasonable notice and without undue prejudice to the counterparty. The case, involving the sale of goods, also triggered the Uniform Commercial Code, which recognizes the importance of course of performance in interpreting agreements and finding waiver of future rights. The court upheld the trial court’s finding that, despite an express “no waiver” provision in the contract prohibiting oral waivers, the seller by its conduct (i) waived the past due purchase requirements; (ii) made an election not to terminate the contract because of those breaches; and also (iii) waived the future purchase requirements because the seller failed to give timely notice withdrawing its waiver. The court dismissed the seller’s claims because the seller did not enforce the purchase requirements or make written reservations of rights and, instead, made accommodations to the purchaser in the hopes of increased sales.
The end result for the seller was that after 11 years of litigation (over seven times longer than the contract term), and after trial and appeal, the court granted the purchaser a $17,500 verdict on its breach of contract claim and dismissed the seller’s claims holding the seller waived the purchaser’s admitted breaches of every purchase requirement in the contract. This case provides a cautionary tale that contracting parties should avoid informal changes, and instead enforce their contracts and document amendments and new understandings.
While the above presents an extreme situation, you might face a less severe situation that could still result in a court later finding you waived your rights by failing to enforce your contract rights or by making oral changes without reservations of rights and proper documentation. If you have any questions about your contractual relationships and how you can best protect your business (whether to enforce or avoid a particular contract), please do not hesitate to contact us.
