Fresno Lawyer – Randolf Krbechek

It may be time for average persons to stop investing in the stock market.  I’ve been a big believer in the market over the years, and am familiar with the statistics showing how stock market investments have grown over the years.

But the evidence is mounting – and may now be overwhelming – that shows that the big players have rigged the markets.

First, flash trading a.k.a. computerized trading controls the stock market these days.  The stock exchanges TAKE MONEY to allow traders to hitch their computers closer to the computers used by the stock exchange.

The weird gyrations in the market are driven by computerized traders that make a little going up and a little coming down, as long as the trades keep happening.  For example, Goldman Sachs makes most its income from trading.  Trading your stocks.  For its own benefit.

“Goldman made $3.5 billion in profits in just three months.  While it doesn’t break down profits in detail, it does give a broad sense of where its revenues come from. Just $1 billion or 8 percent, came from traditional investment banking.  The biggest slice, 72 percent, came from trading. Morningstar analyst Michael Wong says that trading category covers a wide range of activity.”

“What we do see is a trend which has been developing over the past few decades. Goldman Sachs and the other investment banks are making more money making trades than they do doing the things investment banks traditionally do.”

The part that makes this all crazy is the hidden derivatives market.  As Matt Taibbi recently reported (Rolling Stone – May 26, 2010), “This insane outgrowth of jungle capitalism has spun completely out of control since 2000, when Congress deregulated the derivatives market.  That market is now roughly 100 times bigger than the federal budget and 20 times larger than both the stock market and the GDP.”

Try to get your arms around that point.  The derivatives market is 20 times larger than both the stock market and the GDP.

Gary Gensler, chairman of the Commodity Futures Trading Commission, described the problem as follows at a June 2010 exchanges conference in New York:   “The buyer and seller never meet in a centralized market.   Right now, when Wall Street banks enter into derivatives transactions with their customers, they know how much their last customer paid for the same deal, but that information is not made publicly available.  They benefit from internalizing this information.”

Taibbi also reports that “Five of America’s biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year.  By some estimates, more than half of JP Morgan’s trading revenue between 2006 and 2008 came from such derivatives.”

That is simply insane unregulated capitalism.  Your 401k account goes into the tank, the stock market experiences unprecedented gyrations, and the big players make money hand over fist, at your expense.

“Imagine a world where there’s no New York Stock Exchange, no NASDAQ or Nikkei: no open exchanges at all, and all stocks traded in the dark. Nobody has a clue how much a share of IBM costs or how many of them are being traded . . . That world exists. It’s called the over-the-counter derivatives market. Five of the country’s biggest banks [ ] account for more than 90 percent of the market, where swaps of all shapes and sizes are traded more or less completely in the dark.”

Congress drafted legislation to bring derivatives out into the open, which the Senate gutted this spring.  Notes Taibbi, “The Senate [functions] as a kind of ongoing negotiation between public sentiment and large financial interests.”

Folks, we are getting clobbered here.  The Wall Street giants don’t want us to make money the old fashioned way in stocks, by buying good companies at a fair price.  They want trades, lots and lots of trades.  And they want derivatives, where they can gamble all day and make lots and lots of money.

Traditional investing look like a bad play until there is fundamental change in the markets.  Derivatives must come out into the open.  America just suffered a “lost decade” in which the market declined over a 10-year period, just like happened previously in Japan.  Your 401k money is a pawn, and we are all losing while the big players just get richer and richer.

Prof. Seana Shiffrin of UCLA Law School tackles the issue of “contract law’s strong traditional bar on punitive damages for intentional, gratuitous breach of contract.”

She jumps right into the fray:  “Morality, I claimed, correctly regards some breaches of promise as morally wrong and as warranting not only compensation but the administration of morality’s punitive remedies, including blame, criticism, recrimination, and avoidance.”

That is a valid point.  There are times when morality must be part of contract law.  States Prof. Shiffrin, “The contract law invokes promise as the fundamental component of a contract but, puzzlingly, does not subject gratuitous breaches of contract (and hence breaches of promise) to the distinctive punitive measures endorsed and administered by law, save when those breaches are also torts.”

The argument continues.  “If the law’s rationale for the bar on punitive damages is that the prospect of punitive damages might discourage efficient breach of contract – I label this the efficient-breach rationale – then the divergence between morality’s response to breach and the law’s response to breach is problematic in ways that morally decent citizens cannot accept.”

“The efficient-breach rationale forwards a justification for a legal doctrine that consists in the claim that barring punitive damages would encourage and facilitate certain breaching behavior.”

“But this behavior is condemned by morality.  To the extent the law adopts and embodies this rationale, it thereby embraces and tries to encourage and facilitate immoral behavior.  Although the law need not enforce morality as such, it is problematic when the law, either directly, or by way of the justifications underlying the law, embraces and encourages immoral action.”

Amen.  It’s about time someone steps up like this.  The law of contracts should not turn a blind eye to contract that is immoral.

Prof Shiffrin concludes that “Citizens, who in a democratic polity must be thought of as partial authors of the law, cannot, in all consistency, accept such laws and their justifications while simultaneously acting and reasoning as moral agents.  The law ought not to be structured or justified in ways that place citizens in such an untenable position: it must accommodate the needs of moral agency even if it need not or should not enforce morality directly.”

(Seana Shiffrin, Could Breach of Contract Be Immoral?, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1551.)

Prof. Stefan Grundmann argues that strict liability is essential to contract law because it enforces an important societal norm – freedom of choice.

According to Prof. Grundmann, “The majority of civil law scholars endorse the idea that the fault principle is ethically well-founded, and some scholars clearly see it as ethically superior to strict liability.  The core argument is the following: A system that grounds damages in fault gives the breaching party more freedom, since he does not have to answer for developments that he could not control.”

The professor bends the opposing argument.  The application of fault to contract law rests on the premise that the society should condemn some acts, to a greater extent than merely enforcing the financial obligations that are established by private contract.

Prof. Grundmann continues.  “In a Kantian tradition, it is seen as an act of freedom to choose between breach or conformity with a contract.  Others, however, argue that a regime of strict liability may also foster some level of freedom by furthering the principle of pacta sunt servanda, that agreements must be kept – a principle of equal importance with freedom of will.  Therefore, balancing of both principles seems necessary.”

Here the professor seeks to balance two moral standards.  He asserts that “freedom and pacta sunt servanda are not of equal importance, at least not in the context discussed here.  There is actually a clear hierarchy between them, and pacta sunt servanda is clearly more important because of the following reason.”

“Those who advocate the ethical superiority of the fault principle because it gives the breaching party the freedom to answer only for those acts and events for which he is responsible forget one rather simple fact: there is an earlier type of freedom that allows each party to decide what offers he makes and to which standards he wants to bind himself, i.e., the freedom of contract.”

Here we get to the heart of the argument – that protection of individual rights is more important than protection of societal norms.  States Prof. Grundmann, “The most vital tenet of freedom in modern times [ ] is the right of each person to decide, to the greatest extent possible, which obligations to assume.  This freedom – which comes first – is disregarded if the question of whether fault or strict liability should govern is decided, not on the basis of the parties’ expressed or implicit intentions, but rather on the basis of an ‘ethical credo’ about the superiority of fault or of strict liability.”

Again, the focus on individual rights ignores the question of whether fault – not as an excuse for breach of contract, but as justification for additional remedies – advances important societal values.

Concludes the author, “strict liability better fosters freedom of contract.”  Thus, “If the freedom of the parties is taken seriously, the question is how to interpret their intentions, not to impose on them a regime judged by scholars, legislatures, or any other third party to foster their freedom and therefore be ethically superior.  Replacing the choice made by the parties – even if justified as fostering freedom – is paternalistic.”

(Stefan Grundmann, The Fault Principle as the Chameleon of Contract Law: A Market Function Approach, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1583.)

Prof. Roy Kreitner of Tel Aviv University shows great insight into the dichotomy between tort and contract law.  He first discusses how tort law shifted toward a fault-based system during the nineteenth century.

States Prof Kreitner, “the early [tort] law asked simply, ‘Did the defendant do the physical act which damaged the plaintiff?’  T[ort] law of today, except in certain cases based upon public policy, asks the further question, ‘Was the act blameworthy?’”

Thus, “the ethical standard of reasonable conduct has replaced the unmoral standard of acting at one’s peril.  It is most likely that theories of strict liability were dominant during the formative years of the common law.  But during the nineteenth century . . . there was a decided and express shift towards the theories of negligence.”

Prof Kreitner continues.  “The accounts of such a shift are persuasive, but only when one acknowledges that the shift took place over the course of decades (rather than, say, through one key judgment of an individual court) and that it solidified quite late in the nineteenth century.”

Further, the shift in tort liability occurred among societal changes.  “The importance of the shift in background assumptions about liability could hardly have been imagined early in the nineteenth century, when the number of serious injuries from industrial activity was minuscule in comparison to what would emerge in the last third of the century.”

“By the last two decades of the nineteenth century, the question of the extent to which injuries from industrial accidents could go uncompensated had become a major economic battleground in ways that would have been difficult to appreciate early in the century.”

Prof Kreitner then turns to contract liability.  As he states, “Everyone is familiar with the idea that contract rests on a species of strict liability, namely the claim that in general “duties imposed by contract are absolute . . . It remains an ingrained aspect of mainstream understandings of contract.”

He explains that, “What generally escapes appreciation is that the understanding of contract as a strict liability regime is anything but an age-old phenomenon.  In fact, such a regime emerged in the United States only at about the same time as the solidification of the no-liability-without-fault regime in tort, during the final decades of the nineteenth century.”

“During the first half of the nineteenth century, although receding slowly in the decades following, contract was understood as a fault-based regime.”  The professor explains that fault was interposed because contracts arose out of relationships.  Contract law “was understood in direct reference to the typical contractual relationships that constituted it.  This world of contract was inhabited by people in relational pairs: bailor and bailee, principal and agent, master and servant, principal and factor, landlord and tenant, vendor and purchaser, husband and wife.”

Given these relationships, “actors had standardized duties, whose contours were shaped by the relation itself.  Individual agreement tailored these duties only on the margins.  And while some of the relations included duties we could characterize as absolute, it was far more typical for duties to be framed in terms of reasonable skill, reasonable diligence, or reasonable care.”

Accordingly, early contract liability was premised on fault.  “It was a failure to meet the standard of care, often phrased directly in terms of negligence, that triggered contractual liability.  Thus, the basic standard of liability was one of fault, even if fault of an objective variety.”

Societally-imposed standards were gradually removed from contract law.  “In order to exclude the state, the theory of contract had to place the parties in full control of the relationship.  Once that was accomplished, the road was open for the parties’ self-imposed obligation to be construed as absolute.”

The shift was societal standards (i.e., liability based on fault) to absolute liability has been complete in contract law for a century.  “Contract was thus established as the very center of the private realm, in part by purging its fault-based standards.  Indeed, it is the image of strict liability that heightens the sense of party control and autonomy, since it is always assumed that the parties could, if they wished, contract for any other standard of liability within their contract.”

Yet, norms of conduct remain part of contract law, which is why concepts of fault have not been eradicated from contract theory.  “Part of what parties to a contract are involved in is the generation of a public good [. ]  This idea should not sound farfetched.  It is intuitive that contracting parties generate a public good in the shape of trust in the market, or the idea of safe contracting.”

“Consider, for example, the difference between analyses of nondisclosure and misrepresentation: when dealing with silence regarding features of the transaction . . . The analysis of misrepresentation is fundamentally different, quintessentially fault based, and obviously reliant on sources outside the parties’ own agreement – and yet, no less contractual for that.  Nondisclosure can theoretically be overcome simply by asking the right question.  Misrepresentation, however, threatens to unravel the basic background trust without which market transactions would be far more difficult.”

(Roy Kreitner, Fault at the Contract-Tort Interface, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1533.)

This week we consider another view on the issue of whether some contractual breaches are such that additional remedies should be imposed by the courts, beyond the traditional damages for breach of contract.

In other words, Is some conduct sufficiently wrongful that a court should have the right to impose additional damages to deter such wrongful acts?  The law of fiduciary duties answers “Yes – courts should award additional damages by way of deterrence.”  Does this analysis hold weight in a contractual setting?

Professors Steve Thel and Peter Siegelman state that, in the context of a contractual breach, “Willfulness matters [ ] because it identifies those breaches that should be prevented or deterred – that is, all breaches that could have been avoided at little or no cost to the promisor.”

Now, I agree that wilfulness matters, but I believe that the reason why is tied to the relationship between the parties.  Thel and Siegelman instead posit that “when willfulness [ ] is present, courts rightly award remedies that serve to deprive the promisor of any incentive to breach and to assure the promisee of getting full expectation.”  Thus, they tie “deterrence damages” to the relative ease by which a party could have avoided breach.

Professors Thel and Siegelman acknowledge that “contract law generally does not concern itself with the morality of breach in any direct way.  People enter into contracts in hopes that the promises made to them will be kept, and when a promise is broken, the promisee’s injury is typically the same whatever the reason for the breach.  A disappointed promisee ought to be satisfied with full expectation, regardless of what motivated the breach.”

Good point, and an analysis often relied upon by judges.  However, “while contracting parties will agree upon different levels of commitment in different situations, they will almost always agree that some breaches are out of bounds.”

That’s the $64 question.  What kinds of breach fall outside of societal norms?  I think that looking at the conduct inherent in the breach can lead to inconsistent results.  Contract law is, after all, greatly concerned with consistency.  In my view, certain kinds of contractual relationship lead to greater reliance by one of the parties, and therefore the law should impose a higher standard of duty on the breaching party.  This is similar to the concept applied to fiduciaries.

Professors Thel and Siegelman work from a well-known case involving a construction project in which the contractor failed to use the materials specified by the contract.  “Imagine a variant in which the contract calls for Reading pipe, but the builder deliberately substitutes Cohoes, which is cheaper (but just as good), with the intent of keeping the savings.  Should this be treated as a willful breach?  We suggest that it should be.”

Why?  In my view, the reason why is because the property owner placed additional reliance on the contractor and could not defend himself.  According to Thel and Siegelman, ”since the two brands are of identical quality, both builder and owner could be made better off by a breach that substitutes cheaper Cohoes for more-expensive Reading and splits the savings between the two parties . . . That would provide the appropriate party with incentives to look for cheaper materials, and would result in lower contract price.”

Yet, the cost of policing the behavior of the breaching party rises dramatically, and places an undue burden on the property owner.  State Thel and Siegelman, “the problem, of course, is that a builder will have an incentive to substitute not just cheaper but functionally identical materials, but also cheaper inferior ones.”

In a 1906 case, Justice Cardozo wrote that “There is no general license to install whatever, in the builder’s judgment, may be regarded as ‘just as good’.”   Similarly, the court in Groves v. John Wunder Co. explained that “defendant’s breach . . . was wilful.  There was nothing of good faith about it.  Hence, that the decision below handsomely rewards bad faith and deliberate breach of contract is obvious.  That is not allowable.”

Professors Thel and Siegelman conclude that “this is especially true in a construction contract, where such substitute materials are easy to find and substitutions are often difficult to detect.  In the face of this problem, treating the breach as willful and awarding the owner the cost-of-correction measure provides the appropriate incentives for the builder to inform the owner of the opportunity for savings, and to negotiate for consent to deviate from the contract.”

Yet, I think the argument is better cast in terms of the relationship between the parties.  A building owner places substantial reliance on the contractor.  The law should support such reliance, which is the reason why extra-contractual damages should be awarded for wilful breach.

(Steve Thel and Peter Siegelman, Willfulness Versus Expectation: A Promisor-Based Defense of Willful Breach Doctrine, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1517.)

Let’s continue the discussion regarding rules of fault in contract law.  This series is from a law review article written by Professor George M. Cohen, who first notes that:

“The economic justification starts from the same premise as the traditionalist justification – that courts should enforce agreements according to the parties’ mutual intentions.  [Thus,] the strict liability paradigm permeates classical contract law.  Usually, however, the explicit label ‘strict liability’ appears only in connection with the doctrines of performance and breach.”

Prof Cohen is absolutely correct on this count.  Considering the three time frames in a contract – formation, performance, and breach – issues of “fault” really make sense only in connection with performance and breach.

Prof. Cohen continues.  “Under these doctrines, failure in any way to perform a contract breaches the contract, and subjects the breaching party to liability, regardless of fault.  The paradigmatic case is a seller who delivers goods that fail in any respect to conform to the contract.”

“An aggrieved party who can prove breach is entitled to compensation, which contract law generally defines as protecting the expectation interest.  In short, the reason for nonperformance does not matter.”

Yet, in contract law, sometimes it does.  It can depend on the relationship of the parties.  “A traditionalist justification of strict liability must defend the proposition that the parties generally intend that the reason for nonperformance does not matter.  That proposition is, however, contestable, as discussed below.”

Prof. Cohen wants to look to intent, not to the relationship of the parties.  He explains that, “Under both the traditionalist and economic justifications, the argument for strict liability is stronger if mutual intent is easily determined and clearly distinguishable from fault.”

He warns that, “Adopting a fault-based system of contract law in those circumstances would lead to illegitimate social judgments by courts on the traditionalist view, and result in inefficient contracting around or failures to contract on the economic view.”

When, then should fault be considered?  “Determining disputed mutual intent is inherently uncertain.  Mutual intent is an ideal.  Contracting parties attempt to express mutual intent, often in writing, but do so imperfectly.  Contracts are largely a set of private rules, and all rules require interpretation, stories that explain their meaning in a particular situation.”

Now we return to relationships and their unfair exploitation.  “As unanticipated situations arise, disputes requiring interpretation inevitably occur.  The objective theory presumes that when one party manifests some intent and then later asserts a different intent, either he negligently or intentionally misled the other party originally, or is acting opportunistically now.”

Here follows a tremendous observation.  “Parties generally resolve these disputes on their own, often driven by reputational concerns.  When these efforts fail, they bring their disputes to court.  In litigated cases, the parties typically contest the requirements of mutual intent . . . But the uncertainty of intent blurs this dichotomy.  When intent is uncertain, fault can help inform intent in a variety of ways.  Most obviously, parties may expressly use fault concepts in their contracts, such as best efforts and good faith clauses, which essentially invite courts to make fault-based judgments in the event of a dispute.”

Prof. Cohen concludes by noting that, “With respect to contract damages, I have previously argued that the choice among different measures of damages (expectation, reliance, and restitution), as well as the limitations on expectation damages, are best understood as doctrines enabling courts to make relative fault assessments.  In fact, damages doctrines are best suited to dividing liability when both parties are at fault.  In light of this crucial role of damages in facilitating relative fault assessments, the resistance of courts to ‘penalty clauses,’ which preclude such assessments, is eminently sensible, despite the continued objection of many economic scholars.”

(George M. Cohen, The Fault that Lies Within Our Contract Law, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1445.)

Let’s continue with the discussion of fault and breach in contract law.  We are starting to see that the law treat different kinds of contracts differently.  Meaning that, with a “relational contract,” being one in which the duties and obligations extend over time, the law imposes higher standards than in a “one-shot” contract.

Professors Oren Bar-Gill and Omri Ben-Shahar comment that “a contractual right entitles a party to the peace of mind that a property right holder enjoys – the right not to be encroached upon.  Deliberate breach is like theft: it undermines this security and diminishes the value of the right.  The problem with the ‘sanctity of contract’ account is that it assumes the conclusion.”

The professors are correct – there are some contracts in which one party establishes sufficient trust in the other side that the law should follow with a higher level of obligation on the breaching party.

Professors Oren Bar-Gill and Omri Ben-Shahar continue.  “To those who regard a contract as a vehicle for promoting the contracting parties’ legitimate commercial interests there remains a puzzle: How is it that willful breach is considered, even by sophisticated parties, to be faulty and wrongful?”

“Why do businessmen reject the notion of efficient breach?  Is there a more subtle reason why a willful breach is perceived to justify supercompensatory damages?”

At this point the discussion takes on a moralistic tone which is lacking in traditional contract theory.  “We argue that willful breach triggers a stronger resentment not because of the harm it causes, but rather because of the harm it reveals.  Willful breach is not any more harmful, nor does it infringe any broader societal interest.  There is no sanctity to contract and no social institution or public good is being violated by willful breach.”

Pause here.  I cannot agree with this premise.  The breach of some kinds of contract causes a societal harm, and there should be additional damages for such wrongful conduct.

Professors Oren Bar-Gill and Omri Ben-Shahar explain that, “Willful breach is a probabilistic indication that the breaching party is the type of transactor who readily chisels and acts in a dishonest way, and has likely exercised such bad faith in other occasions without being sanctioned.”

“An act of willful breach reveals the true nature of the contracting partner: one who would take any opportunity to divert value, if he can get away with it.  This party may act in other self-serving, counterproductive ways that often go undetected and unpunished.  Occasionally, when this party’s opportunistic act is observed and its true nature is revealed, it triggers resentment for what underlies it – for all the other bad things that he likely did, for the choice he made to engage in this pattern of behavior.  That is, when this party is caught in the act of willful breach, he is punished not merely for this act, but for being a nasty type.”

Whatever its attractions, that is not an efficient theory of contracting.  The courts cannot administer justice based on whether a person is a “nasty type.”

Getting back to the discussion.  “Intuitively, this idea tracks a common sentiment experienced by parties who are subject to deliberate breach.  Often, it is not the deprivation resulting from the immediate breach that creates a sense of exploitation for the aggrieved parties, but rather the realization that their partner was not as honest and dependable as they perceived – that he is the type of partner who cares less about their expectations and who would chisel if he can get away with it.”

But a mere moral letdown should not be adequate.  The true disappointment lies in the situational letdown, which is illustrated by the following passage.

“Is this why passengers dislike airlines’ overbooking strategy?  Surely, these passengers do not experience any immediate loss from what is in fact a deliberate booking strategy that leads to occasional nonperformance (indeed, they often line up to receive the offered compensation).  But it is perceived as a symptom of a ruthless strategy of poor service, of skimming off various passenger privileges.  They are angry for what is revealed to be this underlying nonfriendly pattern of treatment.”

Gentlemen, I think you have the right point but the wrong analysis.  The anger and resentment come from misplaced trust.  The passenger was placed in a situation of substantial reliance, and is offended because the airline took advantage of the situation, not because the airline was revealed to be more interested in profits than in its passengers.

(Oren Bar-Gill and Omri Ben-Shahar, An Information Theory of Willful Breach, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1479.)

Journalist and attorney Lloyd Carter questions whether the benefits of subsidized water outweigh the social costs.  The undisputable fact is that the west side of Fresno County is one of the poorest regions in all of America.  Does current water policy help or does it simply compound the misery?

The Cost for West Side Agriculture

According to Mr. Carter, “The value of Westlands’ federal water subsidy was calculated at $110 million a year in 2002.”

Carter adds, “One little-noticed subsidy is cheap electricity to pump all that water uphill from the Delta to the Westlands.  EWG estimates the electricity subsidy for the CVP is $100 million a year, with Westlands getting $71 million of that annual power subsidy in 2002-an average of $165,000 per farm.”

What’s the bottom line?  According to a 1985 study, “the average subsidy per acre in the Westlands . . . was $217 per acre while the average net revenue per acre was only $290, meaning the most expensive irrigation project in American history was built so growers could make $73 an acre.”

The Reality

All of this money has not brought wealth to the area.  “The Twentieth Congressional District, encompassing Westlands and a portion of the western San Joaquin Valley down through Kings and Kern counties, has the dubious distinction of being the poorest of the 436 congressional districts in America.”

Pause again.  Rep. Jim Costa’s district is the POOREST in all of America.  This district include the Westlands water district.

Adds Mr. Carter, “While Westlands growers contend that cutbacks in water supplies have devastated the western San Joaquin Valley economy, it should be remembered that many West Side communities were desperately poor decades before the current cutbacks in water to Westlands, back in the days when cheap water flowed freely and Westlands got its full (or nearly full) annual allotment.”

Facts

• There is no high school inside the boundaries of the 1,000-square-mile Westlands.

• The Westlands district’s biggest town is Huron.  As of 2007, it’s estimated population of 7,174, which is 98% Hispanic

• Eighty-two percent of the children at Huron’s continuation high school qualified for the free lunch program.  Of these students, none qualified for gifted and talented programs

• A 1979 article cited to the fact that nearly two thirds of the Westlands “farmers” did not live within fifty-miles of their “farms,” although the residency requirement was still in effect.  Among the “family farmers” was Southern Pacific Railroad at 106,000 acres, Standard Oil at 10,474 acres, Boston Ranch (owned by cotton billionaire J.G. Boswell) at 26,485 acres, and Harris Ranch, operator of the world’s largest cattle feedlot, at 18,393 acres.

The Pollution Problem

The cost for West Side agriculture is magnified when you consider the environmental problems triggered by the imported water.

As Mr. Carter notes, the soils in the area “include a host of salts, trace elements like selenium, arsenic and boron, and heavy metals, which created an alkali desert on the West Side over eons.”

To further complicate matters, natural drainage is precluded because “several layers of virtually impermeable, thick subterranean clays run below the topsoil and impede the downward percolation of applied irrigation water.”

Growers had known since before World War II that adequate drainage was needed.  Westlands created the Kesterson reservoir in Merced County to hold the runoff, but the waste water created grave pollution problems and harm to wildlife.

Mr. Carter states that, “An estimated 100,000 acres in the Westlands have already gone out of production in the last few years because they salted up for lack of drainage.”

“This includes land covered by a $140 million 2002 Interior Department settlement of a lawsuit against Reclamation and Westlands filed by nineteen old-guard Westlands families who saw 32,400 acres of their farmland ruined by lack of drainage.  That controversial settlement included $70 million for just four prominent farming families.”

Westlands’ “Solution”

Notes Carter, “Because of the enormous cost of completing a federal drainage canal, Westlands has suggested to the government it would take over resolution of the drainage crisis in exchange for debt forgiveness, a guaranteed water supply, and takeover of some federal project plumbing.”

Westlands is seeking:

• A water-delivery contract in perpetuity

• Transfer from the federal government to Westlands of title to all pumping and diversion facilities along the San Luis Canal, the Mendota Pool, the Pleasant Valley Pumping Plant, and distribution and drainage-collector systems

• Subsidized electricity for any drainage-treatment options requiring electrical power

No Disclosure by Westlands

Westlands acts like a governmental agency, and indeed, has the power of condemnation, which is an essential power reserved to sovereign entities.

But Westlands operates without public disclosure.  As Carter notes, “In 1982, the Reclamation Reform Act was passed, eliminating the residency requirement for farms, [and] increasing the acreage limitation to 960 acres.”

That’s the land ownership limitation established by Congress – only 960 acres per farmer is eligible for subsidized water.

There has never been enforcement of this requirement, nor any disclosure by Westlands.  As Mr. Carter points out, “The actual number of “farms” or “farmers” in Westlands is in much dispute, and Westlands has never provided a publicly available list of all of its “farmers,” “farms,” or “water users”; neither has it confirmed whether the “farmers” are people actually involved in farming or merely have their names listed on land deeds or as part of family trusts.”

It’s shocking that Westlands could suggest that it would acquire large portions of the Central Valley Project for irrigation, yet not make basic disclosures so the public could determine whether it was operating lawfully.

Carter’s Conclusion

“Most Westlands growers live far from the bleak and industrialized farmlands of the district; many reside in an exclusive enclave of mansions in north Fresno, in the zip code 93711, which receives more federal farm subsidy money than any other zip code in America.”

“The subsidized factory farm economy, it seems, doesn’t have much of a trickle down effect for the families and communities of workers who bring in the harvest.  In fact, it appears as though this system has helped to foster a culture of unsustainable farming practices, caused large scale environmental degradation, and has created a massive socioeconomic rift between land owners and their primarily Latino workforce.

“Indeed, one cannot help but see two different agricultural worlds among the Eastern and Western flanks of the San Joaquin Valley.  The East Side, where the original irrigation colonies began 130 years ago, is full of orchards and vineyards and farmhouses every quarter of a mile and small towns every few miles.”

“In the Westlands, with a single giant farm sometimes reaching tens of thousands of acres, one can drive for many miles down Interstate 5 through cotton and row-crop fields without ever seeing a farmhouse or the all-but-invisible farm-worker communities. It is a stark contrast indeed.”

Lloyd G. Carter, Reaping Riches in a Wretched Region: Subsidized Industrial Farming and its Link to Perpetual Poverty, in 3 Golden Gate U. Envtl. L.J. (2009) page 5.

Water supplies for West Side agriculture have been major news items in the past few years.  Many residents, including this writer, are proud of our agricultural heritage and bounty, and have questioned decisions that threaten water supplies for agriculture.

Journalist and attorney Lloyd Carter has penned a provocative article that probes the financial integrity of Westside agriculture.

Mr. Carter’s thesis is that, “While Westlands . . . has produced an undisputable bounty of cotton and field crops over the decades in western Fresno and Kings counties, irrigation of this mineral-laden desert has also created huge environmental problems, and the wealth generated has not trickled down to farmworkers or the surrounding poverty-stricken communities.”

Early West Side Farming

Mr. Carter admirably recites the history of West Side farming.  “In 1900, the West Side of the Valley remained an inhospitable desert with no surface water and only intermittent flow from small seasonal creeks . . . The first wells in western Fresno County were sunk a few years after the start of the twentieth century by a few hardy pioneers.  Deep wells were drilled during World War I by large landholders in order to plant cotton, a salt-tolerant crop in demand by the military.”

Take a look at this remarkable photograph, which shows researcher Dr. Joseph F. Poland standing at the location of maximum land subsidence identified in the Central Valley.  The signs on the pole show the approximate altitude of the surface of the land  in 1925, 1955, and 1977.  The site is in the San Joaquin Valley southwest of Mendota, California.

The level of the earth subsided by more than 28 feet at this location near benchmark S661 southwest of Mendota, due to the pumping of groundwater.

More information can be obtained from the U.S. Geological Survey.

And from this article:
“Land Subsidence in the United States,” by  Devin Galloway, David R. Jones, and S.E. Ingebritsen

In 1942, West Side growers, who were running out of groundwater, formed the Westside Landowners Association to gain support for federal assistance in delivering Northern California river water to their region.

In 1952, pursuant to the California Water Code, the growers formed the Westlands Water District, which would grow to become the nation’s largest federal irrigation district, with over 600,000 acres.

Bernie Sisk’s False Promises

Carter continues.  ”In 1959, Representative Bernard F. Sisk (D-Fresno), who represented the Westlands area, pushed for congressional approval of a U.S. Bureau of Reclamation project to deliver Northern California water to Westlands.”

In 1960, Congress approved the San Luis Unit.  Water deliveries to Westlands began in 1968.

Now, if you live in Fresno County, you will be astonished that Rep. Sisk made the following representations to secure Congressional approval for the water project.  Here’s what he promised:

• “If San Luis is built, according to careful studies, the present population of the area will almost quadruple.  There will be 27,000 farm residents, 30,700 rural nonfarm residents, and 29,800 city dwellers; in all, 87,500 people sharing the productivity and the bounty of fertile lands blossoming with an ample supply of San Luis water.”

• “Recent surveys show that the land proposed to be irrigated is now in 1,050 ownerships. These studies show that with San Luis built, there will be 6,100 farms, nearly a sixfold increase.  And in the breaking up of farms to family-size units, anti-speculation and other provisions of the reclamation laws will assure fair prices.”

We can all pause here.  Westlands was built on a false premise.  Nothing close to this has occurred in the past half century.

Where Are We?

“This Article shows how a long American tradition of helping small farmers has, in the past few decades, morphed into a massive government aid program for large industrialized agribusiness operations-a program that not only drives small farmers off the land but also perpetuates rural poverty because agribusiness requires huge numbers of low-paid, seasonal harvest workers”

Part 2 – Continued next week.

Lloyd G. Carter, Reaping Riches in a Wretched Region: Subsidized Industrial Farming and its Link to Perpetual Poverty, in 3 Golden Gate U. Envtl. L.J. (2009) page 5.

This posting continues the question of whether fault should be considered in evaluating a claim for breach of contract, specifically, whether the courts should weigh the “fault” of the non-breaching party.

When would such “fault” by the non-breaching party arise?  It would seem that three time frames could be considered:

• Before (i.e., during the formation of contract)
• During performance
• After breach

The bigger question is, Are we better off as a society if we disregard all fault by the non-breaching party when we assess liability for breach of contract?

Here are several hypotheticals from Prof. Porat, and my comments regarding them.

Before performance:

“Ann, a contractor, and Bob, the owner of a certain piece of land, enter a contract for the performance of construction work.  Due to geological difficulties, there is a delay in performance that causes Bob substantial losses.  It becomes evident, however, that Bob knew about these obstacles at an early stage (although not prior to entering into the contract with Ann).  Had he revealed this to Ann in due time, the delay could have been prevented.”

Response:  This is a thorny issue for contract purists, who would insist that Ann had the obligation to review the situation fully before entering into the contract.  Yet, Bob had the power to prevent some of the losses, and, indeed, could probably help reduce the overall cost of performance.  The law should impose a duty on Bob to cooperate and assist in the performance of the contract.

During performance:

“In the course of a construction project, Charles makes demand for an installment payment.  In fact, Charles is not entitled to any payment, because she failed to meet an additional condition stipulated by the contract.  Charles is not aware of this additional condition because of an oversight on her part.  Debbie refuses to pay, stating that he is not obliged to do so under the contract, but Debbie provides no other explanation.  Charles then stops her work, causing loss to Debbie.  Only after a month, during which Debbie stubbornly refuses to meet with Charles, does Debbie explain to Charles why he was not entitled to payment.”

Response:  The law should encourage efficiency.  Debbie should not be rewarded for her failure to act in a commercially reasonable manner, and the damages should be reduced accordingly.

During performance:

“Edward undertakes to construct a building for Fay.  During the last stage of performance, Fay gives Edward’s employees confusing instructions on the construction work required.  In the end, there is a delay in the completion of performance; moreover, some of the construction work is found to be defective.  Had Fay refrained from instructing Edward’s employees, the contract would have been adequately performed.”

Response:  In this hypothetical, the contributing fault of Fay, the non-breaching party, should be considered to reduce liability.  Fay caused part of the harm, and Edward should not bear all of the losses.

Comment:  The hypothetical is not complete, as we need to know the nature of the losses suffered by Fay.

During performance:

“In a home remodeling contract, both George and Harold are aware that there could be delays in completion.  Even though Harold is well aware of this risk, he enters into a contract with a contractor to refurnish the house starting on the day set for delivery.  He also incurs expenses advertising the house for rent.  In the end, George breaches due to late delivery, and Harold suffers losses due to forfeiting the contractor’s deposit and his advertising expenses.  These losses would have been prevented had Harold waited to see whether the contract would be adequately performed.”

Response:  It would seem that Harold assumed the risk of loss.  However, assumption of the risk is not a traditional contract defense.  This is an uncomfortable fit for the law, as Harold caused some of his own losses, yet it appears that George is liable for late delivery.

After breach:

“Ike, a carrier, undertakes to ship a crank shaft from Jane’s mill for repair and to bring it back in one week’s time.  Ike instead brings the shaft back after two weeks, which results in high consequential losses to Jane, who could not find a substitute shaft.  At the time of contracting, the parties were aware of a small risk that a substitute shaft would not be available.  One week later it became clear to Jane, but not to Ike, that this risk had materialized.  Had Jane conveyed this information to Ike on time, Ike would have taken costly precautions to ensure that he would return the shaft on time, thus preventing the breach.”

Response:  Historically, the law has favored common carriers, in the sense that the public does not want to pay exorbitant rates for carriage.  It seems that the carrier could have take precautions to avoid the loss.  However, I want know whether the rate structure reflected the potential loss.

In other words, Did the price for shipping reflect a one-week delivery time?  Ike could have shopped for someone who would have guaranteed delivery.  Further, the additional loss was not due to any acts or omissions on the part of Ike, in that Jane simply could not locate the replacement part in a timely manner.

(Ariel Porat, A Comparative Fault Defense in Contract Law, in Michigan Law Review (June 2009), Vol. 107, No. 8, p. 1397.)