Hawkins v. McGee: The Case Every Doctor Should Know About

Medical Doctor Profession Contract Operation
Medical Profession

Every medical operation, no matter how familiar or routine it may be, carries with it a certain level of risk. There is always a chance that an operation will fail to produce its desired result. What’s more, there is always a possibility that a patient will suffer negative consequences from the operation. The case of Hawkins v. McGee (1929) is a famous example of a surgical procedure which put the patient in a condition worse than the one he started in. Hawkins v. McGee should be required reading for all physicians and future physicians just to show them the bizarre possibilities which are a natural part of their profession.

Facts

The plaintiff (Hawkins) injured his hand during childhood when he touched a piece of electrical wire. The defendant (McGee) claimed that he could perform surgery on plaintiff’s hand and make it a “one hundred percent good hand.” The defendant expressly guaranteed that the plaintiff’s hand would be returned to top condition following the operation. The defendant used a surgical technique known as “skin grafting” and placed skin taken from the plaintiff’s chest area into the injured hand. The operation failed to fully repair the injured hand. Moreover, the plaintiff’s hand soon started to grow hair! The plaintiff claimed he was entitled to damages for the breach of contract and for the pain and suffering caused by the operation.

Law

If a contract is breached, the underlying aim is to put the injured party in a position which most approximates the position they would be in had the breach not occurred. There are a variety of ways to approach this goal. In this situation, the court found that the plaintiff should be entitled to expectation damages as a result of the breach. Expectation damages amount to the difference in value between what the plaintiff received and what the defendant promised to deliver.

Ruling

The court (the New Hampshire Supreme Court) ruled in favor of the plaintiff and found that expectation damages should be recovered. The plaintiff contracted for a “one hundred percent good hand” and received a hand which grew hair and was still injured. The plaintiff was therefore entitled to a sum which approximated the difference between what was contracted for and what was received. The court found that the plaintiff was not entitled to recover damages for pain and suffering as these things were a normal part of undergoing such a procedure.

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Hamer v. Sidway & the Benefit-Detriment Theory of Consideration

Contract Law Consideration Business
Contract Law

In America, our law is a constantly evolving mechanism. Along with the codes passed by legislative bodies and administrative agencies, we adhere to principles derived from our common law tradition. In our common law system, established principles have significant weight, but they are not necessarily binding because our society understands that old principles cannot adequately address every factual scenario. Sometimes a novel scenario requires that an established principle be modified – or a new principle be developed altogether – in order to produce an equitable outcome. Our whole body of common law is quite literally the sum of all the changes which have been made in response to new factual scenarios.

Our law of contracts has been shaped by this continually evolving system. Because an infinite number of factual scenarios are possible, it follows that our law of contracts will never be completely “set” or finished; but as more and more rulings are issued our general picture of our law of contracts will become clearer. The famous case of Hamer v. Sidway (1891) is an excellent example of a scenario which helped to clarify the concept of consideration. Because the facts of Hamer v. Sidway were unique, the court could not simply apply preexisting principles in a straightforward manner but instead had to innovate to create a just ruling.

Facts

The basis of the suit was a promise made between an uncle (William E. Story I) and his nephew (William E. Story II). The uncle promised his nephew a sum of $5,000 if he would avoid alcohol, tobacco, foul language and gambling until the age of 21. The nephew agreed to abstain from such things and fully complied until his 21st birthday. However, though the promise had concluded, the uncle convinced his nephew to postpone receiving the sum of money until a later period in his life. The uncle passed away before he could transfer the money to his nephew. Subsequently, a suit was brought to collect the sum because the executor of the uncle’s estate (Franklin Sidway) denied that a valid contract had been created.

Sidway argued that valid consideration did not exist because there was no bargaining process or anything of value exchanged between the parties. The counterargument was that consideration had been created because the nephew had voluntarily agreed to avoid certain activities even though he was legally permitted to partake in them.

Law

At the time of Hamer v. Sidway, the so-called “benefit-detriment theory” of consideration was still viable. This particular theory of consideration held that valid consideration could be established through a detriment suffered or forbearing from an activity.

Ruling

Though the nephew did not confer a benefit or transfer something of value to his uncle, valid consideration was created because the nephew voluntarily refrained from engaging in a number of activities he was otherwise permitted to engage in. The court (the New York Court of Appeals) overturned the decision of the intermediate appellate court and ruled in favor of Hamer.

Today, the benefit-detriment theory of consideration holds less weight than it did in the time of Hamer v. Sidway, but it is still relevant. Business owners need to be aware of the many theories which govern the law of contracts so that they can make informed decisions.

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Jacob & Youngs v. Kent: A Lesson on Substantial Performance

Huddleston Tax Weekly will continue to feature articles on contracts because it is very important for business owners to have at least a basic knowledge of contract law. Business owners negotiate and execute contracts on a recurring basis and so an understanding of fundamental contract principles is essential. Today we will discuss the concept of substantial performance and demonstrate how this concept informs how damages are settled when a contract has been breached.

Many people assume that when a breach of contract has occurred damages necessarily follow in all instances. In reality, this is not always the case. If an offending party violates a contract in such a way that the violation does not materially affect the goals of the contract then damages usually do not follow. The case of Jacob & Youngs v. Kent (1921) is a famous example of a breach which ended up not leading to any damages.

Facts

The plaintiff (Jacob & Youngs) contracted with defendant (Kent) to build a house. The defendant wished to have a specific brand of pipe installed and the contract reflected this wish. When the plaintiff was nearly completed with the project the defendant discovered that a different brand of pipe had been used. The pipe used by the plaintiff was of equal quality to the brand of pipe desired by defendant. The plaintiff originally brought suit in order to receive the remainder owed by the defendant on the original contract price. The defendant argued that the breach was material and requested that the existing pipe should be replaced with the desired brand. The plaintiff argued that using a different brand was a trivial error and that replacement would present an oppressive burden.

Law

The doctrine of substantial performance prevents trivial offenses from totally wiping out an existing contract. When a breach of contract is deemed trivial such that it does not materially affect the goals of a contract the offending party must pay for whatever difference in value occurs as a consequence of its breach. The offending party is not required to redo every part of the contract.

Ruling

The court (New York Court of Appeals, highest court in the state of New York) found that using a pipe of a different brand but of the same type and quality was a trivial error. Ordering the plaintiff to completely replace the existing pipe with the desired brand would be oppressively expensive. However, since the plaintiff did breach the contract, the defendant is entitled to the difference in value between the product received and the product promised. In this case, the difference in value was literally zero because the two brands of pipe were of the same quality.

In the world of business, these kinds of trivial mistakes are quite common. Having an awareness of the concept of substantial performance can give you a sense of what to expect when these sorts of errors happen.

Jones v. Star Credit Corporation: An Example of an Unconscionable Transaction

Legal Contract Sales
Legal Contract

Simply because all of the elements of a contract have been completed does not necessarily mean that a court will enforce the contract in every individual case. There are special conditions which can make an otherwise perfectly valid contract unenforceable. For instance, when a contract – or a particular clause within a contract – has been deemed “unconscionable” for whatever reason by a court, it may be rendered unenforceable.

The doctrine of unconscionability developed from a tradition in English common law which has attempted to prevent the most vulnerable members of society from being unfairly taken advantage of by merchants. This doctrine continued in American law and was then adopted by the Uniform Commercial Code. The UCC section 2-302 states that when a court determines that a contract (or clause of a contract) is unconscionable it has the power to correct the situation in such manner as to avoid injustice. Courts have taken the language of the UCC on the doctrine of unconscionability and applied it to a number of specific cases. Jones v. Star Credit Corporation (1969) is an example of an unconscionable contract which was rendered unenforceable.

Facts

The plaintiffs (Jones) bought a home freezer from a door-to-door sales representative. Since they were unable to pay the full amount up front, the plaintiffs set up a financing arrangement through the defendant. The retail price of the freezer was approximately $300, but the plaintiffs were charged a price of $900 plus various other credit and insurance charges. The final purchase price of the freezer came out to $1234.80. The plaintiffs had paid $619.88 when the matter was brought before the court. The issue is whether the very large difference between the purchase price of the freezer and its maximum retail price indicates an unconscionable contract.

Law

As mentioned above, a court may render an otherwise valid contract unenforceable if it finds the contract to be unconscionable either in whole or in part. In sales transactions, the court may give weight to the difference between the market (or retail) price of an item and its selling price. The court may also give weight to the specific circumstances (i.e. socioeconomic, financial, etc.) of the buyer.

Ruling

The court (the Supreme Court of New York, Second District) determined that the contract was unenforceable given that the difference between the retail price and selling price was so vast. Although the court did not find any evidence of fraud or malice, the court nonetheless found that the sheer size of the disparity indicated an unconscionable contractual agreement on its face.

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Businesspeople should always be conscious of contract law since the formation of contracts is such a major part of the business world. To learn more about starting your own business view the following video

Kirksey v. Kirksey: The Case of the Promise Which Lacked Consideration

Farm House Real Estate Property
Real Estate

The law of contracts is primarily concerned with deciding whether promises are enforceable in a given set of circumstances. In order to be (facially) valid, the elements of a contract must all be satisfied. A contract consists of the following elements: offer, acceptance, consideration, legality, capacity and writing (when applicable). Occasionally, a dispute arises over whether one (or more) of these elements has been successfully established. These disputes have created an enormous body of case law which serves to clarify the requirements for contractual elements. This body of case law stretches back literally hundreds of years. In the case of Kirksey v. Kirksey (1845), a dispute developed over whether adequate consideration was exchanged when a landowner encouraged his sister-in-law to live on his land.

Facts

The plaintiff was the defendant’s sister-in-law. After the death of her husband, the plaintiff received a letter from the defendant in which he encouraged her to move from her current location to his farm. He promised that if she moved he would allow her to live in a house on his property. The plaintiff took the defendant’s offer and moved into the house on the defendant’s land. Two years later the defendant ordered the plaintiff to leave the property. The plaintiff brought suit against the defendant and argued that the promise extended to her was an enforceable contract.

Law

In order for a contract to be enforceable, there must be adequate consideration. Consideration roughly equates to value. Consideration is present when the parties of a contract exchange things which are of equal value. For instance, when a house is sold for its market price, this constitutes valid consideration because there is an exchange of equal value. If someone were to sell a house for well below its market value – say, for just $1 – consideration has not been established because the values are so disparate.

Ruling

The court (the Supreme Court of Alabama) ruled that the promise made by the defendant was unenforceable because, even though the plaintiff uprooted herself and relied on the defendant’s word, no consideration had occurred. The main reason that the defendant wanted the plaintiff to move was so he could be closer to her and her children following the death of her husband (the defendant’s brother), and so the plaintiff essentially exchanged her physical “closeness” for her stay on the property. And so even though the plaintiff’s reliance on the promise was reasonable, she did not offer enough in return in order to produce valid consideration.

Though the message of this case may seem almost childishly self-evident to us today, it represents an important development in the law of contracts since it added clarification to the element of consideration. In law, boundaries are sometimes never completely defined, they are only made slightly clearer and clearer as new factual scenarios add more and more clarification. Kirksey v. Kirksey is one example of this process!

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Hadley v. Baxendale: The Case of Unforeseen Damages

Law Books Case Contract
Contract Law

In the United States, most people are aware that our legal system is modeled on the British legal system. However, people are generally less aware that British law informs our own law in many areas. In point of fact, a number of our most fundamental legal concepts take origin in British case law. The famous case of Hadley v. Baxendale (1854) is one important example of this phenomenon.

Hadley v. Baxendale is an English contract law case which made a major contribution to the legal doctrine of foreseeability. As we will see, the plaintiff Hadley (who was the defendant in the appellate case) suffered considerably in lost profits as a consequence of the poor performance of Baxendale. However, the lost profits were not recoverable because the loss of such profits was not a reasonably foreseeable consequence of this performance.

Facts

Mr. Hadley and his associate were millers who worked together in the town of Gloucester. Hadley hired Baxendale to deliver a broken crankshaft to a repair shop in Greenwich so that the repairmen could correctly make a new crankshaft. The delivery was a time sensitive matter and Hadley needed the part to arrive at the repair shop by a specific date. Baxendale failed to deliver the broken crankshaft to the shop by the proper date and as a consequence of this lateness Hadley lost business. Hadley brought a claim against Baxendale to recover the profits which were lost as a result of Baxendale’s poor performance. The trial court jury awarded Hadley £25 (roughly £2500 today). This award was appealed and then brought before the Court of Exchequer.

Law

In cases where a breach of contract has occurred, damages which result from the breach are recoverable only when such damages could be reasonably foreseen unless special circumstances were communicated explicitly between the parties involved. Just because damages result from a breach of contract does not mean that they are automatically recoverable; they must be a reasonably foreseeable consequence of the breach.

Ruling

The appellate court (Court of Exchequer) overturned the jury award and determined that, although Baxendale had violated the contract by failing to deliver the crankshaft at the proper time, it was not reasonably foreseeable that the lateness would have caused a substantial loss of profits. In order for such lost profits to have been recoverable Hadley needed to have specifically communicated the fact that such lost profits were a probable consequence of late delivery.

Though factually and theoretically very simple, the case of Hadley v. Baxendale is a landmark decision and still informs our contract law today. As spectacular as it may sound, Hadley may still be invoked today when a package is not delivered on time!

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Given its significance, the case of Hadley v. Baxendale is known by virtually every attorney no matter what their specialty. Attorneys who would like to learn more about how we can help them should view our tax tips for lawyers video

Greiner v. Greiner: Be Careful with Promises

Real Estate Houses
Real Estate

Promises which are made among family members very rarely end up involving the legal system. But those which do tend to offer valuable lessons which, if heeded, can help people avoid considerable hassle and headache. The case of Greiner v. Greiner (1930) is an interesting example of a promise made between family members gone awry. Though the peculiar facts of Greiner are highly unlikely to be replicated today, the case still gives useful information for those who are considering giving something of great value away to a family member or close friend. Real estate owners in particular should pay close attention so that they can avoid the ordeal which the Greiner family had to experience.

Facts

Mrs. Greiner inherited a large piece of land following the death of her husband. She made a promise to her son, Frank Greiner, which allowed him to have a small portion of this land provided that he move his family onto the land and live there indefinitely. In direct response to this promise Frank Greiner moved onto the property with his family. Over time, Frank Greiner made improvements to the property and eventually asked Mrs. Greiner for a deed. Mrs. Greiner refused to give the deed and soon thereafter brought suit against her son in the hope of forcibly removing him from the premises. Mrs. Greiner argued before the court that a valid contract had not been made and therefore forcible removal was warranted; on the other hand, Frank Greiner argued that he had relied on the promise extended by his mother to such an extent that forcible removal would be unjust.

Law

Though a valid contract had not been made because no consideration was exchanged, the rule of promissory estoppel was still triggered by the offer given to Frank Greiner. The doctrine of promissory estoppel states that when a person reasonably relies on a promise to their detriment that promise may be enforceable by law in order to avoid injustice.

Ruling

The court (Supreme Court of Kansas) ruled that the doctrine of promissory estoppel applied given the facts of the case. It was reasonable to expect that Frank Greiner would uproot himself, move his family onto the property and then make valuable improvements to the property because of the promise made by Mrs. Greiner. And since he reasonably relied on the promise in this manner the promise should be enforceable by law. The court granted the land to Frank Greiner.

As Greiner v. Greiner illustrates, one has to be very careful when making promises which involve things of exceptional value. This is true even when the promise is made among family members. If you’re a real estate owner, be very careful before you promise any part of your land to someone else!

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Baker v. Weedon: A Case of Mistakenly Sold Property

Real Estate Property Houses
Real Property

The process of selling real estate is typically fairly complicated. In order to sell a piece of real estate properly, one usually has to consult with a variety of professionals, such as an appraiser, a licensed agent, a construction professional and others as well. To reap the greatest possible benefit, the seller must also conduct a great deal of market research and be fully conscious of both past and future market trends. Selling a home is tricky enough when the ownership status of the home is straightforward; when ownership status is not straightforward, however, the process of selling a home can be downright maddening. The case of Baker v. Weedon (1972) is one example of a sale of land made complicated by the presence of multiple ownership interests (specifically contingent remainder interests). As we will see, if you are preparing to sell your home and are worried about the complexity of the process, just be thankful you aren’t saddled with the circumstances of Baker v. Weedon!

Facts

In Baker v. Weedon, a dispute developed over the sale of a portion of land in Alcorn County, Mississippi. The person who attempted to sell the land, Anna Plaxico Weedon, was married to the original owner, John Harrison Weedon, and had been granted a life estate interest in the land following Mr. Weedon’s death. The will of Mr. Weedon stated that if Anna had any children ownership of the land would be transferred to them upon Anna’s death; however, in the event that Anna died without children, the land would be transferred to his biological grandchildren from a previous marriage. Hence, these grandchildren (who initiated the suit against Anna) had a contingent remainder interest in the land in that they may have someday claimed ownership if Anna died without children.

Anna sold a portion of the land in 1964 to the city. At the time of the sale, the land was appreciating in value in tandem with commercial development in the surrounding area. In fact, the value of the land was projected to increase by over $150,000 in just a few years following the initial trial. Anna felt she needed to sell the portion of land so that she could construct a new home for herself and live comfortably in old age. However, selling the land clearly presented problems as doing so removed the remainder interests of the grandchildren as well as thousands of dollars in unrealized income. The issue presented was whether the court could order a sale of land affected by future interests given the unique facts of the case.

Law

A court may order a judicial sale of land in certain situations. For instance, a court may order a sale in order to avoid economic waste and prevent deterioration of the land. However, when making a ruling, the court must consider what is necessary for the best interest of all parties.

Ruling

In this case, the court decided that the interests of the life tenant (Anna) and the remaindermen (grandchildren) were not properly served by the sale of the portion of land made by Anna. Though such a sale may have been appropriate under different circumstances, in this case the court reasoned that the sale would have resulted in too great of a financial loss for the remaindermen due to the fact that the value of the land was appreciating so rapidly. The court (the Supreme Court of Mississippi) sent the case back to the chancery court with instructions to find a more equitable solution to the problem.

The facts of Baker v. Weedon are of course exceptional, but they are useful to illustrate the level of complexity which can arise when real property is sold. Let’s be happy this type of situation doesn’t develop very often!

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Gruen v. Gruen: A Lesson on Gift Delivery

Painting Gift Tax Expensive
Expensive Gift

When we think of gift giving we tend to conjure a predictable set of ideas and images: we think of Christmas, birthdays, graduation ceremonies and other occasions in which gifts are exchanged. Seldom do we think of legal ramifications which may be triggered by the delivery of a gift. But when a gift is of exceptionally high monetary value, the act of gift giving can sometimes become a bit more complicated than normal. Gruen v. Gruen (1986) is an interesting case which involved the transfer of an extremely valuable piece of art from a father to his son; the ruling of the case clarified some of the uncertainty on the question of what constitutes proper or “valid” delivery of a gift. If you or someone you know is thinking about giving a gift of similar value, Gruen v. Gruen may be essential reading!

Facts

The father, Victor Gruen, attempted to make a gift of an oil painting by Gustav Klimt to his son, Michael Gruen, in 1963. The father wrote his son a letter in which he explained that, although he wished to transfer title of the gift, he wanted to retain physical possession of the painting for the duration of his life (in other words, retain a life estate in the painting). After being advised against this by his lawyer and accountant, the father wrote another letter to his son regarding the gift and omitted reference to his continued physical possession of the painting. The issue of the case is whether a valid transfer of title of the painting occurred given the fact that the son never took physical possession of the painting while his father was alive.

Ruling

The court (the Supreme Court of New York, upholding the decision of the appellate court) ruled in favor of the son. The son was attempting to establish ownership of the painting against another relative (Michael Gruen’s stepmother). The court found that the father had made a valid transfer of ownership despite the fact that he retained a lifetime interest in the painting. If someone wishes to transfer ownership of property specifically after their death, a will is required; the court reasoned that in this case present transfer of ownership occurred because there was a clear donative intent to bestow ownership upon the son.

Lessons

At the time the case was being tried, the painting by Klimt was worth approximately 2.5 million dollars – quite a birthday gift! The father was afraid that his son would have had to pay inheritance taxes on the gift if he (the father) continued to hold possession of it for the remainder of his life. As it turns out, his fear was without basis: Gruen v. Gruen shows that it is possible to make an inter vivos gift even without physical delivery of the property. As long as there is donative intent, physical or constructive delivery, and acceptance by the receiving party, a valid gift has been made.

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The next time you plan to make a gift of an expensive item, don’t be worried about gift tax laws and instead be thankful your situation isn’t nearly as tricky as the one faced by the Gruen family!

Understanding Cost Basis

Money Cost Basis
Cost Basis

Cost basis is a tax concept which is used for determining the true amount which has either been gained or lost from the sale of a given commodity. When you sell property, basis is used to compute the correct amount of tax which is owed from the sale. Though cost basis is a relatively simple concept, it can be a bit difficult to apply in some situations. In this essay we will discuss the fundaments of the concept and explain why it can be a bit trickier than it may seem upon first glance.

Simple Definition

The IRS provides a simple definition of cost basis on its 551 publication: “Basis is the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property. … The basis of property you buy is usually its cost.”

Thus, in its simplest form, cost basis is the purchase price of your property. In the real world, however, cost basis is more subtle as the value of property tends to change over time; also, not all property is acquired through sale, and in cases where it is not acquired through sale computing cost basis is less straightforward.

Practical Definition

If a person buys an item — say a piece of furniture, such as a sofa — for $100, then $100 is the cost basis of the item (the sofa) at the outset. If the person decides to sell the sofa at a later date for $100, and the sofa has retained its original value of $100, then no tax is owed because no profit was realized. However, if the person managed to sell the sofa for $150, then a capital gain has been realized and therefore a tax is due (on the $50 of profit).

In other words, cost basis is a mechanism which is intended to offset one’s investment in property so that an individual is not unfairly taxed. If an individual were taxed for a sale even when no profit was realized, the commercial world would literally be turned topsy-turvy.

However, as mentioned previously, the computation of cost basis is not always straightforward. Seldom does the value of property remain fixed; in many cases the value fluctuates over time as the market goes up and down. An asset’s basis can decrease or increase depending on the way its value fluctuates over the course of its life. If an asset either improves or declines in value it acquires an adjusted basis which is then used to compute the correct amount realized from its sale.

Manner of Acquisition

When property is not acquired through a traditional sale the determination of its cost basis is more involved. For instance, when property is acquired through inheritance, the cost basis of the property is its fair market value at the time of the decedent’s death. And when property is transferred by gift or trust, the cost basis can either be directly carried over from the donor (i.e. transferred basis or carryover basis) or it can be the fair market value of the property. Hence, these other means of acquiring assets add complexity to the determination of cost basis.

Final Thoughts

Basis is a foundational concept in U.S. tax law as it is used constantly to determine the true amount owed from sales. Although it is simple to understand in its most basic applications, it can be a bit subtle depending on the particular circumstances. We will explore this interesting concept in greater depth in a later post.

Cost basis is particularly relevant for owners of real estate. Readers who own real estate should consider viewing the following presentation on the tax issues of real estate ownership

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