George Mason School of Law
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George Mason School of Law. Contracts II Relational Contracts II F.H. Buckley [email protected]. Next day’s assignment. Up to Scott 541-56. Relational Contracts. Relational contracts as different in kind from one-shot transactions. - PowerPoint PPT Presentation
Transcript of George Mason School of Law
Next day’s assignment
Up to Scott 541-56
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Relational Contracts
Relational contracts as different in kind from one-shot transactions
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent They promote norms of solidarity more
than of autonomy??? Macneil, The New Social Contract (1980)
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent2. A lengthier process of negotiation where it
may be difficult to identity the moment at which contractual duties arise Hoffman: promissory estoppel
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent2. A lengthier process of negotiation where it
may be difficult to identity the moment at which contractual duties arise
3. The object of exchange is not easily quantified Varney: “a fair share of the profits”
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent2. A lengthier process of negotiation where it
may be difficult to identity the moment at which contractual duties arise
3. The object of exchange is not easily quantified
4. Future cooperation is anticipated
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent2. A lengthier process of negotiation where it
may be difficult to identity the moment at which contractual duties arise
3. The object of exchange is not easily quantified
4. Future cooperation is anticipated5. Trust becomes more important
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Relational contracts as different in kind from one-shot transactions
1. Relations are seen as semi-permanent2. A lengthier process of negotiation where it
may be difficult to identity the moment at which contractual duties arise
3. Future cooperation is anticipated4. The object of exchange is not easily
quantified5. Trust becomes more important
A special concern for strategic behavior
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Forms of Strategic Behavior
Post-contractual opportunism
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Armen Alchian et al. 21 J.L.E. 297(1978)
Relational Contracts and Strategic Behavior
Post-contractual opportunism
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Armen Alchian et al. 21 J.L.E. 297(1978)
Relational Contracts and Strategic Behavior
Post-contractual opportunism Bilateral Monopolies and relation-specific
assets
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Oliver Williamson (Nobel 2009)Markets and Hierarchies (1975)
No opportunism where no relation-specific assets
In some relationships, no one invests anything
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Jean-Paul Belmondo, Jean Seberg, Breathless (1960)Jean-Luc Godard
But where asymmetric investments are made, opportunism is possible
In others, one person only invests
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Ford Maddox Brown, Stages of Cruelty
But where asymmetric investments are made, opportunism is possible
Giving the otherperson a threat advantage
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Which results in the underinvestment problem
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Curing Underinvestment
Ex ante, planners should seek to reinforce long-term stability
Minimize the possibility of post-contractual opportunism
Cure the underinvestment problem
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What if both parties invest equally?
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Brangelina
What if both parties invest equally?
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Hamburger U. as a risk-sharing strategy
What if both parties invest equally?Mutually Assured Destruction
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Dr Strangelove
The Schwartz-Scott Proposal
Can you think of other applications?
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The Schwartz-Scott Proposal
Security deposits
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The Schwartz-Scott Proposal
Joint investments
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Relational Contracts
Should they be treated differently than one-shot transactions?
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Relational Contracts
Should they be treated differently than one-shot transactions? They may be relational, but the relation
is invariably over when they sue each other
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Relational Contracts
Should they be treated differently than one-shot transactions? Should courts worry less about certainty
of terms, if the parties seem to want a binding agreement?
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Indefinite Agreements
When should a court gap-fill and when not?
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Indefinite Agreements
When should a court gap-fill and when not? The court’s informational problem
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Indefinite Agreements
When should a court gap-fill and when not? The court’s informational problem The parties’ transaction cost problem
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Indefinite Agreements
If a court gap-fills, can you suggest the criterion it should apply?
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Indefinite Agreements
If a court gap-fills, can you suggest the criterion it should apply?Mimicking the intention of the parties?
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Indefinite Agreements
If a court gap-fills, can you suggest the criterion it should apply?Ex ante and ex post
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Indefinite Agreements
If a court gap-fills, can you suggest the criterion it should apply?Tailored and untailored
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Agreements to Agree
Shepard v. Carpenter (p.300) An agreement to cut all logs in a
specified area, resell them, and pay owner 1/3 of resale price
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Agreements to Agree
Shepard v. Carpenter (p.300) An agreement to cut all logs in a
specified area, resell them, and pay owner 1/3 of resale price
But an agreement to agree negatives an agreement
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Open Price Terms
Joseph Martin p. 38 Renew “at annual rentals to be agreed
on”
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Open Price Terms
Joseph Martin p. 38 Renew “at annual rentals to be agreed
on” Held: an “agreement to agree”
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Open Price Terms
United Press case at p. 301 Weekly payments not to exceed $300 for
news service
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Open Price Terms
United Press case at p. 301 Weekly payments not to exceed $300 for
news service Price an “essential element”
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Open Price Terms
Lee v. Seagram p. 40 What was left out?
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Open Price Terms
Lee v. Seagram p. 40 What was left out?
“a price roughly equal to that of their current distributorships”
A location “acceptable to plaintiffs”
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Open Price Terms
Lee v. Seagram p. 40 What was left out?
Court thought acceptable a price at book + 3 times net profits
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Open Price Terms and Sales of Goods
D.R. Curtis p. 36
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Indefinite Agreements
Is a forward grain contract a sale of goods?
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Indefinite Agreements
Is a forward grain contract a sale of goods? UCC 2-105(1)
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Indefinite Agreements
What was left out of the contract?
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Indefinite Agreements
What was left out of the contract?1. The actual protein content of the grain
(which won’t be known until the grain is harvested)
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Indefinite Agreements
What was left out of the contract?1. The actual protein content of the grain2. Protein basis figure
(standard protein content: which is what the case is about)
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Indefinite Agreements
What was left out of the contract?1. The actual protein content of the grain2. Protein basis figure3. “Scale”: $ times divergence of (1) from (2)
and is usually fixed on delivery by the export company
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Indefinite Agreements
What was left out of the contract? Does the omission to specify the basis
render the contract void for uncertainty?
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Indefinite Agreements
Can you think of any evidence that you want to have introduced as the Mathews lawyer?
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Indefinite Agreements
Suppose I told you that the average % of protein in hard red spring is 12.6%?
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The UCC
Cf Kleinschmidt on p. 301 What is the intent of the parties
UCC 2-204(3)
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The UCC
What is the intent of the parties UCC 2-204(3)
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The UCC and Open Price Terms
Gap-filling price: UCC 2-305
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The UCC
Why should there be a different standard in sales law?
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The UCC
Why should there be a different standard in sales law?
More standardized?
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The UCC
Why should there be a different standard in sales law?
More standardized? Market prices?
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The UCC
Why should there be a different standard in sales law?
More standardized? Market prices? Historical accident?
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Karl Llewellyn
The UCC
Alter p. 302 Anything unusual about this case?
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The UCC
Alter p. 302: a rush order for pumps
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Three Mile Island 1979
The UCC
Alter p. 302: a rush order for pumps
Ex ante, would the purchaser have wanted a binding contract?
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The UCC
Alter p. 302: a rush order for pumps
Ex ante, would the purchaser have wanted a binding contract? Seller’s “belated concern with the lack of
agreement as to sale price…”
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Preliminary Agreements
You are contemplating a joint venture with a social acquaintance, Mr. Gold. He’s a dot.com person, made his bundle, got out, now wants to get back in the game. His idea is synchronous virtual meetings. To bring this to market he needs to work on the software and create platforms to support it.
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Preliminary Agreements
You have the business contracts and network to provide users
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
Transaction costs
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
Transaction costs Informational uncertanties
Will the product find a market? How do we divide up the equity? Do we have enough players in our venture?
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Risk and Uncertainty
Frank Knight, Risk, Uncertainty and Profit
Risk and Uncertainty[
There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don't know we don't know.
Risk and Uncertainty[
Unfortunately, there are also unknown knowns – the ones we don't know but think we know
Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point?
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
Transaction costs
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
Transaction costs Informational uncertanties
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Preliminary Agreements
Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so?
Transaction costs Informational uncertanties Might the negotiations get in the way of
progress on the venture?
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Brown v. Cara 304
Was the MOU a binding agreement? What was missing?
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Brown v. Cara
Was the MOU a binding agreement? What was missing?
Financing and construction contracts Architectural plans Equity stakes What happened after the $175,000
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Brown v. Cara
Was the MOU a binding agreement? What was missing?
Financing and construction contracts Equity stakes What happened after the $175,000 Obligation to erect building
A “formal agreement” to follow
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Brown v. Cara
Was the MOU a binding agreement? What was missing?
Financing and construction contracts Equity stakes What happened after the $175,000 Obligation to erect building
Why didn’t they negotiate all terms then and there?
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Brown v. Cara
What is the difference between Leval’s Type I and II agreements?
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Brown v. Cara
Badges of Type I agreements?
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Brown v. Cara
Badges of Type I agreements? Express denial of an agreement means
no agreement
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Brown v. Cara
Badges of Type I agreements? Express denial of an agreement means
no agreement Partial performance evidence of
agreement
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Brown v. Cara
Badges of Type I agreements? Express denial of an agreement Partial performance All material terms agreed to evidences
an agreement
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Brown v. Cara
Badges of Type I agreements? Express denial of an agreement Partial performance All material terms agreed to Agreement of a kind usually committed
to writing: otherwise an agreement
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Brown v. Cara
Badges of a Type II agreement?
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Brown v. Cara
Badges of a Type II agreement? An intention to be bound Too uncertain for a Type I agreement Partial performance
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Brown v. Cara
What duties arise under a Type II agreement?
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Brown v. Cara
What duties arise under a Type II agreement? What does a good faith negotiation
mean?
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Brown v. Cara
What duties arise under a Type II agreement? What does a good faith negotiation
mean? Give examples of bad faith?
What questions would you want answered on remand?
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Brown v. Cara: What happened to 100 Jay?
Rising 33 stories alongside the Manhattan Bridge, J Condo is Brooklyn’s premiere luxury residential building.
As the tallest building in Dumbo, J Condo adds an easily recognizable icon to the Brooklyn skyline with its dramatic curved, sail-like façade of floor to ceiling windows that maximizes the building’s abundant natural light and offers magnificent panoramic views of Manhattan, Brooklyn, the East River, and New York Harbor.
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Brown v. Cara: What happened to 100 Jay?
Does this suggest why the deal didn’t happen?
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Does this look like “Light Bridges at J Street”?
If it’s not a Type I agreement, is it necessarily a Type II agreement?
Arcadian Phosphate at 309
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Arcadian Phosphate
The agreement specified: the timing and amounts of the payments the fixed assets to be purchased, and a closing date of not later than May
31, 1987.
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Arcadian Phosphate
The agreement specified: a framework of negotiation for the purchase
of Arcadian's finished product inventory at closing at a "mutually agreeable market value," with phosphate stores to be purchased at closing at Arcadian's book value.
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Arcadian Phosphate
[a] binding sales agreement will be completed by December 31, 1986.
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Arcadian Phosphate
Both parties agreed to the memorandum "to cooperate fully and work judiciously in order to expedite the closing date and consummate the sale of the business.
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Arcadian Phosphate
Why did the defendant back out?
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Arcadian Phosphate
If negotiations for the sale failed, Arcadian would repay any capital expenditures agreed to thereafter and made by API, and if the negotiations failed through no fault of API, Arcadian would refund API's deposit.
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