George Mason School of Law Contracts II Relational

George Mason School of Law Contracts II Relational Contracts I F. H. Buckley fbuckley@gmu. edu 1

Assignment for next day o Scott 313 -89 and related statutory sections 2

The Exam o Mean of 2. 87 (midway between Band B) o Range of C- to A 3

The Exam o “Status obligations, which require hotels to offer similar rates for each season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of hotelkeepers. ” 4

The Exam o “Status obligations, which require hotels to offer similar rates for each season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of hotelkeepers. ” 5

So who owes Status Obligations? Innkeepers 6

Efficient Rescue Contracts On Dry Land? o Livingston is an explorer who finds himself without food or water, alone in the desert. After a week he comes across an inn, owned by Conrad. “I’ll give you food and water, ” says Conrad, “in exchange for all your money. ” Livingston is a millionaire. “Think it over…, ” says Conrad. 7

Rescue at Sea o How do Admiralty Courts handle rescue claims? n Post v. Jones 8

Are status obligations needed today for innkeepers? 9

Was this the question? o “Status obligations, which require hotels to offer similar rates for every season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of hotelkeepers. ” 10

Was this the question? o “Status obligations, which require hotels to offer similar rates for every season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of hotelkeepers. ” 11

Was this the question? o “Status obligations, which require hotels to offer similar rates for each season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of hotelkeepers. ” 12

Was this the question? o “Status obligations, which require hotels to offer similar rates for each season to all guests and prevent hotels from turning away unwanted guests, are in the best interests of the guests. ” 13

Question 2 o “Promises made between family members should be presumed to be not legally enforceable. ” 14

Why might a promisor want to incur legal liability? o And why might he not? n How would you expect promisors to react, in an interfamily setting, if all promises were enforceable. o Fewer promises o Conditional promises 15

Question 3 o “As a condition for enforcement of their contract, sellers should not be required to disclose to buyers that the sellers anticipate a sharp fall in the market price of the goods. ” 16

Non-disclosure o What happened in Laidlaw? P. 451 Treaty of Ghent 1815 17

Non-disclosure Aquinas, Summa Theologica Need the seller disclose where “the goods are expected to be of less value at a future time, on account of the arrival of other merchants, which was not foreseen by the buyers”? The seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what is going to happen. If however he were to do so, or if he lowered his price, it would be exceedingly virtuous on his part: although he does not seem to be bound to do this as a debt of justice. Summa theologica II. 2 77. 3 18

Non-disclosure Aquinas, Summa Theologica o Under which rule is the famine soonest over? 19

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. 20

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. n Is this an Article 2 contract? 21

When does Art. 2 apply? Monetti o A sale of inventory or a distributorship agreement? n UCC § 2 -102 n A general or a nominate contract? 22

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. n If an Article 2 contract, then how does Article 2 treat firm offers? o UCC § 2 -205 23

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. n If not an Article 2 contract, then might 2205 be applied by analogy, as per Posner? 24

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. On Dec. 6 Vic sent Buckleys by Fedex a letter saying “we accept your terms, ” which Buckleys received on Dec. 9. However, on December 7 Buckley’s had phoned Vic to withdraw the offer. Vic wasn’t in and Buckley’s left the message on Vic’s answering machine. 25

Question 4 On Dec. 1 Buckleys faxes Vic a letter which states: Buckleys offers to sell you its inventory of our extremely effective syrup in Virginia (24, 000 cases of 48 six-ounce bottles in storage in Alexandria VA) for $800, 000, and to appoint you our exclusive distributor of Buckleys products in Virginia for a five-year term. This is a firm offer. On Dec. 6 Vic sent Buckleys by Fedex a letter saying “we accept your terms, ” which Buckleys received on Dec. 9. However, on December 7 Buckley’s had phoned Vic to withdraw the offer. Vic wasn’t in and Buckley’s left the message on Vic’s answering machine. 26

When is an offer accepted? o The mailbox rule: when put of the offeree’s possession: n Restatement § 63 “if by a medium invited by the offeror n Restatement § 65: if the same medium used by the offeror “or one customary in similar transactions” 27

Question 4 o Buckleys decided not to proceed with the arrangement with Vic because it had received a competing offer from Bob and his brother Chuck Smith of Woodbridge. The Smith brothers had seen a copy of the Dec. 1 letter to Vic (which had been posted by a third party on a trade industry web site). Chuck telephoned Buckleys on December 7 and said “we’ll do the deal at $900, 000. ” The Buckleys representative said “Deal!” 28

Question 4 o Buckleys decided not to proceed with the arrangement with Vic because it had received a competing offer from Bob and his brother Chuck Smith of Woodbridge. The Smith brothers had seen a copy of the Dec. 1 letter to Vic (which had been posted by a third party on a trade industry web site). Chuck telephoned Buckleys on December 7 and said “we’ll do the deal at $900, 000. ” The Buckleys representative said “Deal!” n Statute of Frauds: Contracts for a term of more than one year 29

Question 4 o Buckleys decided not to proceed with the arrangement with Vic because it had received a competing offer from Bob and his brother Chuck Smith of Woodbridge. The Smith brothers had seen a copy of the Dec. 1 letter to Vic (which had been posted by a third party on a trade industry web site). Chuck telephoned Buckleys on December 7 and said “we’ll do the deal at $900, 000. ” The Buckleys representative said “Deal!” n Could the written offer satisfy Restatement § 131? (“is sufficient to indicate that a contract … has been made between the parties”? 30

Question 4 o On Dec. 9 Buckley’s received the following email from the Smith brothers: n 31 We confirm that we accepted your offer at a price of $900, 000 but would ask that we be given the exclusive distributorship for the District of Columbia as well. We know that right now no one buys your noxious product in Washington. This isn’t a big deal to you, but it is to us.

Question 4 o On Dec. 9 Buckley’s received the following email from the Smith brothers: n n n 32 We confirm that we accepted your offer at a price of $900, 000 but would ask that we be given the exclusive distributorship for the District of Columbia as well. We know that right now no one buys your noxious product in Washington. This isn’t a big deal to you, but it is to us. Does this satisfy the Statue of Frauds? “signed by the party to be charged”

Question 4 o On Dec. 9 Buckley’s received the following email from the Smith brothers: n n 33 We confirm that we accepted your offer at a price of $900, 000 but would ask that we be given the exclusive distributorship for the District of Columbia as well. We know that right now no one buys your noxious product in Washington. This isn’t a big deal to you, but it is to us. A counter-offer? How does UCC § 2 -207 apply (if it does apply) Between merchants. But a “material alteration”? Notice of objection under 2 -207 (2)(c)?

Contracts II: General Themes o Pacta sunt servanda n except when they’re not 34

Contracts II: General Themes o Pacta sunt servanda n except when they’re not o So just was the pacta anyway? n Relational contracts n Terms, Conditions, Warranties n Mistake and Impossibility 35

Contracts II: General Themes o Pacta sunt servanda n except when they’re not o So just was the pacta anyway? n Relational contracts n Terms, Conditions, Warranties n Mistake and Impossibility o Remedies 36

Contracts II: General Themes o Pacta sunt servanda n except when they’re not o So just was the pacta anyway? n Relational contracts n Terms, Conditions, Warranties n Mistake and Impossibility o Remedies o Third Parties 37

Relational Contracts o Should different principles apply when the parties propose to enter into a long-term relationship? n Corporations n Partnerships n “Joint ventures”, Distributorships, Longterm supply and requirements contracts 38

Some History: Legal Realism The life of the law has not been logic; it has been experience 39

Legal Realism Roscoe Pound 40 Louis Brandeis

Legal Realism Ian Mac. Neil (“the Mac. Neil”) 41

Legal Realism o Use insights from other disciplines (“Law and …”) 42

Legal Realism o Use insights from other disciplines (“Law and …”) o Look at how people bargain in fact 43

Legal Realism o Use insights from other disciplines (“Law and …”) o Look at how people bargain in fact o Distinguish between different bargaining situations 44

Legal Realism A 70 s attack on enforceability n The nineteenth century model, in which private parties make their own law, is inapplicable in the 20 th century 45

Legal Realism A 70 s attack on enforceability n The nineteenth century model, in which private parties make their own law, is inapplicable in the 20 th century o Consumer contracts fail to satisfy autonomy norms because of standard form contracts 46

Legal Realism A 70 s attack on enforceability n The nineteenth century model, in which private parties make their own law, is inapplicable in the 20 th century o Consumer contracts fail to satisfy autonomy norms because of standard form contracts o Relational parties don’t rely on contract enforceability 47

Legal Realism A 70 s attack on enforceability n The nineteenth century model, in which private parties make their own law, is inapplicable in the 20 th century n The prescription: Pay less attention to what they parties say, and give courts more discretion to interpret contracts 48

Relational vs One-short Contracts Defection dominates in one-shot bargains Cooperate Player 1 Defect 49 3 -1 Cooperate Defect 4 0

Relational vs One-short Contracts Defection dominates in one-shot bargains Cooperate 3 4 Defect 50 Defect -1 Player 2 0

Iterated PD Games A Lessened Need for Enforcement o Axelrod, The Evolution of Cooperation (1984) n Tit-for-tat as a dominant strategy for iterated PD games o Telser, A Theory of Self-enforcing agreements, 53 J. Bus. 27 (1980) 51

Preliminary Agreements How deals begin… 52

Preliminary Agreements Assume both parties sign the following: o “This letter is to memorialize our agreement in which you will ship 1, 000 widgets fob Los Angeles to my address by Monday next for $5, 000. ” n A binding contract? 53

Preliminary Agreements Assume both parties sign the following: o “This letter is to memorialize our agreement in which you will ship 1, 000 widgets fob Los Angeles to my address by Monday next for $5, 000. ” n A binding contract? n Restatement § 33 54

Preliminary Agreements Assume both parties sign the following: o “This constitutes a binding contract between us” n A binding contract? 55

Preliminary Agreements Assume both parties sign the following: o “No binding contract between us will exist until we have executed a final agreement? ” n A binding contract? 56

Preliminary Agreements Assume both parties sign the following: o “No binding contract between us will exist until we have executed a final agreement? ” n A binding contract? o Restatement §§ 33(3), 21, Illus. 4 57

Preliminary Agreements Assume both parties sign the following: o “We agree that this letter agreement will be reduced to a binding definitive agreement. ” n A binding contract? 58

Preliminary Agreements Assume both parties sign the following: o “We agree that this letter agreement will be reduced to a binding definitive agreement. ” n A binding contract? n “I agree to agree with you. ” o Have I agreed with you? 59

Preliminary Agreements Assume both parties sign the following: o “We agree that this letter agreement will be reduced to a binding definitive agreement. ” n A binding contract? n “I agree to agree with you. ” o Restatement § 27 60

Coley v. Lang o The Deal… 61

Coley v. Lang o The Deal… Lang shares IAS Inc. 62 Coley Asset sale to old IAS shareholders

Coley v. Lang o The Deal… n On or before [17 days later] this letter agreement will be reduced to a definitive agreement binding upon all of the parties n Until then Coley can bid on behalf of IAS 63

Coley v. Lang o The Deal… n What happens if the Sept. 18 closing date is missed? 64

Coley v. Lang o The Deal… n What happens if the Sept. 18 closing date is missed? o A condition precedent? o A breach by Lang? 65

Coley v. Lang o The Deal… n Did the parties intend that the contract would be binding as of Sept. 1? 66

Coley v. Lang o The Deal… n Did the parties intend that the contract would be binding as of Sept. 1? n Does the court have enough information about the details of the deal to award specific performance? 67

Coley v. Lang o The Deal… n Did the parties intend that the contract would be binding as of Sept. 1? n Does the court have enough information about the details of the deal to award specific performance? n Is this a suitable case for promissory estoppel? o Qu. the current version of Restatement § 90 68

Coley v. Lang o Supposing you didn’t want litigation. How would you draft the agreement? 69

Coley v. Lang o Supposing you didn’t want litigation. How would you draft the agreement? n (1) The parties understand that this is not a binding agreement and that no liability will arise until a definitive agreement is signed. 70

Coley v. Lang o Supposing you didn’t want litigation. How would you draft the agreement? n (1) The parties understand that this is not a binding agreement and that no liability will arise until a definitive agreement is signed. o Restatement § 21 71

Coley v. Lang o Supposing you didn’t want litigation. How would you draft the agreement? n (2) The parties understand that this is a binding agreement and that failure to sign a definitive agreement will give rise to liability. 72

Coley v. Lang o Supposing you didn’t want litigation. How would you draft the agreement? n (2) The parties understand that this is a binding agreement and that failure to sign a definitive agreement will give rise to liability. o Restatement § 27 73

Coley v. Lang o Which term would the client want and why? 74

Coley v. Lang o Which term would the client want and why? n Was anything important missing from the terms of the deal? 75

Coley v. Lang o Which term would the client want and why? n Was anything important missing from the terms of the deal? n Was the 17 day gap a big deal? 76

What if more reliance is required? o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. To see if this is feasible, we must both invest $50, 000. We both do so, and I decide that the deal doesn’t work for me. We both lose our $50, 000 investment. n Am I liable for your reliance damages? 77

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. To see if this is feasible, you (but not me) must invest $50, 000. I decide that the deal doesn’t work for me. n Am I liable for your reliance damages? 78

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. To see if this is feasible, you (but not me) must invest $50, 000. I decide that the deal doesn’t work for me. n Suppose we had agreed that there would be no liability for reliance damages? 79

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. To see if this is feasible, you (but not me) must invest $50, 000. I decide that the deal doesn’t work for me. n Suppose we had agreed that there would be liability for reliance damages? 80

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. To see if this is feasible, you (but not me) must invest $50, 000. I decide that the deal doesn’t work for me. n In what circumstances would we agree for liability or no liability for reliance damages? 81

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. n To see if the deal is worthwhile you must build a prototype for $50, 000. If I decide not to do the deal, the prototype is worthless. 82

Preliminary Agreements o You and I contemplate a joint venture which, if successful, promises $10 M in profits for each of us. n To see if the deal is worthwhile you must build a prototype for $50, 000. If I decide not to do the deal, the prototype is worthless. o Bilateral Monopolies and Post-contractual Opportunism 83

Post-contractual Opportunism Austin v. Loral o Why did Loral agree to the contract modification? 84

Post-contractual Opportunism Austin v. Loral o Why did Loral agree to the contract modification? o An under-investment problem 85

Preliminary Agreements o I evaluate you for a franchise. To show that you are trustworthy, I ask you to register for a training course, on your nickel. Problems? 86

Preliminary Agreements o I evaluate you for a franchise. To show that you are trustworthy, I ask you to register for a training course, on your nickel. o I ask you further to put up some cash in the franchise. Problems? 87

Preliminary Agreements o I evaluate you for a franchise. To show that you are trustworthy, I ask you to register for a training course, on your nickel. o I ask you further to put up some cash in the franchise. o I have questions about you. I ask for a greater cash investment. Problems? 88

Preliminary Agreements 89

Preliminary Agreements o Was Red Owl in bad faith? n And just what might bad faith mean here? 90

Preliminary Agreements o Was Red Owl in bad faith? n And just what might bad faith mean here? n Did Red Owl jerk Hoffman around? o Did Red Owl up the ante from the $18, 000 investment? 91

Preliminary Agreements o Was Red Owl in bad faith? n And just what might bad faith mean here? n Did Red Owl jerk Hoffman around? o What would you infer from the discussion as reported at p. 294? 92

Preliminary Agreements o Was Red Owl negligent? n Cf. Scott at 295 -96 93

Preliminary Agreements o Was Red Owl negligent? n Cf. Scott at 295 -96 n Should negligence liability be excluded from arms-length negotiations? 94

Preliminary Agreements o Was Red Owl negligent? n Cf. Scott at 295 -96 n Should negligence liability be excluded from arms-length negotiations? n What about the difference in skills in the parties? 95

Preliminary Agreements o Could Red Owl have bargained around estoppel liability? 96

Preliminary Agreements o What was the remedy? 97

Preliminary Agreements o How would you expect franchisors to react to Red Owl? 98

Preliminary Agreements o How would you expect franchisors to react to Red Owl? n Non-liability agreements? 99

Preliminary Agreements o How would you expect franchisors to react to Red Owl? n Non-liability agreements? n Exit from state? o Brickley et al. , The Economic Effects of Franchise Termination Laws, 34 J. L. & ECON. 101 (1991) 100

Preliminary Agreements o How would you expect franchisors to react to Red Owl? n Non-liability agreements? n Exit from state? n Only deal with sure things? 101

Mooney v. Craddock p. 297 German Racquetball: Das Luft manoeuvre 102

Mooney v. Craddock n Was Craddock in bad faith? 103

Mooney v. Craddock n Was Craddock in bad faith? n Why did the project fail? 104

Mooney v. Craddock n Was Craddock in bad faith? n Why did the project fail? n Who was in the best position to evaluate the prospects of failure? 105

Mooney v. Craddock n Was Craddock in bad faith? n Why did the project fail? n Who was in the best position to evaluate the prospects of failure? n What result in the case? 106

Mooney v. Craddock n Was Craddock in bad faith? n Why did the project fail? n Who was in the best position to evaluate the prospects of failure? n What result in the case? o Should Craddock have been required to build the club? o Who took the risk? 107

Indefinite Agreements o Varney v. Ditmars n What was the promise? 108

Indefinite Agreements o Varney v. Ditmars n “I will give you a fair share of the profits. ” 109

Indefinite Agreements o Varney v. Ditmars n “I will give you a fair share of the profits. ” o Restatement § 33 n Sed. Qu. Restatement § 204 110

Indefinite Agreements o Varney v. Ditmars n “I will give you a fair share of the profits. ” n Qu. I agree to sell you my car for a fair price. ” 111

Indefinite Agreements o Varney v. Ditmars n “I will give you a fair share of the profits. ” n Qu. I agree to sell you my car for a fair price. ” n Was Varney more indefinite than an unspecified price for goods? 112

Indefinite Agreements o Varney v. Ditmars n “I will give you a fair share of the profits. ” n Qu. I agree to sell you my car for a fair price. ” o UCC §§ 2 -204(3), 2 -305 n “if they so intend” 113

Indefinite Agreements o Varney v. Ditmars n Was the termination wrongful? o Was it strategic? 114

Indefinite Agreements o Varney v. Ditmars n Cardozo’s point: what kind of evidence might have been led? 115

Indefinite Agreements o Complete Contingent Contracts o Transaction Costs and Gap-filling 116

Indefinite Agreements o We settle on a price for a car but don’t specify if payment is due on delivery? n UCC §§ 2 -507, 2 -511 117

Indefinite Agreements o Corthell v. Summit (p. 34) n Is this consistent with Varney? 118

Indefinite Agreements o Corthell v. Summit (p. 34) n Is this consistent with Varney? o What kind of evidence would be needed to find a “reasonable compensation”? 119