1 George Mason School of Law Contracts II Relational Contracts
I F.H. Buckley [email protected]
Slide 2
Assignment for next day Scott 313-89 and related statutory
sections 2
Slide 3
The Exam Mean of 2.87 (midway between B- and B) Range of C- to
A 3
Slide 4
The Exam 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
Slide 5
The Exam 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
Slide 6
So who owes Status Obligations? Innkeepers 6
Slide 7
Efficient Rescue Contracts On Dry Land? 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. Ill
give you food and water, says Conrad, in exchange for all your
money. Livingston is a millionaire. Think it over, says Conrad.
7
Slide 8
Rescue at Sea How do Admiralty Courts handle rescue claims?
Post v. Jones 8
Slide 9
Are status obligations needed today for innkeepers? 9
Slide 10
Was this the question? 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
Slide 11
Was this the question? 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
Slide 12
Was this the question? 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
Slide 13
Was this the question? 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
Slide 14
Question 2 Promises made between family members should be
presumed to be not legally enforceable. 14
Slide 15
Why might a promisor want to incur legal liability? And why
might he not? How would you expect promisors to react, in an
interfamily setting, if all promises were enforceable. Fewer
promises Conditional promises 15
Slide 16
Question 3 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
Slide 17
Non-disclosure What happened in Laidlaw? P. 451 17 Treaty of
Ghent 1815
Slide 18
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
Slide 19
Non-disclosure Aquinas, Summa Theologica Under which rule is
the famine soonest over? 19
Slide 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. 20
Slide 21
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. Is this an Article 2
contract? 21
Slide 22
When does Art. 2 apply? Monetti A sale of inventory or a
distributorship agreement? UCC 2-102 A general or a nominate
contract? 22
Slide 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. If an Article 2 contract,
then how does Article 2 treat firm offers? UCC 2-205 23
Slide 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. If not an Article 2 contract,
then might 2- 205 be applied by analogy, as per Posner? 24
Slide 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 Buckleys had phoned Vic
to withdraw the offer. Vic wasnt in and Buckleys left the message
on Vics answering machine. 25
Slide 26
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 Buckleys had phoned Vic
to withdraw the offer. Vic wasnt in and Buckleys left the message
on Vics answering machine. 26
Slide 27
When is an offer accepted? The mailbox rule: when put out of
the offerees possession: Restatement 63 if by a medium invited by
the offeror Restatement 65: if the same medium used by the offeror
or one customary in similar transactions 27
Slide 28
Question 4 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 well do the deal at $900,000. The Buckleys
representative said Deal! 28
Slide 29
Question 4 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 well do the deal at $900,000. The Buckleys
representative said Deal! Statute of Frauds: Contracts for a term
of more than one year 29
Slide 30
Question 4 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 well do the deal at $900,000. The Buckleys
representative said Deal! Could the written offer satisfy
Restatement 131? (is sufficient to indicate that a contract has
been made between the parties? 30
Slide 31
Question 4 On Dec. 9 Buckleys received the following email from
the Smith brothers: 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 isnt
a big deal to you, but it is to us. 31
Slide 32
Question 4 On Dec. 9 Buckleys received the following email from
the Smith brothers: 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 isnt
a big deal to you, but it is to us. Does this satisfy the Statue of
Frauds? signed by the party to be charged 32
Slide 33
Question 4 On Dec. 9 Buckleys received the following email from
the Smith brothers: 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 isnt
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)? 33
Slide 34
Contracts II: General Themes Pacta sunt servanda except when
theyre not 34
Slide 35
Contracts II: General Themes Pacta sunt servanda except when
theyre not So just was the pacta anyway? Relational contracts
Terms, Conditions, Warranties Mistake and Impossibility 35
Slide 36
Contracts II: General Themes Pacta sunt servanda except when
theyre not So just was the pacta anyway? Relational contracts
Terms, Conditions, Warranties Mistake and Impossibility Remedies
36
Slide 37
Contracts II: General Themes Pacta sunt servanda except when
theyre not So just was the pacta anyway? Relational contracts
Terms, Conditions, Warranties Mistake and Impossibility Remedies
Third Parties 37
Slide 38
Relational Contracts Should different principles apply when the
parties propose to enter into a long-term relationship?
Corporations Partnerships Joint ventures, Distributorships, Long-
term supply and requirements contracts 38
Slide 39
Some History: Legal Realism 39 The life of the law has not been
logic; it has been experience
Slide 40
Legal Realism 40 Roscoe Pound Louis Brandeis
Slide 41
Legal Realism 41 Ian MacNeil (the MacNeil)
Slide 42
Legal Realism 42 Use insights from other disciplines (Law and
)
Slide 43
Legal Realism 43 Use insights from other disciplines (Law and )
Look at how people bargain in fact
Slide 44
Legal Realism 44 Use insights from other disciplines (Law and )
Look at how people bargain in fact Distinguish between different
bargaining situations
Slide 45
Legal Realism A 70s attack on enforceability The nineteenth
century model, in which private parties make their own law, is
inapplicable in the 20 th century 45
Slide 46
Legal Realism A 70s attack on enforceability The nineteenth
century model, in which private parties make their own law, is
inapplicable in the 20 th century Consumer contracts fail to
satisfy autonomy norms because of standard form contracts 46
Slide 47
Legal Realism A 70s attack on enforceability The nineteenth
century model, in which private parties make their own law, is
inapplicable in the 20 th century Consumer contracts fail to
satisfy autonomy norms because of standard form contracts
Relational parties dont rely on contract enforceability 47
Slide 48
Legal Realism A 70s attack on enforceability The nineteenth
century model, in which private parties make their own law, is
inapplicable in the 20 th century The prescription: Pay less
attention to what they parties say, and give courts more discretion
to interpret contracts 48
Slide 49
49 CooperateDefect Cooperate3 Defect40 Player 1 Relational vs
One-short Contracts Defection dominates in one-shot bargains
Slide 50
50 CooperateDefect Cooperate34 Defect0 Player 2 Relational vs
One-short Contracts Defection dominates in one-shot bargains
Slide 51
51 Iterated PD Games A Lessened Need for Enforcement Axelrod,
The Evolution of Cooperation (1984) Tit-for-tat as a dominant
strategy for iterated PD games Telser, A Theory of Self-enforcing
agreements, 53 J. Bus. 27 (1980) 51
Slide 52
Preliminary Agreements How deals begin 52
Slide 53
Preliminary Agreements Assume both parties sign the following:
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. A binding contract? 53
Slide 54
Preliminary Agreements Assume both parties sign the following:
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. A binding contract? Restatement 33 54
Slide 55
Preliminary Agreements Assume both parties sign the following:
This constitutes a binding contract between us A binding contract?
55
Slide 56
Preliminary Agreements Assume both parties sign the following:
No binding contract between us will exist until we have executed a
final agreement? A binding contract? 56
Slide 57
Preliminary Agreements Assume both parties sign the following:
No binding contract between us will exist until we have executed a
final agreement? A binding contract? Restatement 33(3), 21, Illus.
4 57
Slide 58
Preliminary Agreements Assume both parties sign the following:
We agree that this letter agreement will be reduced to a binding
definitive agreement. A binding contract? 58
Slide 59
Preliminary Agreements Assume both parties sign the following:
We agree that this letter agreement will be reduced to a binding
definitive agreement. A binding contract? I agree to agree with
you. Have I agreed with you? 59
Slide 60
Preliminary Agreements Assume both parties sign the following:
We agree that this letter agreement will be reduced to a binding
definitive agreement. A binding contract? I agree to agree with
you. Restatement 27 60
Slide 61
Coley v. Lang The Deal 61
Slide 62
Coley v. Lang The Deal Lang shares 62 Coley IAS Inc. Asset sale
to old IAS shareholders
Slide 63
Coley v. Lang The Deal On or before [17 days later] this letter
agreement will be reduced to a definitive agreement binding upon
all of the parties Until then Coley can bid on behalf of IAS
63
Slide 64
Coley v. Lang The Deal What happens if the Sept. 18 closing
date is missed? 64
Slide 65
Coley v. Lang The Deal What happens if the Sept. 18 closing
date is missed? A condition precedent? A breach by Lang? 65
Slide 66
Coley v. Lang The Deal Did the parties intend that the contract
would be binding as of Sept. 1? 66
Slide 67
Coley v. Lang The Deal Did the parties intend that the contract
would be binding as of Sept. 1? Does the court have enough
information about the details of the deal to award specific
performance? 67
Slide 68
Coley v. Lang The Deal Did the parties intend that the contract
would be binding as of Sept. 1? Does the court have enough
information about the details of the deal to award specific
performance? Is this a suitable case for promissory estoppel? Qu.
the current version of Restatement 90 68
Slide 69
Coley v. Lang Supposing you didnt want litigation. How would
you draft the agreement? 69
Slide 70
Coley v. Lang Supposing you didnt want litigation. How would
you draft the agreement? (1)The parties understand that this is not
a binding agreement and that no liability will arise until a
definitive agreement is signed. 70
Slide 71
Coley v. Lang Supposing you didnt want litigation. How would
you draft the agreement? (1)The parties understand that this is not
a binding agreement and that no liability will arise until a
definitive agreement is signed. Restatement 21 71
Slide 72
Coley v. Lang Supposing you didnt want litigation. How would
you draft the agreement? (2)The parties understand that this is a
binding agreement and that failure to sign a definitive agreement
will give rise to liability. 72
Slide 73
Coley v. Lang Supposing you didnt want litigation. How would
you draft the agreement? (2)The parties understand that this is a
binding agreement and that failure to sign a definitive agreement
will give rise to liability. Restatement 27 73
Slide 74
Coley v. Lang Which term would the client want and why? 74
Slide 75
Coley v. Lang Which term would the client want and why? Was
anything important missing from the terms of the deal? 75
Slide 76
Coley v. Lang Which term would the client want and why? Was
anything important missing from the terms of the deal? Was the 17
day gap a big deal? 76
Slide 77
What if more reliance is required? You and I contemplate a
joint venture which, if successful, promises $10M 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 doesnt work for
me. We both lose our $50,000 investment. Am I liable for your
reliance damages? 77
Slide 78
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M 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 doesnt work for me. Am I liable for your
reliance damages? 78
Slide 79
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M 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 doesnt work for me. Suppose we had agreed that
there would be no liability for reliance damages? 79
Slide 80
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M 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 doesnt work for me. Suppose we had agreed that
there would be liability for reliance damages? 80
Slide 81
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M 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 doesnt work for me. In what circumstances
would we agree for liability or no liability for reliance damages?
81
Slide 82
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M in profits for each of us. 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
Slide 83
Preliminary Agreements You and I contemplate a joint venture
which, if successful, promises $10M in profits for each of us. 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. Bilateral Monopolies and Post-contractual Opportunism
83
Slide 84
Post-contractual Opportunism Austin v. Loral Why did Loral
agree to the contract modification? 84
Slide 85
Post-contractual Opportunism Austin v. Loral Why did Loral
agree to the contract modification? An under-investment problem
85
Slide 86
Preliminary Agreements 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
Slide 87
Preliminary Agreements I evaluate you for a franchise. To show
that you are trustworthy, I ask you to register for a training
course, on your nickel. I ask you further to put up some cash in
the franchise. Problems? 87
Slide 88
Preliminary Agreements I evaluate you for a franchise. To show
that you are trustworthy, I ask you to register for a training
course, on your nickel. I ask you further to put up some cash in
the franchise. I have questions about you. I ask for a greater cash
investment. Problems? 88
Slide 89
Preliminary Agreements 89
Slide 90
Preliminary Agreements Was Red Owl in bad faith? And just what
might bad faith mean here? 90
Slide 91
Preliminary Agreements Was Red Owl in bad faith? And just what
might bad faith mean here? Did Red Owl jerk Hoffman around? Did Red
Owl up the ante from the $18,000 investment? 91
Slide 92
Preliminary Agreements Was Red Owl in bad faith? And just what
might bad faith mean here? Did Red Owl jerk Hoffman around? What
would you infer from the discussion as reported at p. 294? 92
Slide 93
Preliminary Agreements Was Red Owl negligent? Cf. Scott at
295-96 93
Slide 94
Preliminary Agreements Was Red Owl negligent? Cf. Scott at
295-96 Should negligence liability be excluded from arms-length
negotiations? 94
Slide 95
Preliminary Agreements Was Red Owl negligent? Cf. Scott at
295-96 Should negligence liability be excluded from arms-length
negotiations? What about the difference in skills in the parties?
95
Slide 96
Preliminary Agreements Could Red Owl have bargained around
estoppel liability? 96
Slide 97
Preliminary Agreements What was the remedy? 97
Slide 98
Preliminary Agreements How would you expect franchisors to
react to Red Owl? 98
Slide 99
Preliminary Agreements How would you expect franchisors to
react to Red Owl? Non-liability agreements? 99
Slide 100
Preliminary Agreements How would you expect franchisors to
react to Red Owl? Non-liability agreements? Exit from state?
Brickley et al., The Economic Effects of Franchise Termination
Laws, 34 J.L. & ECON. 101 (1991) 100
Slide 101
Preliminary Agreements How would you expect franchisors to
react to Red Owl? Non-liability agreements? Exit from state? Only
deal with sure things? 101
Slide 102
Mooney v. Craddock p. 297 102 German Racquetball: Das Luft
manoeuvre
Slide 103
Mooney v. Craddock Was Craddock in bad faith? 103
Slide 104
Mooney v. Craddock Was Craddock in bad faith? Why did the
project fail? 104
Slide 105
Mooney v. Craddock Was Craddock in bad faith? Why did the
project fail? Who was in the best position to evaluate the
prospects of failure? 105
Slide 106
Mooney v. Craddock Was Craddock in bad faith? Why did the
project fail? Who was in the best position to evaluate the
prospects of failure? What result in the case? 106
Slide 107
Mooney v. Craddock Was Craddock in bad faith? Why did the
project fail? Who was in the best position to evaluate the
prospects of failure? What result in the case? Should Craddock have
been required to build the club? Who took the risk? 107
Slide 108
Indefinite Agreements Varney v. Ditmars What was the promise?
108
Slide 109
Indefinite Agreements Varney v. Ditmars I will give you a fair
share of the profits. 109
Slide 110
Indefinite Agreements Varney v. Ditmars I will give you a fair
share of the profits. Restatement 33 Sed. Qu. Restatement 204
110
Slide 111
Indefinite Agreements Varney v. Ditmars I will give you a fair
share of the profits. Qu. I agree to sell you my car for a fair
price. 111
Slide 112
Indefinite Agreements Varney v. Ditmars I will give you a fair
share of the profits. Qu. I agree to sell you my car for a fair
price. Was Varney more indefinite than an unspecified price for
goods? 112
Slide 113
Indefinite Agreements Varney v. Ditmars I will give you a fair
share of the profits. Qu. I agree to sell you my car for a fair
price. UCC 2-204(3), 2-305 if they so intend 113
Slide 114
Indefinite Agreements Varney v. Ditmars Was the termination
wrongful? Was it strategic? 114
Slide 115
Indefinite Agreements Varney v. Ditmars Cardozos point: what
kind of evidence might have been led? 115
Slide 116
Indefinite Agreements Complete Contingent Contracts Transaction
Costs and Gap-filling 116
Slide 117
Indefinite Agreements We settle on a price for a car but dont
specify if payment is due on delivery? UCC 2-507, 2-511 117
Slide 118
Indefinite Agreements Corthell v. Summit (p.34) Is this
consistent with Varney? 118
Slide 119
Indefinite Agreements Corthell v. Summit (p.34) Is this
consistent with Varney? What kind of evidence would be needed to
find a reasonable compensation? 119