1 George Mason School of Law Contracts II Relational Contracts II This file may be downloaded only by registered students in my class, and may not be shared.

1

George Mason School of Law

Contracts IIRelational Contracts II

This file may be downloaded only by registered students in my class, and may not be shared by them

F.H. Buckley

[email protected]

Next day

Scott 541-62

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Indefinite Agreements

Why leave a term open?

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Why leave a term open Didn’t occur to one

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Why leave a term open Didn’t occur to one The informational problem and the

impossibility of a Complete Contingent Contract

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Risk and Uncertainty

Frank Knight, Risk, Uncertainty and Profit

Risk as probabilistic

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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.

Uncertainty[

Unfortunately, there are also unknown knowns – the ones we don't know but think we know


Why leave a term open The informational problem and the

impossibility of a Complete Contingent Contract

Didn’t occur to one Don’t want to block progress on

negotiations

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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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You have the business contracts and network to provide users, he has the technical expertise

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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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Informational uncertainties 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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Informational uncertainties Chilling the deal

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So terms may be left blank Should a court then refuse to enforce

an agreement because of indefiniteness?

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Why refuse to enforce an agreement because of indefiniteness? The court’s informational problem, as

compared to that of the parties Varney v. Ditmars: On January 1 next, “I will

give you a fair share of the profits.”

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The difference in perspectives

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The parties look forward, the courts look back


Why refuse to enforce an Varney v. Ditmars: On January 1 next, “I will give you a fair share of the profits.”

The Court ex post is better able to know what the profits are, while the parties ex ante are better able to know what a fair share is.

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Open Price Terms in United Press at p. 301

Weekly payments for news stories “not exceeding $300”

What would you expect a judge to say?

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What would you expect a judge to say?

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Gimme a break!


Open Price Terms in United Press 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?

“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

Lee v. Seagram p. 40 Who was in the best position tocure the informational problem?

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Indefinite Agreements and Article 2

What about D.R. Curtis (p. 36)

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Is a forward grain contract a sale of goods?

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Is a forward grain contract a sale of goods? UCC 2-105(1)

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What was left out of the contract?

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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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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)

(typically provided at the time of contracting)

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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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What was left out of the contract? Does the omission to specify the basis

render the contract void for uncertainty? UCC § 2-305

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What was left out of the contract? Does this incentivize the parties not to

specify terms ex ante which they might easily do so?

How does the risk play out?

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Can you think of any evidence that you want to have introduced as the Mathews lawyer?

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Suppose I told you that the average % of protein in hard red spring is 12.6%?

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Indefinite Agreements and the UCC

Why should there be a different standard in sales law?

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Why should there be a different standard in sales law?

More standardized? Market prices? Historical accident?

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Karl Llewellyn


Cf Kleinschmidt on p. 301 What is the intent of the parties

UCC 2-204(3)

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Alter p. 302 Anything unusual about this case?

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Alter p. 302: a rush order for pumps

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I mean, what could go wrong?


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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Why refuse to enforce an agreement because of indefiniteness? The parties could more easily have cured

the informational problem

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Why refuse to enforce an agreement because of indefiniteness? The expression of an intent by the

parties that the agreement is not enforceable

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parties that the agreement is not enforceable This might be inferred from uncertainty

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parties that the agreement is not enforceable “Agreements to agree”

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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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Agreements to Agree

Joseph Martin p. 38 Renew “at annual rentals to be agreed

on”

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Agreements to Agree

Joseph Martin p. 38 Renew “at annual rentals to be agreed on”

Held: an “agreement to agree” Would a sale of goods case be different?

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Agreements to Agree

The Deal in Coley v. Lang 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

Was what was left out that which must be left out until a final deal?

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Brown v. Cara 304

Was the MOU a binding agreement? The Memorandum of Understanding

Cara Brown

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100 Jay Street, Brooklyn

MOU: The parties will “work together to develop, build, market and manage” the property

Brown to front development costs of $175K

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


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


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

Why did Cara back off the deal?

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Brown v. Cara: What happened to the area?

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Dumbo in the 1980s


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Dumbo has emerged as one of New York City's premier arts districts, with a cluster of for-profit art galleries and such not-for-profit institutions as the St. Ann's Warehouse and the A.I.R. Gallery. Chef Jacques Torres opened a chocolate factory in Dumbo in December 2000. Other culinary businesses in the area include Grimaldi's, the Brooklyn Ice Cream Factory, the River Café, and, in the One Old Fulton Street building, Pete's Downtown Restaurant. (Wikipedia)

Dumbo today

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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Brown v. Cara

What is the difference between Leval’s Type I and II agreements in Tribune?

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Brown v. Cara

Badges of Type I agreements?

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Brown v. Cara

Badges of Type I agreements? No express denial of an agreement

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Brown v. Cara

Badges of Type I agreements? No express denial of an agreement Partial performance evidence of

agreement

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Brown v. Cara

Badges of Type I agreements? No 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? No express denial of an agreement Partial performance All material terms agreed to Not an agreement of a kind usually

committed to writing

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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 Some 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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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 seller back out?

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Arcadian Phosphate

Why did the defendant seller back out? The price had risen And that’s not bad faith?

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Arcadian Phosphate

The parties contemplated a breakdown in negotiations 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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Curing the underinvestment problem

Ex ante, planners will want to reinforce long-term stability

Minimize the possibility of post-contractual opportunism

Cure the underinvestment problem

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Schwartz-Scott on presumptive reliance damages

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Security deposits

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Hamburger U. as a risk-sharing strategy


Repeated dealings

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George Mason School of Law

Contracts II

Relational Contracts III

F.H. Buckley

[email protected]

1 George Mason School of Law Contracts II Relational Contracts II This file may be downloaded only by registered students in my class, and may not be shared.

Documents

profit slide

preliminary agreements

term open didnt

informational uncertainties

courts informational

fair share

parties varney

relational contracts