1 George Mason School of Law Contracts II Relational Contracts IV F.H. Buckley [email protected].
Mar 26, 2015
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Next day…
Up to and including Implied Conditions
2
The Agency Cost Problem
Agency costs are the costs resulting from:1. Underperformance by agent retained by
principal
3
The Agency Cost Problem
Agency costs are the costs resulting from:2. Passed-up opportunities
(underinvestment)
4
The Agency Cost Problem
What kind of agent misbehavior? Observable?
5
The Agency Cost Problem
What kind of agent misbehavior? Or unobservable?
6
The Agency Cost Problem
What kind of agent misbehavior? The misbehavior must be unobservable
Otherwise the principal could specify the agent’s duties
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The Agency Cost Problem
What kind of agent misbehavior? The misbehavior must be unobservable So that monitoring for misbehavior can
reduce agency costs
8
The Agency Cost Problem
Agency Costs as the sum of Underperformance by agents Underinvestment by principals Monitoring costs
9
The Agency Cost Problem
What kind of agent misbehavior? The misbehavior must be unobservable So that monitoring for misbehavior can
reduce agency costs Coupled with termination rights
10
Employees as agents:Note the two-way play
The employer has a free hand to dismiss the employee under the at-will standard
The employee can resign any time
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Note the two-way play
The employee can resign any time Might the employer be unhappy with
this?
12
Note the two-way play
The employee can resign any time Might the employer be unhappy with
this? Labor shortages Firm-specific assets
Training Proprietary info)
13
Note the two-way play
The employee can resign any time Can you think of some way in which the
parties might bargain around this?
14
Well, there are Constitutional issues…
15
Note the two-way play
The employee can resign any time Can you think of some way in which the
parties might bargain around this? Compensation schemes
16
Note the two-way play
The employee can resign any time Can you think of some way in which the
parties might bargain around this? Compensation schemes Non-competes
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Non-competes: Gagliardi
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Non-competes: Gagliardi
19
The trade secrets?
Non-competes: Gagliardi
20
The trade secrets Beef formula Slicing machine Packaging Marketing research
Non-competes: Gagliardi
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Scope of the non-compete: a one-year ban: Controlled meat business Employment within 100 miles of West
Chester with similar business
Non-competes: Gagliardi
22
Legal restrictions on non-competes Must be ancillary to an employment
contract made at hiring or on a change of status
Non-competes: Gagliardi
23
Legal restrictions on non-competes?
Non-competes: Gagliardi
24
Legal restrictions on non-competes Must be ancillary to an employment
contract How would you justify this restriction?
Non-competes: Gagliardi
25
Was there a change in status here? Cf. Marine Contractors at 373
Non-competes: Gagliardi
26
Was there a change in status here? Cf. Marine Contractors at 373 Cf. Leatherman at 373
Non-competes: Gagliardi
27
Legal restrictions on non-competes Reasonably limited in time and
geographic scope Not excessive for the protection of the
employer
Non-competes: Gagliardi
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Legal restrictions on non-competes Reasonably limited in time and
geographic scope Not excessive for the protection of the
employer
How would you justify these restrictions?
Non-competes: Gagliardi
29
Can you explain why employers have a free hand in termination decisions but not with non-competes?
Non-competes: Gagliardi
30
Were the restrictions excessive here?
Non-competes: Gagliardi
31
Were the restrictions excessive here? Caputo was the controller What about reverse engineering?
Non-competes: Gagliardi
32
Relevance of the occupation Garage mechanic?
Non-competes: Gagliardi
33
Relevance of the occupation Garage mechanic? Doctor?
Non-competes: Gagliardi
34
Relevance of the occupation Garage mechanic? Doctor Lawyer
Non-competes: Gagliardi
35
Relevance of the occupation Garage mechanic? Doctor Lawyer
Maltby at 374
Contract Modification
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As relational contracts are long term, conditions may change and prompt a modification of the agreement Should there be any restrictions on this?
Contract ModificationAustin v. Loral p. 397
Why did Loral agree to the contract modification?
3737
Alaska Packers
38
Pyramid Harbor AK
Alaska Packers
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Will a promise to perform that which the promisor was already bound to do under a prior contract satisfy the consideration requirement?
Alaska Packers
40
Will a promise to perform that which the promisor was already bound to do under a prior contract satisfy the consideration requirement? Restatement § 73 Illustration 4 Restatement § 175 Illustration 5 Restatement § 176
Alaska Packers
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Will a promise to perform that which the promisor was already bound to do under a prior contract satisfy the consideration requirement? Restatement § 89
Fair and equitable in view of circumstances not anticipated by the parties
Illustrations 1, 3, 4
Alaska Packers
42
UCC § 2-209 Good faith Comment 2 UCC § 1-304. Every contract or duty within [the
Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.
Alaska Packers
43
How would you decide Alaska Packers
under these standards?
Alaska Packers
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How would you decide Alaska Packers
under these standards? The finding of fact at p. 377
Alaska Packers
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Qu. the changed circumstances under Angel v. Murray p. 380
Alaska Packers
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Qu. the changed circumstances under Angel v. Murray p. 380
Brian v. Brighenti p. 381
Alaska Packers
47
How might a party protect himself against an extortionate modification?
Alaska Packers
48
How might a party protect himself against an extortionate modification? No modification clauses?
Is UCC § 2-209(2) a safe harbor?
Alaska Packers
49
How might a party protect himself against an extortionate modification? No modification clauses?
Restatement § 311, Comment a Can you offer a justification for this?
Alaska Packers
50
No modification clauses The parties to a joint venture decide that
it’s not profitable and write a termination agreement. Problems?
Alaska Packers
51
No modification clauses The parties to a joint venture decide that
it’s not profitable and write a termination agreement. Problems? El Paso Natural Gas p. 383
Alaska Packers
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No modification clauses The parties to a joint venture decide that
it’s not profitable and write a termination agreement. Problems? El Paso Natural Gas p. 383 Alexi Yashin p. 382
Alaska Packers
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No modification clauses The parties to a joint venture decide that
it’s not profitable and write a termination agreement. Problems? Is there a possibility of strategic behavior
here?
Alaska Packers
54
No modification clauses The parties to a joint venture discover
that one party’s duties are much more onerous than was contemplated and write an amending agreement. Problems?
Was this Austin v. Loral?
5555
Underinvestment if no-modification clauses are banned?
56
Unless one trusts the courts to get it right
57
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