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 by them F.H. Buckley

Next day Scott

Indefinite Agreements Why leave a term open? 3

Indefinite Agreements Why leave a term open Didnt occur to one 4

Indefinite Agreements Why leave a term open Didnt occur to one The informational problem and the impossibility of a Complete Contingent Contract 5

Risk and Uncertainty Frank Knight, Risk, Uncertainty and Profit

Risk as probabilistic 7

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

Indefinite Agreements Why leave a term open The informational problem and the impossibility of a Complete Contingent Contract Didnt occur to one Dont want to block progress on negotiations 10

Preliminary Agreements You are contemplating a joint venture with a social acquaintance, Mr. Gold. Hes 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. 11

Preliminary Agreements You have the business contracts and network to provide users, he has the technical expertise 12

Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? 13

Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Informational uncertainties Will the product find a market? How do we divide up the equity? Do we have enough players in our venture? 14

Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Informational uncertainties Chilling the deal 15

Indefinite Agreements So terms may be left blank Should a court then refuse to enforce an agreement because of indefiniteness? 16

Indefinite Agreements Why refuse to enforce an agreement because of indefiniteness? The courts 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. 17

The difference in perspectives 18 The parties look forward, the courts look back

Indefinite Agreements 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. 19

Indefinite Agreements 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? 20

Indefinite Agreements What would you expect a judge to say? 21 Gimme a break!

Indefinite Agreements Open Price Terms in United Press at p. 301 Weekly payments not to exceed $300 for news service Price an essential element 22

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 23

Open Price Terms Lee v. Seagram p. 40 What was left out? Court thought acceptable a price at book + 3 times net profits 24

Open Price Terms Lee v. Seagram p. 40 Who was in the best position to cure the informational problem? 25

Indefinite Agreements and Article 2 What about D.R. Curtis (p. 36) 26

Indefinite Agreements and Article 2 Is a forward grain contract a sale of goods? 27

Indefinite Agreements and Article 2 Is a forward grain contract a sale of goods? UCC 2-105(1) 28

Indefinite Agreements and Article 2 What was left out of the contract? 29

Indefinite Agreements and Article 2 What was left out of the contract? 1.The actual protein content of the grain (which wont be known until the grain is harvested) 30

Indefinite Agreements and Article 2 What was left out of the contract? 1.The actual protein content of the grain 2.Protein basis figure (standard protein content: which is what the case is about) (typically provided at the time of contracting) 31

Indefinite Agreements and Article 2 What was left out of the contract? 1.The actual protein content of the grain 2.Protein basis figure 3.Scale: $ times divergence of (1) from (2) and is usually fixed on delivery by the export company 32

Indefinite Agreements and Article 2 What was left out of the contract? Does the omission to specify the basis render the contract void for uncertainty? UCC §

Indefinite Agreements and Article 2 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? 34

Indefinite Agreements and Article 2 Can you think of any evidence that you want to have introduced as the Mathews lawyer? 35

Indefinite Agreements and Article 2 Suppose I told you that the average % of protein in hard red spring is 12.6%? 36

Indefinite Agreements and the UCC Why should there be a different standard in sales law? 37

Indefinite Agreements and the UCC Why should there be a different standard in sales law? More standardized? Market prices? Historical accident? 38 Karl Llewellyn

Indefinite Agreements and the UCC Cf Kleinschmidt on p. 301 What is the intent of the parties UCC 2-204(3) 39

Indefinite Agreements and the UCC Alter p. 302 Anything unusual about this case? 40

Indefinite Agreements and the UCC Alter p. 302: a rush order for pumps 41 I mean, what could go wrong?

Indefinite Agreements and the UCC Ex ante, would the purchaser have wanted a binding contract? Sellers belated concern with the lack of agreement as to sale price… 42

Indefinite Agreements Why refuse to enforce an agreement because of indefiniteness? The parties could more easily have cured the informational problem 43

Indefinite Agreements Why refuse to enforce an agreement because of indefiniteness? The expression of an intent by the parties that the agreement is not enforceable 44

Indefinite Agreements Why refuse to enforce an agreement because of indefiniteness? The expression of an intent by the parties that the agreement is not enforceable This might be inferred from uncertainty 45

Indefinite Agreements Why refuse to enforce an agreement because of indefiniteness? The expression of an intent by the parties that the agreement is not enforceable Agreements to agree 46

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 47

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 48

Agreements to Agree Joseph Martin p. 38 Renew at annual rentals to be agreed on 49

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? 50

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? 51

Brown v. Cara 304 Was the MOU a binding agreement? The Memorandum of Understanding Cara Brown 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 53

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 54

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 didnt they negotiate all terms then and there? 55

Brown v. Cara Why did Cara back off the deal? 56

Brown v. Cara: What happened to the area? 57

Brown v. Cara: What happened to the area? 58 Dumbo in the 1980s

Brown v. Cara: What happened to the area? 59 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 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)St. Ann's WarehouseA.I.R. Gallery Jacques Torres chocolateGrimaldi's Brooklyn Ice Cream Factory Dumbo today

Brown v. Cara: What happened to 100 Jay? Rising 33 stories alongside the Manhattan Bridge, J Condo is Brooklyns 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 buildings abundant natural light and offers magnificent panoramic views of Manhattan, Brooklyn, the East River, and New York Harbor. 60

Brown v. Cara: What happened to 100 Jay? Does this suggest why the deal didnt happen? 61

Brown v. Cara What is the difference between Levals Type I and II agreements in Tribune? 62

Brown v. Cara Badges of Type I agreements? 63

Brown v. Cara Badges of Type I agreements? No express denial of an agreement 64

Brown v. Cara Badges of Type I agreements? No express denial of an agreement Partial performance evidence of agreement 65

Brown v. Cara Badges of Type I agreements? No express denial of an agreement Partial performance All material terms agreed to evidences an agreement 66

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 67

Brown v. Cara Badges of a Type II agreement? 68

Brown v. Cara Badges of a Type II agreement? An intention to be bound Too uncertain for a Type I agreement Some partial performance 69

Brown v. Cara What duties arise under a Type II agreement? 70

Brown v. Cara What duties arise under a Type II agreement? What does a good faith negotiation mean? 71

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? 72

If its not a Type I agreement, is it necessarily a Type II agreement? Arcadian Phosphate at

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,

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. 75

Arcadian Phosphate [a] binding sales agreement will be completed by December 31,

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. 77

Arcadian Phosphate Why did the defendant seller back out? 78

Arcadian Phosphate Why did the defendant seller back out? The price had risen And thats not bad faith? 79

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. 80

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 81

Curing the underinvestment problem Schwartz-Scott on presumptive reliance damages 82

Curing the underinvestment problem Security deposits 83

Curing the underinvestment problem 84 Hamburger U. as a risk-sharing strategy

Curing the underinvestment problem Repeated dealings 85

86 George Mason School of Law Contracts II Relational Contracts III F.H. Buckley