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

2. Next days assignment Up to Scott 541-56 2

3. Relational Contracts Relational contracts as different in kind from one-shot transactions 3

4. 1.Relations are seen as semi-permanent 4

5. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent They promote norms of solidarity more than of autonomy??? Macneil, The New Social Contract (1980) 5

6. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent 2.A lengthier process of negotiation where it may be difficult to identity the moment at which contractual duties arise Hoffman: promissory estoppel 6

7. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent 2.A lengthier process of negotiation where it may be difficult to identity the moment at which contractual duties arise 3.The object of exchange is not easily quantified Varney: a fair share of the profits 7

8. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent 2.A lengthier process of negotiation where it may be difficult to identity the moment at which contractual duties arise 3.The object of exchange is not easily quantified 4.Future cooperation is anticipated 8

9. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent 2.A lengthier process of negotiation where it may be difficult to identity the moment at which contractual duties arise 3.The object of exchange is not easily quantified 4.Future cooperation is anticipated 5.Trust becomes more important 9

10. Relational contracts as different in kind from one-shot transactions 1.Relations are seen as semi-permanent 2.A lengthier process of negotiation where it may be difficult to identity the moment at which contractual duties arise 3.Future cooperation is anticipated 4.The object of exchange is not easily quantified 5.Trust becomes more important A special concern for strategic behavior 10

11. Forms of Strategic Behavior Post-contractual opportunism 11 Armen Alchian et al. 21 J.L.E. 297(1978)

12. Relational Contracts and Strategic Behavior Post-contractual opportunism 12 Armen Alchian et al. 21 J.L.E. 297(1978)

13. Relational Contracts and Strategic Behavior Post-contractual opportunism Bilateral Monopolies and relation-specific assets 13 Oliver Williamson (Nobel 2009) Markets and Hierarchies (1975)

14. No opportunism where no relation-specific assets In some relationships, no one invests anything 14 Jean-Paul Belmondo, Jean Seberg, Breathless (1960) Jean-Luc Godard

15. But where asymmetric investments are made, opportunism is possible In others, one person only invests 15 Ford Maddox Brown, Stages of Cruelty

16. But where asymmetric investments are made, opportunism is possible Giving the other person a threat advantage 16

17. Which results in the underinvestment problem 17

18. Curing Underinvestment Ex ante, planners should seek to reinforce long-term stability Minimize the possibility of post-contractual opportunism Cure the underinvestment problem 18

19. What if both parties invest equally? 19 Brangelina

20. What if both parties invest equally? 20 Hamburger U. as a risk-sharing strategy

21. What if both parties invest equally? Mutually Assured Destruction 21 Dr Strangelove

22. The Schwartz-Scott Proposal Can you think of other applications? 22

23. The Schwartz-Scott Proposal Security deposits 23

24. The Schwartz-Scott Proposal Joint investments 24

25. Relational Contracts Should they be treated differently than one-shot transactions? 25

26. Relational Contracts Should they be treated differently than one-shot transactions? They may be relational, but the relation is invariably over when they sue each other 26

27. Relational Contracts Should they be treated differently than one-shot transactions? Should courts worry less about certainty of terms, if the parties seem to want a binding agreement? 27

28. Indefinite Agreements When should a court gap-fill and when not? 28

29. Indefinite Agreements When should a court gap-fill and when not? The courts informational problem 29

30. Indefinite Agreements When should a court gap-fill and when not? The courts informational problem The parties transaction cost problem 30

31. Indefinite Agreements If a court gap-fills, can you suggest the criterion it should apply? 31

32. Indefinite Agreements If a court gap-fills, can you suggest the criterion it should apply? Mimicking the intention of the parties? 32

33. Indefinite Agreements If a court gap-fills, can you suggest the criterion it should apply? Ex ante and ex post 33

34. Indefinite Agreements If a court gap-fills, can you suggest the criterion it should apply? Tailored and untailored 34

35. 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 35

36. 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 36

37. Open Price Terms Joseph Martin p. 38 Renew at annual rentals to be agreed on 37

38. Open Price Terms Joseph Martin p. 38 Renew at annual rentals to be agreed on Held: an agreement to agree 38

39. Open Price Terms United Press case at p. 301 Weekly payments not to exceed $300 for news service 39

40. Open Price Terms United Press case at p. 301 Weekly payments not to exceed $300 for news service Price an essential element 40

41. Open Price Terms Lee v. Seagram p. 40 What was left out? 41

42. 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 42

43. Open Price Terms Lee v. Seagram p. 40 What was left out? Court thought acceptable a price at book + 3 times net profits 43

44. Open Price Terms and Sales of Goods D.R. Curtis p. 36 44

45. Indefinite Agreements Is a forward grain contract a sale of goods? 45

46. Indefinite Agreements Is a forward grain contract a sale of goods? UCC 2-105(1) 46

47. Indefinite Agreements What was left out of the contract? 47

48. Indefinite Agreements What was left out of the contract? 1.The actual protein content of the grain (which wont be known until the grain is harvested) 48

49. Indefinite Agreements 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) 49

50. Indefinite Agreements 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 50

51. Indefinite Agreements What was left out of the contract? Does the omission to specify the basis render the contract void for uncertainty? 51

52. Indefinite Agreements Can you think of any evidence that you want to have introduced as the Mathews lawyer? 52

53. Indefinite Agreements Suppose I told you that the average % of protein in hard red spring is 12.6%? 53

54. The UCC Cf Kleinschmidt on p. 301 What is the intent of the parties UCC 2-204(3) 54

55. The UCC What is the intent of the parties UCC 2-204(3) 55

56. The UCC and Open Price Terms Gap-filling price: UCC 2-305 56

57. The UCC Why should there be a different standard in sales law? 57

58. The UCC Why should there be a different standard in sales law? More standardized? 58

59. The UCC Why should there be a different standard in sales law? More standardized? Market prices? 59

60. The UCC Why should there be a different standard in sales law? More standardized? Market prices? Historical accident? 60 Karl Llewellyn

61. The UCC Alter p. 302 Anything unusual about this case? 61

62. The UCC Alter p. 302: a rush order for pumps 62 Three Mile Island 1979

63. The UCC Alter p. 302: a rush order for pumps Ex ante, would the purchaser have wanted a binding contract? 63

64. The UCC Alter p. 302: a rush order for pumps Ex ante, would the purchaser have wanted a binding contract? Sellers belated concern with the lack of agreement as to sale price… 64

65. 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. 65

66. Preliminary Agreements You have the business contracts and network to provide users 66

67. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? 67

68. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Transaction costs 68

69. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Transaction costs Informational uncertanties Will the product find a market? How do we divide up the equity? Do we have enough players in our venture? 69

70. Risk and Uncertainty Frank Knight, Risk, Uncertainty and Profit

71. Risk and 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.

72. Risk and Uncertainty [ Unfortunately, there are also unknown knowns – the ones we don't know but think we know

73. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? 73

74. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Transaction costs 74

75. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Transaction costs Informational uncertanties 75

76. Preliminary Agreements Would you want to memorialize your understandings with an agreement at this point? Why might you not want to do so? Transaction costs Informational uncertanties Might the negotiations get in the way of progress on the venture? 76

77. Brown v. Cara 304 Was the MOU a binding agreement? What was missing? 77

78. 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 78

79. 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 79

80. 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? 80

81. Brown v. Cara What is the difference between Levals Type I and II agreements? 81

82. Brown v. Cara Badges of Type I agreements? 82

83. Brown v. Cara Badges of Type I agreements? Express denial of an agreement means no agreement 83

84. Brown v. Cara Badges of Type I agreements? Express denial of an agreement means no agreement Partial performance evidence of agreement 84

85. Brown v. Cara Badges of Type I agreements? Express denial of an agreement Partial performance All material terms agreed to evidences an agreement 85

86. Brown v. Cara Badges of Type I agreements? Express denial of an agreement Partial performance All material terms agreed to Agreement of a kind usually committed to writing: otherwise an agreement 86

87. Brown v. Cara Badges of a Type II agreement? 87

88. Brown v. Cara Badges of a Type II agreement? An intention to be bound Too uncertain for a Type I agreement Partial performance 88

89. Brown v. Cara What duties arise under a Type II agreement? 89

90. Brown v. Cara What duties arise under a Type II agreement? What does a good faith negotiation mean? 90

91. 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? 91

92. 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. 92

93. Brown v. Cara: What happened to 100 Jay? Does this suggest why the deal didnt happen? 93 Does this look like Light Bridges at J Street?

94. If its not a Type I agreement, is it necessarily a Type II agreement? Arcadian Phosphate at 309 94

95. 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. 95

96. 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. 96

97. Arcadian Phosphate [a] binding sales agreement will be completed by December 31, 1986. 97

98. 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. 98

99. Arcadian Phosphate Why did the defendant back out? 99

100. Arcadian Phosphate 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. 100

101. 101 George Mason School of Law Contracts II Relational Contracts III F.H. Buckley fbuckley@gmu.edu