George Mason School of Law

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

2. Next day’s assignment • Up to Scott 541-56

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

4. Relational contracts as different in kind from one-shot transactions • Relations are seen as semi-permanent

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

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

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

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

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

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

14. No opportunism where no relation-specific assets • In some relationships, no one invests anything 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 Ford Maddox Brown, Stages of Cruelty

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

17. Which results in the underinvestment problem

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

19. What if both parties invest equally? Brangelina

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

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

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

23. The Schwartz-Scott Proposal • Security deposits

24. The Schwartz-Scott Proposal • Joint investments

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

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

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?

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

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

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

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

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

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

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

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?

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”

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

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

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

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

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

48. Indefinite Agreements • What was left out of the contract? • The actual protein content of the grain (which won’t be known until the grain is harvested)

49. Indefinite Agreements • What was left out of the contract? • The actual protein content of the grain • Protein basis figure (standard protein content: which is what the case is about)

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