Transcript Basic Business Law (BPP432/80) 2006 Fall Quarter

Basic Business Law (BPP432/80)
2006 Fall Quarter
Instructor: David Oliveiri
Week 4: Facilitating Exchange: Creating
Enforceable Rights – The Bargaining
Requirement; Interpreting Deal Terms;
Third-Party Issues
Agenda
Consideration
Statute of Frauds
Parol Evidence Rule
Third Parties to Contracts
Learnings
Understand Why Enforceable Deals Require
Bargained-For Exchange; What That Is
Understand How to Distinguish Illusory or
Insufficent Dealings
Understand Which Contracts Must Be Written;
When They Need Not Be Written
Understand When Discussions Leading To a
Deal Become Part of the Deal
Understand When Non-Parties to a Deal Have
Rights or Obligations
Consideration
Consideration = Bargained-For Exchange
BFE = f(Value, Swapping, Inducement)
All business deals are not protected by law! The
law is concerned only with deals (and promises)
that involve exchange, trading, or swapping of
one thing for another -- a “bargain.” It is the
bargaining aspect that requires mutual assent.
Dealings Are Complex; So, Many Default Rules
Explain These Concepts
Consideration Quiz: Value or No Value?
“$1.00 and other valuable consideration…”
Doing Something
Not Doing Something
Unilateral Contract: “I’ll pay you $10K when
you quit your bartending job and get an MBA.”
Bilateral Contract
“I might consider…”; “I wish…”; “I
desire…”; “Would you accept…if…”
The Professional Athlete Contract
Renegotiation
Consideration and Contract Types
Type of
Contract
Unilateral
Bilateral
Offer
Acceptance
Consideration
Promise by A
Performance of
requested act or
forbearance by B
→ Promise by A
← Performance of
requested act or
forbearance by B
Promise by A
Return promise by B
to perform
requested act or
forbearance
→ Promise by A
← Return promise
by B to perform
requested act or
forbearance
Legal Sufficiency of
Consideration in a Particular Deal
Either Benefit to Promisor or Detriment to
Promisee
Legal Benefit – Getting Something One
Was Not Otherwise Entitled To
Legal Detriment – Doing Something One
Was Not Obligated To Do; Not Doing
Something One Has The Right To Do
Adequacy – Not Scrutinized!!
Realities of Negotiations:
Illusory Promises
No Value
Watch The Words
But What About…
– Output and Requirements Contracts
– Exclusive Dealing Contracts
– Conditional Promises: “I promise to buy your
restaurant on 3rd Ave. provided the Knicks sign
Kobe Bryant to a long-term contract.”
[S&R 12 – Problems 5]
Pre-Existing Obligations,
Re-Visiting Deals
General Rule: Performance of Preexisting
Contractual Duty Not Consideration
Modification of a Pre-Existing Contract
Substituted Contracts: “Agree to cancel our
current deal and enter into a new one.”
Settlement of a Liquidated Debt: “Payment in
Full – Actual Credit Card Balance.”
Settlement of an Unliquidated Debt: “Payment
in Full – Contested Rent.”
[S&R 12 – Problems 7a, 7b]
Modification of a Preexisting Contract
UCC
Restatement
Common
Law
Original
Contract
+
Modifying
Contract
=
Modified
Contract
Consideration is
required
Consideration is
required
Replaces original
contract
Consideration is
required
Consideration is required
unless modification is
fair and equitable in light
of facts not anticipated
when contract was made
Replaces original
contract
Consideration is
required
No consideration is
required if modification is
made in good faith
Replaces original
contract
Bargained-For Exchange
Definition: A Mutually Agreed-Upon Swap
[S&R 12 – Problem 1]
Past Consideration?
[S&R 12 – Problem 7c]
Involvement of Third Parties? “Kodak pays
its supplier’s supplier to keep Kodak’s
supplier afloat.” Effect Upon Contract
Between Supplier and Supplier’s Supplier?
Contracts Without Consideration –
But Still Enforced
Promises to Perform Prior Unenforceable Obligations
[Examples: Promise to Pay Debt Barred by Statute
of Limitations, Promise to Pay Debt Discharged
in Bankruptcy, Voidable Promises, Moral
Obligations]
Promissory Estoppel
[Circumstance: Interactive dealings lying between
conventional “swap” transactions and
nonreciprocal gifts. Reliance-based enforcement]
[S&R 12 – Problem 16]
Promises Made Enforceable by Statute
[UCC Examples: Contract Modifications,
Renunciation, Irrevocable Offers]
Some Bottom Lines on Consideration
What Are Parties Saying They Will Do Or
Not Do?
What Words Are Used?
What Changes Hands?
If A Doubt, Transfer Something!!
Consideration
A promises B
In exchange for A’s promise B
incurs a legally sufficient
consideration by
Yes
--doing an act
--forbearing from acting
--promising to do an act
--promising to forebear
A’s promise is binding:
it is supported by
consideration
No
A’s promise is to pay obligation
--barred by the statue of limitations
--discharged in bankruptcy
--that is voidable
Yes
A’s promise is binding
without consideration
No
Continued on the next slide...
Consideration (cont.)
No
B detrimentally and justifiably relies
on A’s promise, and A should
reasonably have expected reliance
Yes
No
A’s promise is made under seal
and delivered to B
A’s promise is binding to the
extent necessary to avoid injustice
under the doctrine of promissory
estoppel
Yes
A’s promise is binding in those
states that recognize the seal as a
substitute for consideration
Yes
A’s promise is binding under
the UCC
No
A’s promise is subject to the UCC
and is a
--modification of a sales contract
--renunciation of a claim
--firm offer by a merchant
No
A’s promise is not binding
Deal Mechanics
Suppose: Complex Commercial Deal Meeting
Contract Requirements. Will we still get what
we expect? As we intended? Can we “book”
the deal? MAYBE NOT.
Some Mechanical Issues
Statute of Frauds
Parol Evidence Rule
Contract Interpretation Rules
The Statute of Frauds
“Most commercial transactions will be
reduced to writing and signed by the
parties or their agents. This aids
verifiability, and may even minimize the
impact of default rules.”
All Contracts Need Not Be
Written!!
Some Contracts Must Be Written!!
Contracts Subject To Statute of Frauds
Guarantor
Guarantees
D
C
Exceptions: Original Promise, Main Purpose
Doctrine, Promise Made to Debtor
[S&R 15 – Problem 1]
Executor-Administrator Provision
Marriage Provision
Land Contract Provision
Contracts Subject To Statute of Frauds
One-Year Provision
– Possibility Test – Probability Irrelevant Unless 1.0
– Computation of Time – When Agreement Made
– Full Performance by One Party
[S&R 15 – Problems 2,7]
Sales of Goods Under UCC (>$5,000)
Exceptions: Admissions, Specifically
Manufactured Goods, Delivery or Payment and
Acceptance
How To Comply With
Statute of Frauds – Writing,
Generally, and No Specific Form
Writing Under Common Law Must:
– Specify Parties to Contract
– Signed by Party to be Charged (or Agent)
– Specify Subject and Essential Terms (E.G. Price,
Quantity)
Writing Under UCC Must:
– Indicate Contract Made Between Parties
– Signed by Party to be Charged (or Agent)
– Specify Quantity
– And -- Between Merchants, Written Confirmation
Sufficient Unless Recipient Objects Within 10
Days
Effect of Failure to Comply
With Statute of Frauds
Oral Contract Within Statute of Frauds –
Unenforceable
Fully Performed Oral Contract Within Statute
of Frauds – Statute Does Not Apply to
Executed Contracts.
Restitution of Benefits Conferred in Reliance
on Oral Contract – May Be Available (Quasi
Contract)
Promissory Estoppel – May Be Available If …
Reasonable Reliance on Oral Promise, Avoid
Injustice
Parol Evidence Rule ― How Much
Discussion Leading To Written Deal Are
Actually Part Of The Deal?
Circumstances: Alternate Views, Haggling, Extensive
Negotiation, Give/Take, Time Elapses, Things
Change, Agreement on Core Terms, Leaving Details
to Good Faith
Statement of Rule – “When parties express a contract
in a writing that they intend to be the complete and
final expression of their rights and duties, evidence of
their prior oral or written negotiations or agreements
of their contemporaneous oral agreements that vary or
change the written contract are not admissible.”
[S&R 15 – Problem 8]
Parol Evidence Rule ― How Much
Discussion Leading To Written Deal Are
Actually Part Of The Deal?
Rule Does Not Apply To – Typos, Evidence
of Intent to Integrate Agreement or Not
Managerial Decision-Making
Degree
Of
Integration
Ambiguity
Transaction Cost
Parol Evidence Rule
Written contract?
Yes
Integrated contract?
No
No
Yes
Evidence prior or contemporaneous?
Yes
Evidence varies contract?
No
No
Yes
Evidence provides fraud, misrepresentation,
undue influence, mistake, duress, incapacity,
illegality, or unconscionability?
Yes
No
Continues on next slide...
Parol
Evidence
Rule Does
Not Apply:
Evidence Is
Admissible
Parol Evidence Rule (cont.)
No
Evidence of a condition precedent?
No
Evidence explains an ambiguity?
No
Evidence of a clerical error?
No
Parol Evidence Rule Applies:
Evidence Is Not Admissible
Yes
Yes
Yes
Parol
Evidence
Rule Does
Not Apply:
Evidence Is
Admissible
Rules of Interpretation of Contracts
S&R p. 261
“A writing is interpreted as a whole.”
“Commonly accepted meanings are used unless the
parties manifest a different intention.”
Biggest Rule – “Where ambiguous, a contract is
interpreted against the party that drafted it.”
Third Parties to Contracts
Why:
Time Elapses
Things Change
Procedural Economy/Lower Transactions Costs
How:
Assign Rights
Delegate Duties
Third-Party Beneficiaries
What
Third-Party
Tenant
Landlord
Assignment of Rights
Economical, Preferred
Less Formality, Generally – Consideration
Not Necessary (E.G. Gift); No Writing
(Unless S of F)
Revocable, Generally – Giftlike, Unless
Consideration From Assignee
Partial Assignment OK, Generally
Successive Assignments OK, Generally
What Rights Can Be Assigned
Most Contract Rights, Except
Assignments That Materially Increase Risks
Or Burden (M&A Issue: Supplier of A Kodak
Subsidiary)
Assignments of Personal Rights (E.G.
Employment Contract)
Assignments Forbidden by Contract
Assignments Prohibited by Law
[S&R 16 – Problems 1, 11]
Third-Party Beneficiaries
How – One Party Promises to Render Performance to a
Third Person (Beneficiary)
A
B
Beneficiary
Intended Beneficiaries
Donee Beneficiary – Third Party Receives
Benefit As Gift
Creditor Beneficiary – Third Party Receives
Benefit To Satisfy Duty Owed To Third Party
Incidental Beneficiaries
Rights of Beneficiaries
Rights of Intended Beneficiaries
Donee May Enforce Against Donor, But Not
Party Performing
Creditor May Enforce Against Both Promisor
and Promisee.
No Rights for Incidental Beneficiaries
Hypothetical: A contracts with C to build a
beautiful, decorative fence on A’s lot line with B.
The custom is to face the finished portion of the
fence toward B’s property. Can B sue C if C fails
to perform adequately?
Summary; Q&A
Enforceable Deals Require Bargained-For Exchange
(BFE), Or Consideration
BFE Requires Some (Not Equal) Value, Agreed Swap
Illusory Promises, Past Agreements, and Other
Insufficent Dealing Should Not Be Mistaken For
Consideration
Deal Mechanics (Decisions Re: Writing, Who Drafts,
How) May Affect Predictability And Value
Discussions Leading To a Deal May Or May Not
Become Part of the Deal; Issue Turns On
“Integration”
Anticipated (Or Unanticipated) Non-Parties May
Obtain Significant Rights Under Your Deals
Q&A