George Mason School of Law
Contracts II
Relational Contracts IV
F.H. Buckley
[email protected]
1
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.
4
Passed-up opportunities
(underinvestment)
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
7
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 atwill standard
 The employee can resign any time
11
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
17
Non-competes: Gagliardi
18
Non-competes: Gagliardi
 The trade secrets?
19
Non-competes: Gagliardi
 The trade secrets




20
Beef formula
Slicing machine
Packaging
Marketing research
Non-competes: Gagliardi
 Scope of the non-compete: a oneyear ban:
 Controlled meat business
 Employment within 100 miles of West
Chester with similar business
21
Non-competes: Gagliardi
 Legal restrictions on non-competes
 Must be ancillary to an employment
contract
 made at hiring or on a change of status
22
Non-competes: Gagliardi
 Legal restrictions on non-competes?
23
Non-competes: Gagliardi
 Legal restrictions on non-competes
 Must be ancillary to an employment
contract
 How would you justify this restriction?
24
Non-competes: Gagliardi
 Was there a change in status here?
 Cf. Marine Contractors at 373
25
Non-competes: Gagliardi
 Was there a change in status here?
 Cf. Marine Contractors at 373
 Cf. Leatherman at 373
26
Non-competes: Gagliardi
 Legal restrictions on non-competes
 Reasonably limited in time and
geographic scope
 Not excessive for the protection of the
employer
27
Non-competes: Gagliardi
 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?
28
Non-competes: Gagliardi
 Can you explain why employers have
a free hand in termination decisions
but not with non-competes?
29
Non-competes: Gagliardi
 Were the restrictions excessive here?
30
Non-competes: Gagliardi
 Were the restrictions excessive here?
 Caputo was the controller
 What about reverse engineering?
31
Non-competes: Gagliardi
 Relevance of the occupation
 Garage mechanic?
32
Non-competes: Gagliardi
 Relevance of the occupation
 Garage mechanic?
 Doctor?
33
Non-competes: Gagliardi
 Relevance of the occupation
 Garage mechanic?
 Doctor
 Lawyer
34
Non-competes: Gagliardi
 Relevance of the occupation
 Garage mechanic?
 Doctor
 Lawyer
 Maltby at 374
35
Contract Modification
 As relational contracts are long term,
conditions may change and prompt a
modification of the agreement
 Should there be any restrictions on this?
36
Contract Modification
Austin v. Loral p. 397
 Why did Loral agree to the contract
modification?
37
Alaska Packers
Pyramid Harbor AK
38
Alaska Packers
 Will a promise to perform that which
the promisor was already bound to do
under a prior contract satisfy the
consideration requirement?
39
Alaska Packers
 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
40
Alaska Packers
 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
41
Alaska Packers
 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.
42
Alaska Packers
 How would you decide Alaska Packers
under these standards?
43
Alaska Packers
 How would you decide Alaska Packers
under these standards?
 The finding of fact at p. 377
44
Alaska Packers
 Qu. the changed circumstances under
Angel v. Murray p. 380
45
Alaska Packers
 Qu. the changed circumstances under
Angel v. Murray p. 380
 Brian v. Brighenti p. 381
46
Alaska Packers
 How might a party protect himself
against an extortionate modification?
47
Alaska Packers
 How might a party protect himself
against an extortionate modification?
 No modification clauses?
 Is UCC § 2-209(2) a safe harbor?
48
Alaska Packers
 How might a party protect himself
against an extortionate modification?
 No modification clauses?
 Restatement § 311, Comment a
 Can you offer a justification for this?
49
Alaska Packers
 No modification clauses
 The parties to a joint venture decide that
it’s not profitable and write a termination
agreement. Problems?
50
Alaska Packers
 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
51
Alaska Packers
 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
52
Alaska Packers
 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?
53
Alaska Packers
 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?
54
Was this Austin v. Loral?
55
Underinvestment if no-modification
clauses are banned?
56
Unless one trusts
the courts to get it right
57
George Mason School of Law
Contracts II
Terms
F.H. Buckley
[email protected]
58