Basic Business Law (BPP432/80) Basic Business Law (BPP432/80) 2006 Fall Quarter2006 Fall Quarter

Instructor: David OliveiriInstructor: David Oliveiri

Week 2: Week 2: Facilitating Facilitating ExchangeExchange;; Value of Value of Contracts; Creating Contracts; Creating Enforceable Rights – Enforceable Rights –

Mutual Assent Mutual Assent RequirementRequirement

Agenda:Agenda:

LearningsLearnings

Economic Rationale for ContractsEconomic Rationale for Contracts

The “Laws” of ContractsThe “Laws” of Contracts

Some DefinitionsSome Definitions

Legal Contract Requirements, Legal Contract Requirements, GenerallyGenerally

Mutual Assent Requirements = Mutual Assent Requirements = O+AO+A

Summary; Q&ASummary; Q&A

Learnings:Learnings:Understand Why We Have Contracts Understand Why We Have Contracts and Contract Rulesand Contract Rules

Understand Where to Find Applicable Understand Where to Find Applicable Contract Law (Rules)Contract Law (Rules)

Understand What a Contract is and Understand What a Contract is and Why it Matters to Satisfy Legal Why it Matters to Satisfy Legal Contract RequirementsContract Requirements

Understand the Requirements for Understand the Requirements for Mutual Assent, and ExceptionsMutual Assent, and Exceptions

Understand Practical Details of Offers Understand Practical Details of Offers and Acceptances and Impacts on and Acceptances and Impacts on Effective Deal-Making, Business ValueEffective Deal-Making, Business Value

Economic Context for Economic Context for ContractsContracts

Prevalence of Exchange RelationshipsPrevalence of Exchange Relationships

Simple Economic Exchange Model: 2 Simple Economic Exchange Model: 2 Commodities (X+Y), 2 Consumers (A+B)Commodities (X+Y), 2 Consumers (A+B)

A

.0

.S

B

.S

.0

Y Y

X X

Trade If?Trade Until?

Economic Context of ContractsEconomic Context of Contracts

Complexity of Satisfying Mutual Complexity of Satisfying Mutual BenefitBenefit

• Sheer Volume: Billions of Commodities, Sheer Volume: Billions of Commodities, Billions of ConsumersBillions of Consumers

• OpportunismOpportunism• Multi-Party IssuesMulti-Party Issues

Why Rules/Legal Process?Why Rules/Legal Process?• Lower Information CostsLower Information Costs• Lower Transactions CostsLower Transactions Costs• ““Monetize” RightsMonetize” Rights

Sources of Contract “Law” and Sources of Contract “Law” and RulesRules

Common LawCommon Law• Judge- Made DecisionsJudge- Made Decisions• Primarily, State-Law Primarily, State-Law

Statutes -- The Uniform Commercial Statutes -- The Uniform Commercial Code – Sales of “Goods” – All 50 StatesCode – Sales of “Goods” – All 50 States

Business Significance: Set of Default Business Significance: Set of Default RulesRules

StateLaw

FederalLaw

Law Governing Contracts: Law Governing Contracts: How This WorksHow This Works

Sale of goods?

General contract law governs

No

Specific provision of UCC

applicable?

Yes

UCC governs

Yes

No

What is a Contract?What is a Contract?

What is a Contract?What is a Contract?

Contract = Promise or set of promises of Contract = Promise or set of promises of which the law gives a remedy or the which the law gives a remedy or the performance of which the law in some way performance of which the law in some way recognizes as a duty.”recognizes as a duty.”

Are all promises contracts?Are all promises contracts?

Do all contracts require a promise?Do all contracts require a promise?

Are the following contracts?Are the following contracts?

• ““I’ll pay you $10,000 if you quit your I’ll pay you $10,000 if you quit your bartender job and get an MBA.”bartender job and get an MBA.”

• Ordering and eating a meal in a restaurant?Ordering and eating a meal in a restaurant?

Standard Requirements Standard Requirements of Contract Formationof Contract Formation

Mutual Assent - “Meeting of the Mutual Assent - “Meeting of the Minds”Minds”

ConsiderationConsideration

Legality of ObjectLegality of Object

Capacity of PartiesCapacity of Parties

Some More Definitions and Some More Definitions and DistinctionsDistinctions

““Express Contract” vs. “Implied Contract” Express Contract” vs. “Implied Contract” [“Lease” vs. “Pumping Gas”][“Lease” vs. “Pumping Gas”]

““Unilateral Contract” vs. “Bilateral Unilateral Contract” vs. “Bilateral Contract” [“When You Get Your MBA” vs. Contract” [“When You Get Your MBA” vs. “I Promise to Get My MBA”]“I Promise to Get My MBA”]

““Executed Contract” vs. “Executory Executed Contract” vs. “Executory Contract” [“Completed” vs. “In Process”]Contract” [“Completed” vs. “In Process”]

““Formal Contract” vs. “Informal Contract” Formal Contract” vs. “Informal Contract” [“Deed” or “Draft” vs. …][“Deed” or “Draft” vs. …]

““Valid,” “Void,” “Voidable,” and Valid,” “Void,” “Voidable,” and “Unenforceable” Contracts“Unenforceable” Contracts

Validity of AgreementsValidity of Agreements

Mutual Assent?

Consideration?

Yes

Capacity?

Yes

Free from Invalidating Conduct?

Yes

VoidNo

No

Void or VoidableNo

No

YesSubject Matter Legal?

Statutes of Fraud Satisfied?

Yes Unenforceable

No

No

When Contract Requirements When Contract Requirements Not MetNot Met

Not ContractsNot Contracts, But Still , But Still MayMay Be Be Enforceable – “At Equity!”Enforceable – “At Equity!”

Promissory EstoppelPromissory EstoppelLease in default. “Don’t worry. Lease in default. “Don’t worry. I’ll hold off.” Improvements. I’ll hold off.” Improvements.

QuasiQuasi ContractsContractsLease for Office. Cleaning Service Lease for Office. Cleaning Service Contract Expires, But…Contract Expires, But…

Mutual Assent Mutual Assent (“Meeting of the Minds”)(“Meeting of the Minds”)

Mutual Assent = Offer + AcceptanceMutual Assent = Offer + AcceptanceBusiness Dealings are Complex: Content and Business Dealings are Complex: Content and Time DimensionsTime Dimensions

Also, Impacts of Technology- Internet Commerce, Also, Impacts of Technology- Internet Commerce, E-mails, Faxes, Electronic Signatures, BotsE-mails, Faxes, Electronic Signatures, Bots

BA

Talk Talk Negotiation(Idle) (Focused)

Time

No Contract Contract

Napster Terms of Use Napster Terms of Use (4/25/06)(4/25/06)

““To view all of our Website Terms, please click To view all of our Website Terms, please click HERE.”HERE.”Napster Website Services Terms of Use Napster Website Services Terms of Use Agreement- 6 Page PrintoutAgreement- 6 Page PrintoutSelected TermsSelected Terms

• ““By using any Web Services you agree to be bound By using any Web Services you agree to be bound by these Terms of Use, whether or not you register by these Terms of Use, whether or not you register as a member.”as a member.”

• Any modification of Terms “shall be effective upon Any modification of Terms “shall be effective upon posting by Napster.”posting by Napster.”

• ““Your use of Streams is subject to all of the Your use of Streams is subject to all of the limitations described below…you may not download limitations described below…you may not download Streams or attempt to ‘catch’ or copy Streams in Streams or attempt to ‘catch’ or copy Streams in any way.”any way.”

• In the event of a dispute, “you agree to personal In the event of a dispute, “you agree to personal jurisdiction…in the state and federal courts, State jurisdiction…in the state and federal courts, State of California, City of Los Angeles.”of California, City of Los Angeles.”

• ““You agree to indemnify…Napster…from any loss You agree to indemnify…Napster…from any loss including reasonable attorneys’ fees…”including reasonable attorneys’ fees…”

Objectives of Napster? Your Reactions as Users?Objectives of Napster? Your Reactions as Users?Mission Accomplished?Mission Accomplished?

OffersOffers

Offeror is “Master of the Offer.”Offeror is “Master of the Offer.”

Basic requirementsBasic requirements• Communication = Send + ReceiveCommunication = Send + Receive

““I think I’m going to hire Sally!”I think I’m going to hire Sally!”

• IntentIntentStory of Doug, Dave, and Bubble PuppyStory of Doug, Dave, and Bubble Puppy

1.1. Preliminary Negotiations and Letter of Preliminary Negotiations and Letter of IntentIntent

2.2. Advertisements [S&R 10—Lefkowitz Case Advertisements [S&R 10—Lefkowitz Case (p.183), Problem 17](p.183), Problem 17]

• DefinitenessDefiniteness

1.1. Open TermsOpen Terms

2.2. Output and Requirements ContractsOutput and Requirements Contracts

Duration of Revocable OffersDuration of Revocable Offers

Offer Effective

No OfferOFFER OPEN

Offer TerminatedLapse of time DeathRevocation IncompetencyRejection Destruction of subject matterCounteroffer Subsequent illegality

No Offer

Effects Upon Duration of Effects Upon Duration of OffersOffers

Offers Remain “Open” Till Accepted, OR…Offers Remain “Open” Till Accepted, OR…– RejectionRejection– Lapse of Time Lapse of Time

Possibilities:Possibilities: Time Not Stated in Offer; Date Certain; Time Not Stated in Offer; Date Certain; Time Period SpecifiedTime Period Specified

– Revocation Revocation Exceptions:Exceptions: Option Contracts [S&R 10-Problem 13]; Option Contracts [S&R 10-Problem 13]; Firm Offers under UCC [S&R 10-Problem 5]; Statutory Firm Offers under UCC [S&R 10-Problem 5]; Statutory Irrevocability; Irrevocable Offers of Unilateral Irrevocability; Irrevocable Offers of Unilateral Contracts; Promissory EstoppelContracts; Promissory Estoppel

– CounterofferCounterofferWhen offeree purports to accept an offer, but adds When offeree purports to accept an offer, but adds conditions and qualifications; such conditional conditions and qualifications; such conditional acceptance is not binding on the offeror. Acceptance acceptance is not binding on the offeror. Acceptance must be a “mirror image.” Is a counteroffer an end to must be a “mirror image.” Is a counteroffer an end to negotiation? Complicating factors are silence, study, negotiation? Complicating factors are silence, study, elapsed time. [S&R 10-Problem 3] elapsed time. [S&R 10-Problem 3]

– Death/IncompetencyDeath/Incompetency– Destruction of Subject MatterDestruction of Subject Matter– Subsequent IllegalitySubsequent Illegality

[S&R 10-Problem 2][S&R 10-Problem 2]

Acceptance of OffersAcceptance of OffersOnce accepted, a valid offer becomes a Once accepted, a valid offer becomes a contract, the defining moment of obligation for contract, the defining moment of obligation for both parties. Until then, …both parties. Until then, …– [Example: [Example: Fairmount GlassFairmount Glass Case – Give me “lowest price you Case – Give me “lowest price you

can make us for 10 carloads of Mason green jars, complete, can make us for 10 carloads of Mason green jars, complete, with caps, packed 1 dozen to a case.” Reply – “we quote you with caps, packed 1 dozen to a case.” Reply – “we quote you Mason fruit jars …pints $4.50, quarts $5…for immediate Mason fruit jars …pints $4.50, quarts $5…for immediate acceptance and shipment no later than 5/15.” Purchaser acceptance and shipment no later than 5/15.” Purchaser then ordered “10 carloads per quotation.” Seller’s then ordered “10 carloads per quotation.” Seller’s inventory depleted, “impossible to book order.” Valid offer inventory depleted, “impossible to book order.” Valid offer and acceptance?]and acceptance?]

Communication of AcceptanceCommunication of Acceptance– General Rule – Word or ConductGeneral Rule – Word or Conduct– Silence Not Acceptance!Silence Not Acceptance!– Effective Moment [S&R 10 – Problem 6] -- Stipulated Effective Moment [S&R 10 – Problem 6] -- Stipulated

Provisions in Offer, Authorized Means, Unauthorized Provisions in Offer, Authorized Means, Unauthorized MeansMeans

– Acceptance Following Prior RejectionAcceptance Following Prior Rejection

Variant Acceptances [S&R 10 – Problem 14] – Variant Acceptances [S&R 10 – Problem 14] – Common Law vs. UCC TreatmentCommon Law vs. UCC Treatment

How All This WorksHow All This Works

Offerees Offeror Offer?

Acceptance?

Rejection?

Revocation?

Counter Offer?

Offer and Acceptance -- Offer and Acceptance -- SummarySummary

Communications byOfferor

Time Effective Effect

Offer Received by offeree Creates power to form acontract

Revocation Received by offeree Terminates power to form acontract

Communication by Offeree

Rejection Received by offeror Terminates offer

Counteroffer Received by offeror Terminates offer

Acceptance Sent by offeree Forms a contract

Acceptance after priorrejection

Received by offeror If received before rejection,forms a contract

GatewayGateway

Mutual Assent in CyberspaceMutual Assent in Cyberspace

Shrinkwrap Licenses – Shrinkwrap Licenses – ProCd v. ProCd v. Zeidenberg, Zeidenberg, Gateway ComputersGateway Computers

Clickwrap Licenses – Hotmail, Clickwrap Licenses – Hotmail, Microsoft Security UpdatesMicrosoft Security Updates

Browsewrap Licenses – NapsterBrowsewrap Licenses – Napster

Business ImplicationsBusiness Implications – Feasibility – Feasibility of Business Model, Content of of Business Model, Content of Agreement vs. Presentation, Law Agreement vs. Presentation, Law vs. Marketingvs. Marketing

Summary; Q&ASummary; Q&A

Contracts and Enforceable Contract Rules Contracts and Enforceable Contract Rules Help Businesses “Monetize” Rights Help Businesses “Monetize” Rights

Contract Default Rules are State-Law Contract Default Rules are State-Law DrivenDriven

Enforceability Depends on Whether Legal Enforceability Depends on Whether Legal Contract Requirements are MetContract Requirements are Met

Contracts Require a “Meeting of the Contracts Require a “Meeting of the Minds,” Defined Through Mutual Assent Minds,” Defined Through Mutual Assent RulesRules

New Technology Forces A Reinterpretation New Technology Forces A Reinterpretation of Classic Mutual Assent Rulesof Classic Mutual Assent Rules