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. 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 OfferAcceptanceConsideration Unilateral Promise by A Performance of requested act or forbearance by B → Promise by A ← Performance of requested act or forbearance by B Bilateral 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] [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] [S&R 12 – Problems 7a, 7b]

Modification of a Preexisting Contract + = Original Contract Modifying Contract Modified Contract UCC Consideration is required No consideration is required if modification is made in good faith Replaces original contract Restatement 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 Common Law Consideration is required Replaces original contract

Bargained-For Exchange Definition: A Mutually Agreed-Upon Swap [S&R 12 – Problem 1] [S&R 12 – Problem 1] Past Consideration? [S&R 12 – Problem 7c] [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] [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] [Circumstance: Interactive dealings lying between conventional “swap” transactions and nonreciprocal gifts. Reliance-based enforcement] [S&R 12 – Problem 16] [S&R 12 – Problem 16] Promises Made Enforceable by Statute [UCC Examples: Contract Modifications, Renunciation, Irrevocable Offers] [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 In exchange for A’s promise B incurs a legally sufficient consideration by --doing an act --forbearing from acting --promising to do an act --promising to forebear A promises B A’s promise is binding: it is supported by consideration Yes A’s promise is to pay obligation --barred by the statue of limitations --discharged in bankruptcy --that is voidable No A’s promise is binding without consideration Yes Continued on the next slide... No

Consideration (cont.) A’s promise is binding to the extent necessary to avoid injustice under the doctrine of promissory estoppel Yes A’s promise is binding under the UCC Yes A’s promise is binding in those states that recognize the seal as a substitute for consideration Yes A’s promise is made under seal and delivered to B No A’s promise is not binding 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 B detrimentally and justifiably relies on A’s promise, and A should reasonably have expected reliance No

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 Guarantees Exceptions: Original Promise, Main Purpose Doctrine, Promise Made to Debtor Exceptions: Original Promise, Main Purpose Doctrine, Promise Made to Debtor [S&R 15 – Problem 1] [S&R 15 – Problem 1] Executor-Administrator Provision Marriage Provision Land Contract Provision CD Guarantor

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 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 Integra- tion AmbiguityTransaction Cost

No Yes Parol Evidence Rule Does Not Apply: Evidence Is Admissible Parol Evidence Rule Yes Evidence prior or contemporaneous? Yes Evidence varies contract? Written contract? Yes Integrated contract? Yes Evidence provides fraud, misrepresentation, undue influence, mistake, duress, incapacity, illegality, or unconscionability? No Continues on next slide...

No Evidence of a clerical error? Evidence explains an ambiguity? No Parol Evidence Rule Applies: Evidence Is Not Admissible No Yes Parol Evidence Rule Does Not Apply: Evidence Is Admissible Parol Evidence Rule (cont.) Evidence of a condition precedent? No

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 TenantLandlord Third-Party

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] [S&R 16 – Problems 1, 11]

Third-Party Beneficiaries How – One Party Promises to Render Performance to a Third Person (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 AB Beneficiary

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