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

2. Next day… Up to and including Implied Conditions 2

3. The Agency Cost Problem Agency costs are the costs resulting from: 1.Underperformance by agent retained by principal 3

4. The Agency Cost Problem Agency costs are the costs resulting from: 2. Passed-up opportunities (underinvestment) 4

5. The Agency Cost Problem What kind of agent misbehavior? Observable? 5

6. The Agency Cost Problem What kind of agent misbehavior? Or unobservable? 6

7. The Agency Cost Problem What kind of agent misbehavior? The misbehavior must be unobservable Otherwise the principal could specify the agents duties 7

8. The Agency Cost Problem What kind of agent misbehavior? The misbehavior must be unobservable So that monitoring for misbehavior can reduce agency costs 8

9. The Agency Cost Problem Agency Costs as the sum of Underperformance by agents Underinvestment by principals Monitoring costs 9

10. 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

11. Employees as agents: Note the two-way play The employer has a free hand to dismiss the employee under the at- will standard The employee can resign any time 11

12. Note the two-way play The employee can resign any time Might the employer be unhappy with this? 12

13. 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

14. 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

15. Well, there are Constitutional issues… 15

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 16

17. 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

18. Non-competes: Gagliardi 18

19. Non-competes: Gagliardi 19 The trade secrets?

20. Non-competes: Gagliardi 20 The trade secrets Beef formula Slicing machine Packaging Marketing research

21. Non-competes: Gagliardi 21 Scope of the non-compete: a one- year ban: Controlled meat business Employment within 100 miles of West Chester with similar business

22. Non-competes: Gagliardi 22 Legal restrictions on non-competes Must be ancillary to an employment contract made at hiring or on a change of status

23. Non-competes: Gagliardi 23 Legal restrictions on non-competes?

24. Non-competes: Gagliardi 24 Legal restrictions on non-competes Must be ancillary to an employment contract How would you justify this restriction?

25. Non-competes: Gagliardi 25 Was there a change in status here? Cf. Marine Contractors at 373

26. Non-competes: Gagliardi 26 Was there a change in status here? Cf. Marine Contractors at 373 Cf. Leatherman at 373

27. Non-competes: Gagliardi 27 Legal restrictions on non-competes Reasonably limited in time and geographic scope Not excessive for the protection of the employer

28. Non-competes: Gagliardi 28 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?

29. Non-competes: Gagliardi 29 Can you explain why employers have a free hand in termination decisions but not with non-competes?

30. Non-competes: Gagliardi 30 Were the restrictions excessive here?

31. Non-competes: Gagliardi 31 Were the restrictions excessive here? Caputo was the controller What about reverse engineering?

32. Non-competes: Gagliardi 32 Relevance of the occupation Garage mechanic?

33. Non-competes: Gagliardi 33 Relevance of the occupation Garage mechanic? Doctor?

34. Non-competes: Gagliardi 34 Relevance of the occupation Garage mechanic? Doctor Lawyer

35. Non-competes: Gagliardi 35 Relevance of the occupation Garage mechanic? Doctor Lawyer Maltby at 374

36. Contract Modification 36 As relational contracts are long term, conditions may change and prompt a modification of the agreement Should there be any restrictions on this?

37. Contract Modification Austin v. Loral p. 397 Why did Loral agree to the contract modification? 37

38. Alaska Packers 38 Pyramid Harbor AK

39. Alaska Packers 39 Will a promise to perform that which the promisor was already bound to do under a prior contract satisfy the consideration requirement?

40. Alaska Packers 40 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

41. Alaska Packers 41 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

42. Alaska Packers 42 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.

43. Alaska Packers 43 How would you decide Alaska Packers under these standards?

44. Alaska Packers 44 How would you decide Alaska Packers under these standards? The finding of fact at p. 377

45. Alaska Packers 45 Qu. the changed circumstances under Angel v. Murray p. 380

46. Alaska Packers 46 Qu. the changed circumstances under Angel v. Murray p. 380 Brian v. Brighenti p. 381

47. Alaska Packers 47 How might a party protect himself against an extortionate modification?

48. Alaska Packers 48 How might a party protect himself against an extortionate modification? No modification clauses? Is UCC § 2-209(2) a safe harbor?

49. Alaska Packers 49 How might a party protect himself against an extortionate modification? No modification clauses? Restatement § 311, Comment a Can you offer a justification for this?

50. Alaska Packers 50 No modification clauses The parties to a joint venture decide that its not profitable and write a termination agreement. Problems?

51. Alaska Packers 51 No modification clauses The parties to a joint venture decide that its not profitable and write a termination agreement. Problems? El Paso Natural Gas p. 383

52. Alaska Packers 52 No modification clauses The parties to a joint venture decide that its not profitable and write a termination agreement. Problems? El Paso Natural Gas p. 383 Alexi Yashin p. 382

53. Alaska Packers 53 No modification clauses The parties to a joint venture decide that its not profitable and write a termination agreement. Problems? Is there a possibility of strategic behavior here?

54. Alaska Packers 54 No modification clauses The parties to a joint venture discover that one partys duties are much more onerous than was contemplated and write an amending agreement. Problems?

55. Was this Austin v. Loral? 55

56. Underinvestment if no-modification clauses are banned? 56

57. Unless one trusts the courts to get it right 57

58. 58 George Mason School of Law Contracts II Terms F.H. Buckley fbuckley@gmu.edu