Basic Business Law (BPP432/80) 2006 Fall Quarter

1. Basic Business Law (BPP432/80) 2006 Fall Quarter Instructor: David Oliveiri Week 2: Facilitating Exchange; Value of Contracts; Creating Enforceable Rights – Mutual Assent Requirement

2. Agenda: • Learnings • Economic Rationale for Contracts • The “Laws” of Contracts • Some Definitions • Legal Contract Requirements, Generally • Mutual Assent Requirements = O+A • Summary; Q&A

3. Learnings: • Understand Why We Have Contracts and Contract Rules • Understand Where to Find Applicable Contract Law (Rules) • Understand What a Contract is and Why it Matters to Satisfy Legal Contract Requirements • Understand the Requirements for Mutual Assent, and Exceptions • Understand Practical Details of Offers and Acceptances and Impacts on Effective Deal-Making, Business Value

4. Economic Context for Contracts • Prevalence of Exchange Relationships • Simple Economic Exchange Model: 2 Commodities (X+Y), 2 Consumers (A+B) Y Y A .0 .S B .S .0 X X Trade If? Trade Until?

5. Economic Context of Contracts • Complexity of Satisfying Mutual Benefit • Sheer Volume: Billions of Commodities, Billions of Consumers • Opportunism • Multi-Party Issues • Why Rules/Legal Process? • Lower Information Costs • Lower Transactions Costs • “Monetize” Rights

6. Sources of Contract “Law” and Rules • Common Law • Judge- Made Decisions • Primarily, State-Law • Statutes -- The Uniform Commercial Code – Sales of “Goods” – All 50 States • Business Significance: Set of Default Rules State Law Federal Law

7. Yes Yes Specific provision of UCC applicable? No Sale of goods? UCC governs No General contract law governs Law Governing Contracts: How This Works

8. What is a Contract?

9. What is a Contract? • Contract = Promise or set of promises of which the law gives a remedy or the performance of which the law in some way recognizes as a duty.” • Are all promises contracts? • Do all contracts require a promise? • Are the following contracts? • “I’ll pay you $10,000 if you quit your bartender job and get an MBA.” • Ordering and eating a meal in a restaurant?

10. Standard Requirements of Contract Formation • Mutual Assent - “Meeting of the Minds” • Consideration • Legality of Object • Capacity of Parties

11. Some More Definitions and Distinctions • “Express Contract” vs. “Implied Contract” [“Lease” vs. “Pumping Gas”] • “Unilateral Contract” vs. “Bilateral Contract” [“When You Get Your MBA” vs. “I Promise to Get My MBA”] • “Executed Contract” vs. “Executory Contract” [“Completed” vs. “In Process”] • “Formal Contract” vs. “Informal Contract” [“Deed” or “Draft” vs. …] • “Valid,” “Void,” “Voidable,” and “Unenforceable” Contracts

12. Mutual Assent? No Void Yes No Consideration? Yes No Capacity? Yes Void or Voidable No Free from Invalidating Conduct? Yes Subject Matter Legal? No Unenforceable Yes No Statutes of Fraud Satisfied? Validity of Agreements

13. When Contract Requirements Not Met • Not Contracts, But Still May Be Enforceable – “At Equity!” • Promissory Estoppel Lease in default. “Don’t worry. I’ll hold off.” Improvements. • QuasiContracts Lease for Office. Cleaning Service Contract Expires, But…

14. Mutual Assent (“Meeting of the Minds”) • Mutual Assent = Offer + Acceptance • Business Dealings are Complex: Content and Time Dimensions • Also, Impacts of Technology- Internet Commerce, E-mails, Faxes, Electronic Signatures, Bots B A Time Talk Talk Negotiation (Idle) (Focused) Contract No Contract

16. Napster Terms of Use (4/25/06) • “To view all of our Website Terms, please click HERE.” • Napster Website Services Terms of Use Agreement- 6 Page Printout • Selected Terms • “By using any Web Services you agree to be bound by these Terms of Use, whether or not you register as a member.” • Any modification of Terms “shall be effective upon posting by Napster.” • “Your use of Streams is subject to all of the limitations described below…you may not download Streams or attempt to ‘catch’ or copy Streams in any way.” • In the event of a dispute, “you agree to personal jurisdiction…in the state and federal courts, State of California, City of Los Angeles.” • “You agree to indemnify…Napster…from any loss including reasonable attorneys’ fees…” • Objectives of Napster? Your Reactions as Users? • Mission Accomplished?

17. Offers • Offeror is “Master of the Offer.” • Basic requirements • Communication = Send + Receive “I think I’m going to hire Sally!” • Intent Story of Doug, Dave, and Bubble Puppy • Preliminary Negotiations and Letter of Intent • Advertisements [S&R 10—Lefkowitz Case (p.183), Problem 17] • Definiteness • Open Terms • Output and Requirements Contracts

18. Duration of Revocable Offers Offer Effective OFFER OPEN No Offer No Offer Offer TerminatedLapse of time DeathRevocation IncompetencyRejection Destruction of subject matterCounteroffer Subsequent illegality

19. Effects Upon Duration of Offers Offers Remain “Open” Till Accepted, OR… • Rejection • Lapse of Time • Possibilities: Time Not Stated in Offer; Date Certain; Time Period Specified • Revocation • Exceptions: Option Contracts [S&R 10-Problem 13]; Firm Offers under UCC [S&R 10-Problem 5]; Statutory Irrevocability; Irrevocable Offers of Unilateral Contracts; Promissory Estoppel • Counteroffer • When offeree purports to accept an offer, but adds conditions and qualifications; such conditional acceptance is not binding on the offeror. Acceptance must be a “mirror image.” Is a counteroffer an end to negotiation? Complicating factors are silence, study, elapsed time. [S&R 10-Problem 3] • Death/Incompetency • Destruction of Subject Matter • Subsequent Illegality [S&R 10-Problem 2]

20. Acceptance of Offers • Once accepted, a valid offer becomes a contract, the defining moment of obligation for both parties. Until then, … • [Example: Fairmount Glass Case – Give me “lowest price you can make us for 10 carloads of Mason green jars, complete, with caps, packed 1 dozen to a case.” Reply – “we quote you Mason fruit jars …pints $4.50, quarts $5…for immediate acceptance and shipment no later than 5/15.” Purchaser then ordered “10 carloads per quotation.” Seller’s inventory depleted, “impossible to book order.” Valid offer and acceptance?] • Communication of Acceptance • General Rule – Word or Conduct • Silence Not Acceptance! • Effective Moment [S&R 10 – Problem 6] -- Stipulated Provisions in Offer, Authorized Means, Unauthorized Means • Acceptance Following Prior Rejection • Variant Acceptances [S&R 10 – Problem 14] – Common Law vs. UCC Treatment

21. How All This Works Offer? Acceptance? Rejection? Revocation? Counter Offer? Offerees Offeror

22. Offer and Acceptance -- Summary

23. Gateway

24. Mutual Assent in Cyberspace • Shrinkwrap Licenses – ProCd v. Zeidenberg, Gateway Computers • Clickwrap Licenses – Hotmail, Microsoft Security Updates • Browsewrap Licenses – Napster • Business Implications – Feasibility of Business Model, Content of Agreement vs. Presentation, Law vs. Marketing

25. Summary; Q&A • Contracts and Enforceable Contract Rules Help Businesses “Monetize” Rights • Contract Default Rules are State-Law Driven • Enforceability Depends on Whether Legal Contract Requirements are Met • Contracts Require a “Meeting of the Minds,” Defined Through Mutual Assent Rules • New Technology Forces A Reinterpretation of Classic Mutual Assent Rules