Contracts may arise either through the intentions of the parties, through their actions, or as a result of law or equity (fairness). We begin our discussion of contract formation by talking about express and implied contracts.
What is an express contract?
These are contracts formed through the discussion or negotiation of the parties. Generally, the parties intend to form a contract and openly discuss or negotiate its terms.
Example: Tom says to Eric, I will sell bricks to you in lots of 5,000 bricks (a cube) at $.89 per brick. Eric replies, Excellent! I will purchase 10 cubes for my upcoming construction project. The parties then write down these statements on a napkin and sign it. In this case, the parties have formed an express, written contract. The contract is express because the parties stated specific terms of an intended agreement. It does not matter that the contract lacks formality. As previously stated, however, parties do not necessarily have to intend or even realize that they have entered into a contract. One such scenario is an implied-in-fact contract.
Note: While an express contract does not necessarily have to be in writing, failing to write out a contract for the sale of goods may affect its enforceability. This issue is discussed in greater detail in later chapters.
What is an implied-in-fact contract?
This type of contract arises from the conduct of the parties, rather than from their intention to form an agreement. In the absence of an express agreement, the parties carry on some type of activity that is sufficient to considered a contractual relationship under the law. Restated, the facts of the situation (the actions of the individuals) make it reasonable for a court to determine that a contract exists under the applicable law. Some of the necessary elements to establish an enforceable contract may be missing (discussed later); but the activities of the parties, nonetheless, fill in or supply the missing elements.
Example: John asks his accountant, Sarah, for professional advice. John knows that Sarah is a CPA and charges clients for her professional advice. Even if there is no mention of charges or a willingness to pay for advice, Johns actions imply a promise to pay for any advice provided by Sarah. John will likely be responsible for paying a reasonable rate for Sarahs advice, even though he did not make an express promise to pay her. Further, John may not have intended to form a contract, but the facts of the situation are sufficient for a court to find that a contract was formed under the applicable law.
In some cases the parties actions do not demonstrate an understanding by each party that a contract exists. That is, their activity does not demonstrate the elements of an enforceable contract. In such situations, the law may determine that an implied-in-law contract exists.
What is an Implied-in-Law or Quasi-Contract?
An implied in law or quasi-contract is a contract formed by judicial order to promote fairness among the parties. In these types of contracts, the necessary elements of the contract are absent. The court decides to step in and impose obligations on the parties as if an express contract exists.
A common scenario in which an implied-in-law contract arises is through unjust enrichment. When one party is unfairly benefited (unjustly enriched) at the expense of another, the law may imply a duty on the first party to pay the second even though there is not contract between the two parties.
Example: John rents land to Tom and, during the rental period, with the understanding that he will sell Tom the land to build his home. Tom begins the process of clearing the land and preparing it to build a home. After Tom has the ground leveled for the foundation, John decides to go back on his promise. As you will learn later, this agreement is not a valid, enforceable contract because there is no consideration and it is not in writing. The court, however, determines that Tom justifiably relied on Toms promise to sell the land. He further, undertook effort (and spent money) in reliance on that promise. To deny that an enforceable contract exists would prejudice Tom in a number of ways. The court, therefore, holds that there is an implied-in-law contract and John must sell the land to Tom.
Note: If Tom makes a payment and accepts possession of the land, it may provide an exception to the writing requirement and make the contract enforceable.
Now that you understand the different ways in which a contract may arise, lets focus our attention on the elements necessary to form a valid contract.
Elements of a Contract
A contract requires that parties come to some form of agreement. While the extent of the agreement may vary, the key element is that each party express her agreement or mutual assent to some or all of the proposed terms. In determining whether the parties have reached an agreement, a court will use an objective standard. That is, would a reasonable person in the situation of each party understand that she has entered into an agreement? The court will also weigh the subjective intent of each party to the proposed agreement.
The basic building blocks of a contract include:
1) offer by one party,
2) acceptance by another party, and
3) the presence of consideration (something of value) as the subject of the agreement.
Sometimes, an offer and an acceptance are collectively referred to as mutual assent of the parties to the agreement. Below we examine each element of a contract independently.
Resource Video: http://thebusinessprofessor.com/requirements-to-form-a-contract/
The Offer
What is an offer?
An offer is one partys promise and demand of another party. The offer must demonstrate an intent to provide the other party with the ability to accept the offer and form a valid contract.
Example: Winston, I will sell you my car for $10,000. This is a valid offer, as it contains a promise to transfer ownership of a specific item (the car) and there is a specific demand (pay to me $10,000). The party who can accept the offer is properly identified as Winston. There would likely not be a contract if I were to say, Winston, I will sell you my car for the right price. Further, there would not be a contract if I openly stated in conversation that, I would sell my car for $10,000. This broad statement may be an invitation for people to submit offers to buy the vehicle, but is likely not sufficiently definite to constitute a demand of another party.
Note: The above example incorporates numerous elements that make up a valid offer. Each of these elements is discussed in greater detail below.
When is a communication or promise by one party not an offer?
There are numerous types of communication between parties that are not promises, do not contain demands, and do not manifest the intent necessary to bind oneself in an agreement. Examples of non-offers include:
statements of opinion,
Example: I can easily sell this business for $250,000. This is not an offer to sell, but statement of opinion about the value of the business if it were for sale.
statements of intent that do not invite acceptance,
Example: At the end of the year, I am going to put my business on the market for sale for $250,000. This statement of future intention lacks the immediate intent to make an offer.
invitations to others to make offers (such as advertisements in catalogs),
Example: Mark advertises in a local magazine that his products are for sale for $39.99. Courts have interpreted these types of advertisements in magazines to be sufficiently indefinite in identifying an offeree to not constitute an offer. Rather, courts have held that magazine advertisements are requests to the population to submit offers for purchase. This is why a vendor can respond to a purchase order stating that the item is sold out or no longer available.
estimates of prices quoted as such, and
Example: Clark seeks advice from a local contractor about the cost for remodeling his office. The contractor inspects the premises and states, Remodeling this building to your specifications will costs between $100,000 – 150,000.
auctions that maintain reserve prices.
Example: Erik attempts to purchase a piece of equipment listed for sale on Ebay.com. At the end of the auction, he is the highest bidder. The auction, however, indicated that a minimum reserve price was set for the item. As such, Erik does not have a contract. His offer to purchase the item at a given price did not meet the sellers reserve price.
Example:
Party 1: Im going to sell this car at the end of the year, if I can get $10,000 for it.
Party 2: Done. I will pay you $10,000 for the vehicle.
In this case you do not have a contract. The original statement by Party 1 is not an offer that invites acceptance from the offeree. Party 1 is simply speaking generally of future intentions.
Who can be an offeror?
The offeror is the person making the offer. That person must intend and be able to make a commitment to the offeree. Intent is a mental aspect that requires that the offeror understand that she is making an offer. The ability of the offeror to make an offer means that the offeror must have the physical, mental, or otherwise legal ability to make the offer.
Example: I hate this stupid computer. I paid $400 for it, but I swear I would sell this thing for $50 right now. This is likely not an offer. First of all, this is an emotional statement made to demonstrate frustration. There is not specific intent behind the statement to actually make an offer to an identifiable offeree. If, on the other hand, an individual states, Clara, I dont want this computer anymore. I paid $400 for it, but I will sell it to you for $300. This comment demonstrates a specific intent to sell the item and it communicates sufficient information that an identifiable offeree (Clara) to accept the offer.
Note: Legal ability brings up questions of job title; actual, apparent, and implied authority; and the law of agency. Businesses carry on business through the efforts of their employees. Each employee has some level of authority (whether express or implied) to act on behalf of the business. Businesses often dispute the authority granted to agents purportedly acting on its behalf.
How specific must the offer be?
Generally, an offer and any resulting contract must be sufficiently specific to determine whether there is a breach of the obligation and what would be an appropriate remedy for the breach. The required specificity in the contract depends upon whether the contract falls under common law or is for the sale of goods.
Under the common law, contractual terms must be sufficiently definite and certain for an individual to accept the offer. This generally means that the offer must contain a description of the service or property and a price.
Example: You cannot simply say, I will purchase your land at a reasonable price. You must identify the piece of land you are offering to purchase and a price that you are offering for the land.
Under the UCC, the requirement to form an offer is a little different. Contracts for the sale of goods can leave open non-quantity terms to be decided at a future time. The contract will still be enforceable (i.e., is sufficiently definite) when certain terms are left open for the parties to determine and there is a reasonable basis for determining those terms. For example, the parties may leave open the price of the good, and a reasonable price under the circumstance will be imputed. Further, even a quantity of goods can be left open if the quantity to be purchased or sold is the total amount produced by the seller or the total amount needed by the buyer. These are known as supply and exclusive dealing contracts.
Example: Terrence has a new business that involves printing and he needs to arrange for paper supplies. He makes the following offer to a local paper supplier (PaperSupply, Co.), I will purchase all of the paper I need from PaperSupply, Co., at the same rate that you currently charge to Printers, Inc., for paper supplies. Printers, Inc., is another company in town that Terrence knows purchases paper from PaperSupply Co. While this offer leaves open the price, the contract it is a valid offer because there is a reasonable basis for determining the applicable price. Also, the offer does not fail for indefiniteness simply because it does not state a specific amount. Stating that Terrence is bound to purchase all of the paper he needs is likely sufficient to constitute an exclusive dealing contract. Terrence is bound to purchase only from PaperSupply Co., for all of his paper needs.
Note: Most advertisements, catalogs, and web page price quotes are considered too indefinite to form the basis for a contract, unless they are specific about the quantity of goods being offered, as well as the intended offeree.
When does the offer go into effect?
At common law, an offer generally becomes effective when a person empowered to accept the offer (an offeree) receives it. This is important, as there is often more than one offeree to a particular offer.
Example: Ralph is a construction contractor who is soliciting offers from sub-contractors to paint a house that he is building. Tim, a subcontractor in the area, sends in a written offer to paint the house for $5,000. Ralph is empowered to accept the offer the minute he receives it in the mail. At the same time, Tim makes an offer to paint another house for Mitch, a different contractor. Tim sends this offer by email and it arrives to Mitch before the written offer arrives to Ralph. If Mitch accepts Tims offer before Tims offer to Ralph arrives, then Tim may revoke his offer before Ralph receives and is empowered to accept it. This example raises the issue of, when does an offeror have the ability to revoke an offer? The power to revoke an offer is discussed further below.
Note: In todays business world, contracts are routinely formed via electronic communication. In contracts for the sale of goods, the UCC provides that an offer is generally effective upon receipt by an offerees electronic communication system. That is, the offer is effective as soon as it appears in the offerees email.
Once an offer is made, how long does it last?
An offer, unless it has a stated time period or is validly revoked, is presumed to remain open for a reasonable amount of time after it is made. The reasonable standard of time changes with respect to the situation, type of contract, relationship of the parties, and context of the offer. For example, an offer to purchase ripe vegetables will expire more quickly than an offer to sell a piece of furniture. As noted, if an offer states a specific time for acceptance, then the offer closes upon the expiration of that time.
Example: Derek offers to sell Amber a single piece of equipment at a stated price. He writes all of the information down in the offer and mails it to her. Amber receives the offer the next day. She thinks about the offer for a couple of days and then replies to Derek in writing that she will accept the offer. This likely gives rise to a valid contract. The offer was silent about the time period to accept the contract. Responding within a couple of days is likely a reasonable period. Derek did not revoke the offer prior to Ambers acceptance, so there is likely a valid contract. If, however, Amber had waited one month to reply to Dereks offer, this is likely not a reasonable period of time. If Derek has already sold the equipment or simply no longer wishes to sell the piece of equipment to Amber, he would have a valid argument that the offer is no longer valid and that there is no contract.
Note: If an offer is time specific, the time for accepting an offer begins to run as soon as it is (or should be) received. This is true even when there is a delay in delivery or a failure to check ones mail. Thus, the offer could expire before it is actually received by the offeree. There also may be a presumption of when an offer expires, based upon the context of the transmission of the offer. For example, an offer made in-person or over the telephone may be presumed to expire at the end of the conversation, unless there is a clear intent to leave it open.
So, by what means can an offer close or be terminated?
If an offer terminates, it can no longer be accepted. The offer automatically closes under a number of situations, including:
a specific provision in the offer;
Example: Zora offers to sell equipment to Mindy to use in her business. The offer specifically states that Mindy must accept the offer by sending a down payment to Zora by the end of the week. If Mindy fails to make the down payment as demanded by the offer, the offer expires and Mindy cannot later accept the offer.
after a reasonable amount of time;
Example: Zora offers to sell equipment to Mindy to use in her business. The offer does not contain any specific time period for accepting the offer. Mindy will have a reasonable time to accept the offer. A reasonable time is determined by the context and subject matter of the offer. What is the nature of the business? What type of equipment is it? Will delaying the sale of the equipment detriment Zora (such as having to pay storage fees)?
upon rejection by the offeree;
Example: If Mindy rejects the offer from Zora, she cannot later come back and accept that offer. The offer terminates the moment her rejection of the offer is communicated to Zora. Mindy may now make an offer to Zora to purchase the equipment, but that puts the power of acceptance in Zoras hands.
by the offeree making a counter-offer;
Example: In the case of Mindy and Zora, if Mindy states that she will purchase the equipment, but at 50% lesser prices, this is a rejection and counter-offer to Zora.
by the offerors express revocation (prior to acceptance);
Example: If Zora withdraws the offer before Mindy is able to accept it, the offer is revoked and cannot be accepted.
the subject-matter of the offer no longer exists or is destroyed;
Example: If the he specific piece of equipment that Zora intends to sell to Mindy is destroyed, then the object of the contract is gone. As such, the offer to sell that piece of equipment terminates.
the offeror loses mental capacity or passes away; or
Example: If Zora gets into an accident that causes her to lose capacity or is terminally injured, her offer to sell the equipment expires.
the subject-matter of the offer becomes illegal.
Example: The equipment that Zora offers to sell Mindy becomes illegal because of environmental regulations; therefore, the offer terminates and cannot then be accepted my Mindy.
As noted above, revoking the offer prior to acceptance by the offeree terminates the offer.
How do you revoke an offer?
Revocation must come from the offeror or his agent before the offeree accepts the offer. The revocation must be clear and unequivocal. The offer is also revoked if the offeree learns of activity by the offeror that demonstrates that the offer is no longer open. A reasonable person standard is used in each of these determinations.
Example: Alice offers to sell her car to Mary at a given price. Mary does not immediately accept the offer. A week later, Mary learns that Alice sold the car to Jim. Learning of Alices actions, which is inconsistent with her offer to Mary, is sufficient to revoke Alices offer.
Note: The reasonable person standard is an objective standard that determines how a reasonable person would act in a specific situation or context.
Can all offers by revoked?
There are some special circumstances or types of offers that cannot be revoked. The most common types of irrevocable offers are:
valid options contracts that are supported by consideration (value);
Example: Sara works for Big Corp. Big Corp grants options to Sara to purchase stock in the corporation at a given price. The option contract is a form of offer, as it allows Sara to purchase stock if she so desires. She is not obligated to act. Since the option is the subject of a contract supported by consideration (Sara provides services in exchange for the option) it cannot be revoked.
the offer and activity of the offeree give rise to an implied-in-law contract;
Example: Gail is a marketer who agrees to help Hanks startup business to grow. Hank does not have the money to pay Gail; but, in exchange for her services, he agrees to compensate her by awarding her a certain number of shares of the business. Hank includes a contingency that, he will only transfer equity to Gail if the business achieves a specific level of profits at the end of the year. The business performs very well as a result of Gails marketing efforts. At the end of the year, Hank decides to make a major purchase that drastically reduces the business reportable profits. Hank refuses to transfer any equity in the company to Gail because the company technically did not reach its profit target. Gail sues Hank. While there is technically no breach of contract, the court may imply the obligation upon Hank to pay her the reasonable value of her services.
Note: Generally, an implied in law contract arises when the court uses its power of equity to make the outcome of a situation fair and just. A common use of the equitable power to declare an implied-in-law contract is when there is foreseeable, detrimental reliance by the offeree on the offerors promise.
in a unilateral contract, the offeree begins performance (mere preparation is likely insufficient), but has not yet completed her obligations;
Example: Amy offers to pay Zeke $500 to build an ADA compliant ramp into her business. As part of the offer, Amy tells Zeek that he must begin building the ramp before the end of the week. Once Zeke begins to build the deck, he has to complete the job. Amy cannot revoke the contract during this period.
Note: A unilateral contract is one where the offeror requires that the offeree accept the contract by undertaking performance. That is, the offeror requires action rather than a return promise to perform from the offeree. In a unilateral contract without a specific time for performance, the offeror must give an offeree who has begun performance a reasonable amount of time to complete performance.
a UCC merchant makes a firm offer (a written, signed offer that assures the offer will remain open) to buy or sell goods even if the offer is not supported by consideration.
Example: David is a merchant selling bicycles. He offers to sell a fleet of bicycles to the local school as part of a environmentally friendly commuting effort. The schools ability to purchase the bicycles is contingent upon the school receiving a highly anticipated grant. To accommodate this situation, David makes a signed, written offer that says it will remain open for 90 days. In this situation, David cannot withdraw the offer because it constitutes a firm offer by a merchant.
Note: As demonstrated in the above example, a firm offer from a merchant states a specific time that it will stay open. The offer is enforceable and must remain open for that period of time, despite the absence of consideration. If the time period is not specifically stated, it must remain open for a reasonable amount of time. In no event will the time exceed three months.
When is the revocation effective?
Revocations are effective whenever the offeror provides notice of revocation to the offeree. That is, revocation is effective upon receipt.
Example: Fanny agrees to install a new lightening system in Sams recording studio for $10,000. Before Sam accepts the offer, Fanny realizes that she miscalculated the cost of the lighting system. She quickly revokes the contract by calling and notifying Sam. When Sam receives the call, he is preparing to sign and return the contract. Unfortunately for Sam, the revocation is effective when received and Sam cannot accept the contract.
Note: Some courts have treated the revocation of an offer similarly to acceptance. This interpretation makes a revocation effective when it is sent, rather than when received.
Are the rules of offer and acceptance the same when dealing with automated ordering and fulfillment systems?
Contracting via an automated system is a new development in contract law. The UCC proposes that electronic contracting agents be treated similarly to principal parties to the contract. As such, the court would apply the above-discussed rules to the situation. The electronic system is merely an agent that possesses the authority to bind the principal.
How do you accept an offer?
The offeree can accept the offer by any means reasonable under the circumstances. In any event, acceptance of the offer requires an unequivocal response demonstrating a willingness to accept the terms or conditions of the offerors promise. The method of providing this unequivocal response varies between unilateral and bilateral contracts.
Example: Hank sends a letter to Juliet offering to sell her a specific piece of equipment for $250. He does not indicate the method for acceptance of the offer. Hank receives a text from Juliet stating, I accept your offer and I will buy the equipment at the stated price. This text message is sufficient to accept the contract. Given the circumstances, texting notice of acceptance to Hank is reasonable.
What is a bilateral and unilateral contract and how does it affect acceptance?
In previous chapters, we explained that a contract is an agreement that involves the exchange of promises between individuals. This is known as a bilateral contract. A bilateral contract requires that the offeree make an unequivocal return promise that acknowledges acceptance of offerors promise. The offeree makes a promise to perform or carry out the offerors demand at some point in the future. Failure to do so constitutes a breach of contract.
Example: I promise to pay you five dollars, if you promise to baby sit on Friday. If the offeree accepts, this is a bilateral contract, as it consists of mutual exchange of promises between individuals. It is not necessary to use the word promise. You simply have to express that you will perform the required action (sell the item or provide the service) at some point in the future.
Note: In some cases, the offeree may attempt to accept the contract by simply beginning to perform the activity that is demanded by the offeror. In this case, while if the contract requires that an offeree accept by making a promise to perform, the contract may still be enforceable. If the offeree commences work and the offeror recognizes the activity and does nothing to stop it, the contract will likely be implied from the actions of the parties. The offer to form a bilateral contract becomes enforceable as a unilateral contract.
The second form of contract is known as a unilateral contract. An offer to form a unilateral contract makes a promise in exchange for performance of the offerors demand. A party must complete performance in order to accept the offer. Failure to complete performance by the offeree is not a breach, as no contract has been formed until performance is completed.
Example: I promise to pay you five dollars when you wash my car. In this case, one party promises to pay money in exchange for the activity of another person. She does not want a promise from the other party she wants action. In turn, there is no contract until the other party actually washes the car.
Example: Another example of this situation would be the promise to pay a bonus. Your boss says, I promise to pay you a bonus if you reach your sales goal. In this case, you have a unilateral promise to pay in exchange for the other party carrying on an activity. There is no obligation for the boss to perform (pay money) until the employee completes the action (reaches the sales goal).
Can an offeror revoke a unilateral offer after the offeree begins performance, but has not completed?
No. Once the offeree begins performance, the offeree must allow her a reasonable amount of time to complete performance. Again, if the offeree does not fully perform, there is no acceptance of the offer.
Example: Terry offers Arlene $500 if she will design a website for his new business. Arlene begins doing mockups of the website on her computer and sends a sample to Terry. Upon receiving the mockups, Terry decides to save money and use one of the pre-made website services to create the website. In this situation, Arlene has started performance and thereby accepted the offer. As such, Arlene has a reasonable time to accept the contract by completing performance.
Note: There are generally exceptions to this rule. For example, the offeror may be able to revoke if the offerees performance sufficiently deviates from a reasonable standard of acceptance. Further, if the offeree undertakes activity not reasonably relateded to the required services, the offeror can revoke the offer.
Note: As previously noted, if an offeree fails to fully perform, then she may still be entitled to receive from the offeror the reasonable value of the services that she provided. This makes certain that the offeror does not receive a benefit without paying anything for the partially performed services. In this situation, the court may use its equity power to ensure a fair and just result. All courts have powers of equity.
What if the offeree does not respond to the offer?
Under the common law, the general rule is that silence by the offeree is not acceptance of an offer. There are, however, exceptions to this rule. If the relationship between the parties is such that it is not expected that the offeree reply, then silence by the offeree may constitute acceptance. Another example would be where the offeree readily understands that silence or a failure to respond means acceptance of the offer. This generally only arises in situations where the offeror and offeree have a history of prior dealings.
Example: Tim tells Virginia that he will sell her ten bags of apples for $10 per bag and that she must reject the offer within 3 days. This is not a contract, as silence or failing to reject an offer is not acceptance. If, however, Tim regularly sells apples to Virginia on a recurring schedule and there is an understanding that Virginia will accept all shipments that are not rejected within 3 days of delivery, then failure to reject the delivery can constitute acceptance of the offer.
Note: In the case of contracts between merchants under the UCC, silence may constitute acceptance of an offer. In some instances, a merchant is required to expressly reject goods that are delivered; otherwise, her silence constitutes acceptance of the contract.
What if an offeree does not respond to the offer but accepts deliver of the goods or services?
Under common law, if the offeree accepts goods or services with the knowledge that they are being offered or sold for a price, then there is a valid contract.
Example: Mark walks into a dentist office and asks for a routine teeth cleaning. Upon beginning the cleaning, Mark is bound contractually to pay for the services he receives.
Note: If the offeror does not agree to the offeree simply retaining the goods as acceptance of the offer (e.g., she expressly requires payment before there is acceptance), then she may still revoke the offer prior to the offeree accepting the goods.
After acceptance, can a failure to communicate acceptance to the offeror prejudice the offeree?
As discussed above, the offeree must generally communicate with the offeror to effect acceptance. If the offeree acts in a way that demonstrates acceptance, but fails to notify the offeror, the offeror may revoke the offer if she is somehow prejudiced by the offerees silence.
Example: Pete needs a logo for his new business immediately. He makes on offer to pay Alice to develop the logo. Alice begins working, but fails to notify Pete that she is working on the project. In the meantime, Pete, having not received a response from Alice, hires another designer to work on the logo. When Pete learns that Alice is working on the logo, he may be able to revoke the offer. He would be prejudiced if he had to pay for two designers. In this case, he may not have to pay for her services, as he did not receive any value from her beginning performance.
In a unilateral contract, does the offeree have any duty to communicate acceptance to the offeror?
Under the Restatement, the offeree in a unilateral contract simply has to perform in order to accept an offerors offer.
Note: If the offeree knows that the offeror has no way of knowing about his acceptance, the offeree must be diligent in notifying the offeror. Of course, this rule is not applicable if the offeror makes known that she does not need to be notified of acceptance.
Example. Mary puts out an offer to a group of designers that she will pay $500 to anyone who designs a new logo for her website. Tom designs a really nice logo for her website. Tom should realize that Mary cannot know that he has accepted the contract by undertaking the design work. As such, Mary is not bound to the contract if Tom fails to notify her in a timely manner.
Under the UCC, the offeree must notify the offeror of her intent to accept by beginning performance within a reasonable time of the offer being made. If no, the offeror can treat the offer as having lapsed.
Example: Alex makes an offer to pay Jude $10,000 for painting his cabin. Jude, without notifying Alex, begins painting the cabin approximately 2 months after the offer was made. Alex may be able to notify Jude that the offer was rejected and to stop painting the cabin. In such a case, there would not be a breach of contract, as the offer was not accepted within a reasonable time. Rather, Alex would simply owe Jude for the reasonable value of her painting services performed before she was notified to stop.
Are there any standards for how an acceptance must be communicated?
If the offer is not specific on the manner of acceptance, there is no mandatory method for communicating acceptance of an offer. Under the UCC, the offeree can employ any method that is reasonable under the circumstances. Under common law, the offeree may respond in the same manner as the offer or in any manner that is “customary in similar transactions at the time and place the offer is received.
When does acceptance become effective?
The offer may state the time when any acceptance becomes effective. Absent specific direction, an acceptance is effective as soon as it is sent or communicated by a reasonable means. If an improper method or means of communication is used, acceptance becomes effective as soon as it is received.
Note: There is an exception to this general rule. If the offeree accepts by an unapproved method, the acceptance will be effective when sent if the offeror receives the acceptance within the prescribed time period allowed for acceptance by an approved method.
Example: Mark offers to sell his land to Eric. Eric gives him notification of acceptance via mail, but the required method was hand-delivered letter. If Mark gave Eric until Friday to hand-deliver acceptance and Mark receives the mailed acceptance before Friday, then the method may be deemed effective at the time that Eric mailed it.
Note: Special rules apply to other unique situations or types of agreement. For example, acceptance of an option contract is not effective until received by the offeror.
What is the mailbox rule?
Unless the offeror specifies a specific manner of acceptance, the offer is generally accepted when the offeree dispatches it (i.e., drops it in the mail or sends it with a courier). The importance of this rule is that the offeror cannot rescind the offer once the offeree has dropped it in the mail or placed it with a common carrier. Further, if an offer is made to multiple offerees, the first offeree to accept in any manner (including by dropping the acceptance in the mail) has a binding contract.
Example: Whitney offers to sell her car to Victoria and Janice. She does not specify the manner of acceptance, but does require that Victoria or Janice accept the offer before Friday. Victoria drops her acceptance of the offer in the mail on Thursday at 1:00 P.M. Janice attempts to accept the offer in person at 2:30 P.M., that same day. Janices acceptance is not effective, as Victoria as already accepted the contract. This is true even though Whitney has not yet received or is not aware of Victorias acceptance.
Note: The above example should demonstrate the offerors peril in sending out offers to multiple individuals.
What happens if an offeree attempts to accept after the offer is terminated?
Generally, an offer is revoked if a valid acceptance is not communicated within the required time period.
Example: Tom offers to paint Alexs house for $5,000, but Alex must accept the offer within 3 days. On the 4th day, Alex attempts to accept the offer. Tom is not bound in contract by Alexs late acceptance.
Example: In the above example, Tom can waive the lateness of Alexs acceptance. This may give rise to a binding contract. Under the common law, the late acceptance is simply a new or counter-offer from Alex to Tom. Tom is therefore accepting Alexs offer.
Note: The offeror can always waive the late notice and acknowledge the acceptance. If the offeror fails to respond or reject the late acceptance within a reasonable time, then it may result in a valid contract. As stated above, under the common law, the offerees communication may be considered a counter-offer to the offeror.
What happens if an acceptance of an offer includes additional terms or conditions in the acceptance?
It depends on whether the contract is governed by common law or the UCC. Under the common law, the Mirror Image Rule applies. Under the UCC, the additional terms may be excluded from the contract.
What is the Mirror Image Rule?
The mirror image rule applies in common law contracts. It states that the terms of an acceptance of a contract must be exactly the same (or mirror) the terms of the offer. If the acceptance contains terms that are different from or add to the offer, then the acceptance is ineffective. Instead, the acceptance becomes a counter-offer to the offeror. Courts are split on whether minor, immaterial additions cause the acceptance to be defective. One theory is that these are mere suggestions to modify an already accepted agreement.
Example: John offers to wash Wills car for $50. Will agrees, but says that John must also vacuum the interior. In this case, no contract is formed. Will effectively makes a counter-offer to John, stating that he will pay John $50 to wash and vacuum his car.
Note: If the acceptance accepts mirrors the offerors terms and merely suggests additional terms, the court may deem the acceptance sufficient.
What is the rule for additional or different terms in the acceptance of an offer under the UCC?
The UCC takes a different approach than the Restatement to additional or different terms in an acceptance. If the acceptance of the offer is unequivocal, then the UCC deems the acceptance effective. The effect of different or additional terms depends on whether the parties are merchants. If either party is not a merchant, then any additional or different terms are deemed suggestions for addition and do not become part of the contract. If both parties are merchants, the additional terms become a part of the contract unless: they materially alter the contract, acceptance is conditioned on the specific terms of the offer, or the offeror specifically rejects the additional or different terms.
Example: Mary offers to sell a piece of equipment to Darla for $1,000. Darla accepts the offer by sending a check and a letter, but mentions that she would appreciate the ability to return the equipment within 30 days if anything is wrong with it. Neither Mary nor Darla is a merchant. If Darla did not expressly condition her purchase of the equipment on the acceptance of her proposal for the inclusion of a warranty, there is a binding contract and the warranty is not included.
Example: In the above situation, if both parties are merchants, the warranty provision may be included in the contract. If a dispute arose, a court adjudicating the matter would determine whether the warranty provision materially altered the terms of the contract.
What happens when the offer is accepted through an electronic system, such as an auction format?
If the offeree has reason to know that she is accepting the contract via an electronic format, any additional terms that she may add within the electronic system do not become part of the contract.
Example: You purchase an item at auction on an auction-style, website – such as Ebay.com. If you add additional terms to the purchase via the electronic system, those terms do not become part of the contract. The offer is contingent upon acceptance pursuant to the terms of the offer. The contract is complete at the time that you consummate the purchase.
Are there special provisions for requirements contracts and output contracts?
Yes. The UCC makes special provision for these types of contracts. In a requirements contract, the supplier agrees to supply all of the goods required by the buyer. Likewise, in an output contract, the purchaser agrees to purchase all of a suppliers output. The UCC deems requirements and output contracts valid, despite the absence of a specific number of items being purchased or sold. As such, the terms of the purchase (e.g., the amount or number purchased) may change with each order.
Example: Denise enters into a contract with Idina to purchase all of the items of clothing that her company produces. This is an example of a output contract that is enforceable without specifically identifying the number of clothing items being purchase. In order to produce clothes Idina purchases fabric from Olivia. Olivia enters into a contract to supply all of the fabric that Idina requires. This is a supply contract that is enforceable despite the absence of a specific amount of fabric.
Note: These agreements provide security to parties who are uncertain about the market supply or demand for a particular good. In these contracts, there is no fixed quantity of goods; rather, the quantity to be purchased or sold is determined by the needs of the buyer or production capability of the seller. In a requirements contract, the seller is generally not prohibited from selling to other buyers. In an output contract, the seller is generally restricted from selling to other buyers. The buyer, however, can buy from other sellers to meet its requirements.
Are there any special provisions for Terms on Packaging in Shrinkwrap?
Many consumer products are sold with the consumers terms and conditions packaged or shrinkwrapped inside of the box. The consumer is unable to review these provisions and is often unaware that they exist until after the purchase is made. Some products (such a software) indicate that opening the shrinkwrap is deemed acceptance of these terms. Courts are divided on the enforceability of such provisions. Major cases on the subject involve the enforceability of warranty provisions and arbitration clauses.
Example: Derek purchases a computer from Microtek. When the computer arrives, the terms of the purchase, including the limitations on the use of the software loaded on the computer, are inside of the box. The packaging indicates that opening the package and turning on the computer constitutes acceptance of the terms of sale. Courts are split as to whether these terms are enforceable. One theory posits that contract has been formed and opening the box and using the computer cannot unilaterally add previously undisclosed terms to the contract.
Note: Merchants are advised to take care to disclose all terms at the time of purchase via pre-delivered documentation or disclosure provisions on the website.
When are terms printed on the top of packages enforceable?
The majority of courts hold that external terms printed on the top of a package prior to purchase are express terms of the agreement.
Example: Harriet purchases a computer that has statement written on top of the box, photo-editing software included. Upon opening the box, Harriet realizes that the disk supposedly containing the photo-editing software is missing. The store refuses to provide a replacement disk. This would be a breach of contract. The terms on the outside of the box are part of the bargain. Failing to include the photo-editing software is a breach of contract.
Note: This general rule may change when the purchaser is unable to read these terms, such as when the item is purchased over the internet or there are other reasons preventing the general customer from reading or understanding the terms (e.g., a sticker is pasted over the written terms).
What are Clickwrap contract provisions?
Much of todays contracting takes place electronically. The terms of these transactions are included in boilerplate language within the website. Consumers are made to read (or scroll through) and click a button certifying that they have read and accept these terms. Most courts hold that these terms are binding upon the purchaser. Clicking the I agree button indicates express acceptance of the merchants terms of sale.
Example: Hannah purchases a new Apple computer from the Apple.com website. Before finalizing her purchase, she is asked to agree to the terms of sale, which are included in a long list of provisions. One of the provisions states, you agree not to use I-Tunes to create a missile, or nuclear, chemical, or biological weapons. If Hannah accepts these terms, she is indeed contractually prohibited from using the I-Tunes software for any of these purposes.
Note: A similar provision to the above example of a Clickwrap provision was actually included in Apple, Inc.s, End-User License Agreement.
What constitutes a rejection of an offer?
Rejection of an offer is an unequivocal expression that the offer has been rejected. Unlike an acceptance (see Mailbox Rule), the rejection is not effective until received by the offeror.
Example: Eric makes an offer to purchase supplies from Tom. Tom sends a rejection of the offer in the mail. Rethinking his position, Tom then calls Eric and accepts the offer. The acceptance is effective, as Eric has not yet received notice of the rejection of the offer.
What is consideration?
The definition of consideration is a bargained for exchange where each party incurs a legal detriment. In short, consideration means something of value. In any exchange of value, each party gives up their legal rights to something. Whether the parties cared about the thing given up or whether it had any monetary value is immaterial.
Example: Nick enters into a contract with Agatha to complete the build-out construction in her new office. Agatha will pay Nick $5,000 for his work. In this situation, Nick is incurring a legal detriment (the duty to undertake work) and Agatha is incurring a legal detriment (paying $5,000). Both of these legal detriments constitute consideration.
Example: Tyson, I will pay you $100 if you sit silently and do not interrupt me for the rest of this presentation. If Tyson agrees and remains silent for the remainder of my presentation, then we have a valid contract. My $100 is valid consideration and Tyson forgoing his right to talk is valid consideration.
Note: As demonstrated from the above examples, consideration can take any number of forms. The value does not actually have to be exchanged by the parties. It simply has to be the subject of a bargained for agreement between the parties.
What constitutes a legal detriment?
A legal detriment is undertaking an action for which there is no obligation or agreeing not to act when a person has the right to do so. In this sense, the loss of legal rights to the item or to do something is a detriment. In the context of a contract, the promise or action of each party is the inducement for the other partys promise or action. Either persons promise or action is consideration as it limits that persons rights not to perform the promise or action.
Example: Think about a non-compete clause. One party promises money or benefits (such as a job) in exchange for another party agreeing not to compete with that party. The promise to not compete is consideration, because one party forgoes her right to carry on a trade (a legal detriment to her).
Do gifts by one party constitute consideration?
No. The legal detriment (relinquishing rights or ownership in the property) is only suffered by one party. So, promises by one party without some return promise or action constituting a legal detriment by the other party is not enforceable.
Example: Susan says to Victor, You can have my old laptop computer. I dont use it any more. The next day Susans new computer is infected with a virus and stops working. She needs her old computer to continue her work while the new computer is being repaired. There is no valid contract transferring ownership of the computer to Victor, as there is no consideration from Victor to form a contract. As such, Susan may be able to reclaim the computer.
Note: There are situations where the above example could constitute a valid contract or result in an implied-in-law contract. These situations are discussed below.
If one party provides a gift to another party and that gift is subject to specific conditions, this may constitute consideration. The agreement by the other party to adhere to those conditions is a legal detriment (i.e., the inability to use the gift in a given manner) can constitute consideration.
Example: Melinda makes a gift to Bill of 5,000 acres of land. As part of the gift, Melinda requires that Bill use the land as a nature preserve. If Bill ever uses the land for anything other than a nature preserve, the gift is revoked and ownership reverts back to Melinda. In this situation, the gift is subject to a specific condition (use as a nature preserve). By accepting the gift, Bill is forgoing his right to use the property in any manner he so chooses. As such, the conditions on the gift constitute consideration and there is a binding contract. If Bill breaches the contract by using the land as a theme park, the remedy in the contract is for ownership to revert back to Melinda.
A gift from one party to another may be enforceable if some equitable rule (e.g., promissory estoppel) makes it enforceable as an implied-in-law contract.
Example: In the example of Susan and Victor, suppose Victor decides to upload his very expensive software to the computer gifted from Susan. The software only allows for one download and cannot be transferred from one computer to another. Because Victor relies upon Susans gift of the computer to his detriment (loss of his computer programs), then there may be an enforceable contract based upon promissory estoppel.
Can past consideration (consideration from a prior agreement) serve as consideration for a contract?
Generally, no. Prior consideration constituted a legal detriment at that time. If a person does not incur an additional legal detriment then there is no valid consideration.
Example: Michelle hires Gloria to perform landscaping services in her yard. Michelle agrees to pay Gloria $1,000 for her services. Prior to beginning the job, Michelle tells Gloria that she has underpriced the project and it will cost $2,000. Michelle says, I understand, I will pay you the $2,000 for the services. When Gloria completes the project, Michelle is not happy with the results. She does not believe the work is worth $2,000 and only pays Gloria $1,000. In this situation, there was a valid contract for $1,000. Gloria sought to adjust the contract without providing any new, additional consideration (i.e., she was going to perform the exact same services for a hire dollar amount). As such the contract modification likely will not be enforceable and Michelle will only have to pay Gloria $1,000.
Note: An exception to this rule is when a party promises an additional legal detriment on top of an existing detriment. For example, I promise to pay a higher price if you deliver my goods more quickly than previously agreed. This is an additional legal detriment. On the other hand, a promise to pay a lesser amount than owed does not constitute consideration, unless it is involves an agreement to forgo a claim or dispute under the agreement (discussed below).
Example: If, in the above example, Gloria had added some additional services (or other value) to the new contract and Michelle accepted, this would have been new consideration and the new contract for $2,000 would have superseded the original $1,000 contract. Gloria could have agreed to complete the job more quickly, added a landscaping maintenance deal, etc. The additional consideration could be minimal.
Note: Under the UCC, a preexisting obligation can form the consideration for a new contract. The only limitation to this rule is that a contract that is subject to the statute of frauds (i.e., must be in writing), any modification of that contract must also comply with the statute of fraud.
Example: Brad enters into a contract with Violet to sell her a piece of equipment for $1,000. Later, Brad discovers that he mis-priced the item. Violet agrees in writing to pay $1,200 for the equipment instead of the original $1,000. This agreement is enforceable even in the absence of new consideration. Remember, the new agreement must be in writing (comply with the statute of frauds) to be enforceable.
What constitutes adequate consideration?
Courts generally hold that any form of consideration is adequate. Courts do not judge the reasonableness of an exchange; rather, they simply determine whether there was some exchange of value.
Example: Burt is purchasing a house from Ernie for $100,000. They enter into a purchase agreement, subject to a 15-day inspection period, where Burt can back out of the deal for any issues that arise during inspection. Burt inspects the property and finds some minor issues. Burt tells Ernie that he is only willing to pay $98,000 for the home in the current conditions. Burt agrees to the lower price. The parties execute an amendment modifying the original contract. The contract states that, In exchange for $10, the parties agree to the following modifications to the previous contract . The parties include this $10 language so that the modification to the contract is supported by consideration. The consideration is small or nominal in nature, but it is adequate to support the contract modification.
Note: Some courts have held that nominal consideration that is given simply to create a binding contract may not be sufficient to make the contract enforceable.
Are there any other special forms of consideration?
Yes. Courts have recognized many unique situations that constitute valid consideration. For example, giving up ones right to contest or dispute a prior agreement can constitute consideration. Forgoing ones right to sue another person over a dispute or agreeing not to put forward a legally recognizable defense to a claim would also be valid consideration. This is a release or waiver. Often, one party will offer a lesser payment than the amount owed in return for forgoing the right to further dispute the debt. If the other party accepts, then this promise constitutes valid consideration. We will see later, this situation is called an accord and satisfaction.
Example: Helen agrees to perform electrical work for Autumn for $1,000. Autumn is not happy with Helens work and withholds payment. Helen threatens to sue Autumn for the payment. Autumn alleges breach of contract by Helen based on poor or incomplete performance. Rather than go to court, Autumn and Helen agree to settle the matter by Autumn paying Helen $800. In turn, Helen agrees forgo her right to sue Autumn for not paying $1,000. In this settlement, the parties both exchanged value by forgoing a right or entitlement.
Note: In the above situation, there must be some uncertainty as to the merits of the dispute or action for it to constitute valid consideration. That is, there must be some viable argument or challenge to a prior agreement.
What is an illusory promise?
When a promise by one party is subject to a condition that either cannot occur or that is subject to the control of the promising party, the promise is illusory and does not constitute valid consideration.
Example: If you sing me a song, I will pay you ten dollars if I like your voice. This is a subjective determination (not based on objective criteria) that acts as a condition to the promisors performance and is thus illusory.
Are exclusive dealing agreements illusory in nature?
No. An exclusive dealing contract generally says that Party 1 will deal exclusively with Party 2, if Party 1 decides to undertake that specific business activity. The fact that one party is limiting itself in its right to deal with other parties constitutes sufficient consideration. Further, courts have interpreted the implied duty of good faith and best efforts in such an agreement as consideration. That is, one party impliedly promises to act in good faith and use best efforts to bring about the situation in which it will deal with the other party.
Example: Party, Inc., enters into an exclusive dealing contract with Singers, LLC, stating that, Party will exclusively use performing talent from Singers in its party operations. Party is free to not undertake any party operations, but, if it does, it has to work with Singer. This is an enforceable contract, as Party has forgone a right to use other talent. Singers is obligated under the contract to supply talent to Party in the event Party so demands.
What if a contract states that consideration is rendered, but it is not?
Courts will generally not enforce the contract due to lack of sufficient consideration.
Example: Seller enters into an agreement to sell her home to Buyer. During the due diligence phase, the Buyer notices things about the home that she would like to be fixed. These items are not sufficient to trigger the ability to walk away from the contract. The Seller agrees to make the repairs. The parties enter into a document that says, for $5 paid, the Seller agrees to make the repairs. The parties never actually exchange the considerations. If the seller fails to make the repairs, she is likely not liable for breach of contract. The court may find the contract unenforceable for lack of consideration.
Note: Options contracts frequently recite consideration that is not given. Courts are split when enforcing or denying enforcement of these agreements. The Restatement generally states that the failure to exchange consideration should not invalidate the contract.
Are any contracts enforceable without consideration?
Statutes and the common law create many scenarios where contracts are enforceable without consideration. The following types of promises are enforceable without consideration:
Detrimental Reliance: This is an equitable doctrine based upon fairness. It will make an agreement without consideration enforceable where one party justifiably relies on another partys promise and suffers a detriment if the promise is not upheld.
Example: David tells Grace that he will lend her his tractor. Grace wants to use the tractor to perform some services for a client. Grace relies on Davids promise and does not go about renting or purchasing a tractor. On the day of the job, David withdraws his promise to lend Grace the tractor. Grace disappoints the client and is fired from the job. Grace may be able to sue David for breach of contract and the damages she incurred. The promise from David was to make a gift and there was no return promise of performance from Grace. Grace did, however, rely upon Davids promise to her detriment. This detrimental reliance may satisfy the requirement for consideration.
Promise to Pay a Pre-Existing Debt: There is an inference that a party receives something of value by promising to pay a lender a pre-existing debt that is discharged in bankruptcy or barred by a statute of limitations.
Example: Jane purchases goods on credit from a local antique dealer. She later declares bankruptcy and the debts are discharged through legal proceedings. Jane later approaches the antique dealer and promises to repay the defaulted debt. This will be a new enforceable agreement.
Re-affirming a Voidable Promise: If a promisor makes a promise that is voidable because of a lack of mental capacity, mutual mistake, misrepresentation, undue influence, a subsequent promise after the fact may result in an enforceable contract.
Example: Rayann becomes intoxicated from drinking too much alcohol. During her intoxication, she agrees to give Jan her watch. Once she regains capacity, she quickly repudiates the agreement on the grounds that she lacked capacity to enter into an enforceable agreement. Later, she feels bad about backing out of her promise. She tells Jan that she will indeed give her the watch. This may make the previously voidable agreement enforceable.
UCC-Specific Transactions: Between merchants, a written release of a claim, a promise not to revoke an offer, and certain contract modifications are enforceable in the absence of considerations.
Example: Ellie, a merchant, promises to sell Miranda, another merchant, supplies at a given price. Ellie also promises to leave the offer open for 5 days. As previously discussed, this is known as a firm offer. Even though the promise to leave open the offer is not supported by consideration, it will likely be enforceable under the UCC.