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Contract Offer and Acceptance

What constitutes an “offer” to contract?

The following elements must be present to establish a valid offer to contract.

Offeror and Offeree – An offer to contract must contains a specific promise from the the person making the promise (offeror) and a specific demand of the individual receiving the offer (offeree).

Example: I tell you that I will sell you a product for $5. I am the offeror and you are the offeree. My offer is to transfer ownership of a product and my demand is that you transfer ownership $5.

Intent to Make an Offer – The offeror must intend to make the offer. Whether there is intent to make an offer is judged from the position of the offeree. If a reasonable person in the position of the offeree would believe the offeror’s words or actions constitute an offer, it is an offer. This is an objective, rather than subjective, standard for determining whether the intent to make an offer exists.

Example: I shout out loud in frustration that I would sell my piece-of-junk care for a $100. The words look like an offer to sell my car. In reality, I am simply espousing my frustration. I do not have the intent necessary for my statement to constitute an offer and no reasonable person would interpret my statement as truly demonstrating that intent.

Definite Terms – An offer to contract must be sufficiently definite. That is, the terms of the offer must be sufficiently specific to allow the offeree to understand and accept the offer. The offeree must understand that she is the intended recipient of the offer and may accept it. Also, the terms of consideration must be stated.

Example: Simply stating that I will sell you an item “for a reasonable price” is not sufficient to constitute a definite offer. Most advertisements, catalogs, and web page price quotes are considered too indefinite to form the basis for a contract. To be sufficiently definite, the advertisement must be specific about the quantity of goods being offered and who is the intended offeree.

Note: There is an exception to this rule for the sale of goods pursuant to the terms of the UCC. Some contracts for the sale of goods can leave open non-quantity terms to be decided at a future time.

Remember, the above elements do not have to be in writing or formal. Further, the parties do not have to realize that their words or actions constitute a valid contract; rather, each element is judged by an objective standard. That is, how would a reasonable person perceive the actions potentially constituting an offer?

Discussion: How do you feel about the requirement that a contract meet this level of formality? Should it be more or less formal, and why? How do you feel about the fact that individuals can form a contract without fully realizing that their agreement is legally enforceable?

Practice Question: Ashton is reading looking at the merchandise for sale on Smart Clothes Corp’s website. He places an order for a new shirt and goes through the process of setting up an account and attempting to pay. At the end of the process, he gets notification that his purchase is discontinued and cannot be purchased. Ashton is furious and wants to sue Smart Clothes for breach of contract. If he does, what is the likely legal result in this situation?

When does an offer to contract terminate?

An offer to contract terminates at the following times or under the following conditions:

Specific Provision – An offer may include a specific provision detailing how long an offer will stay open and the conditions under which it terminates.

Lapse of Time – Unless the offer states otherwise, an offer terminates after a reasonable period of time. A reasonable period of time will vary depending upon the type of contract.

Example: An offer to sell bananas will terminate more quickly than an offer to sell cement.

Offeree’s Rejection – An offer terminates if the offeree receives the offer and rejects it. Once the offeree rejects the offer, she cannot come back later and accept the offer. Any attempt to do so may constitute a new offer to the original offeror.

Counter Offer – If an offeree makes a counter offer or counter proposal in response to an offer, the original offer terminates. This is the case with negotiations. If a party attempts to negotiate new or additional material terms to the offer, the original offer terminates. Attempting to offer ancillary or non-material terms may not terminate the offer.

Revocation by Offeror – Generally, the offeror may revoke an offer at any time before the offeree accepts it. If the offeree has already accepted the offer, a valid contract exists and an attempt to revoke the offer may constitute breach of the contract.

Note: There are certain offers, known as “firm offers”, that state that the offer cannot be revoked for a certain period. This type of offer is a form of contract in itself.

Destroy Subject Matter of Contract – An offer terminates if, before the offer is accepted, the property that is the subject of the offer is destroyed. If the offer has already been accepted, this could serve to void the contract.

Death or Mental Incapacity – If the offeror dies or loses mental capacity at any time before an offer is accepted, the offer is revoked.

Note: The offer does not become effective again if the offeror regains mental capacity.

Illegality – An offer terminates if the subject of the offer (the activity or product) becomes illegal. If the offer has been accepted, the subject matter becoming illegal will void the contract.

Some of the methods of contract termination are voluntary, while others others are a result of circumstances beyond the control of the parties.

Discussion: Do any of the common methods by which an offer terminates surprise you? What factors should a court consider when determining whether a “reasonable time” has passed? What factors should the court consider in determining whether an offeree has been rejected? Does the rule regarding counter-offers discourage negotiation? Why or why not?

Practice Question: Dudley is interested in purchasing an ownership interest in Sarah’s business. Sarah sends over a term sheet that places a specific value on her business and offers a specific number of shares. Dudley reviews the sheet and sends back a sign subscription agreement that lists a lower valuation, but agrees to buy a larger number of shares. The total purchase price for all shares would equal the amount indicated in Sarah’s term sheet. Sarah writes back and says that she will work with other investors. Dudley is angry and wants to sue for a breach of contract? What is the likely outcome?

What is “acceptance” of an offer?

Acceptance of a contract is the assent of the offeree to the demands contained in the offeror’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offeror. An offeree accepts a unilateral contact by undertaking the performance demanded by the offeror. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are as follows:

Mirror-Image Rule (Restatement) – Contracts that are not primarily for the sale of goods may be governed by rules derived from the Restatement of Contracts. The Restatement proposes the “mirror-image rule” for acceptance of an offer. This rule states that the acceptance of an offer must be exactly as demanded by the offeror. That is, the acceptance must “mirror” the offer. If the offeree adds new terms to the acceptance, it is not really an acceptance. Acceptance with different or additional terms constitutes a counteroffer.

Example: I offer to perform a service for you at a given fee. You reply that my prices are too high and that you want a 15% discount. You changed the terms of the consideration (the price), which is a material aspect of the offer. As such, you have effectively rejected my offer, as your attempted acceptance was not the mirror image of my offer.

Discussion: Why do you think about the mirror-image rule? Does it concern you that a minor deviation in an acceptance can effectively reject a contract? Why or why not? What if this was not the intent of the parties at the time of entering into the agreement?

Practice Question: Kate offers to paint Roger’s house for $2,500. Roger attempts to accept the offer by saying, “Great. But, you have to paint the storage shed in the backyard as well.” Kate does not respond and decides to take a different painting job. Roger is angry, particularly when he learns that the next closest offer is twice as expensive. He wants to sue Kate for her failure to perform. What is the likely result?

What is “acceptance” of an offer?

Acceptance of a contract is the assent of the offeree to the demands contained in the offeror’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offeror. An offeree accepts a unilateral contact by undertaking the performance demanded by the offeror. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are as follows:

Rule for Sale of Goods (UCC) – The mirror-image rule does not apply to sales of goods under the UCC. The UCC recognizes that a contract is formed if the acceptance of the offer is unequivocal. That is, if it is obvious the parties agree on the primary or material terms of the agreement, an acceptance that changes or adds additional terms is a valid acceptance. The effect of different or additional terms depends on whether the parties are merchants. If either party is not a merchant, 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: I am a merchant and I offer to sell you goods. You respond that you are willing to purchase the goods, but I must provide you with a warranty. I send the goods and you accept them. If you are not a merchant, there is no warranty. That was simply a recommendation to be part of the contract. If you are a merchant, the warranty is a part of the contract.

Note: In the above example, if we are both merchants, I could have excluded the warranty from the contract be expressly rejecting the warranty. If I sent the goods and you accepted them, you have agreed to the terms of my original offer.

Discussion: Why do you think the sale of goods employs a different rule than contracts to provide services? Can you think of any reasons for differentiating between the rules that apply to merchants of goods and non-merchants?

Practice Question: Darla is purchasing consumer goods from Isaac’s business. Darla sends in a purchase order and the payment for the goods. Isaac sends the goods and a receipt that includes a clause stating that any disputes about the goods must be submitted to arbitration. Darla is not happy with the quality of the goods and she asks Isaac to return her money. When Isaac refuses she seeks to sue Isaac. What is the result in this situation?

What is “acceptance” of an offer?

Acceptance of a contract is the assent of the offeree to the demands contained in the offeror’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offeror. An offeree accepts a unilateral contact by undertaking the performance demanded by the offeror. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are as follows:

Silence with Regard to Offer – Failing to reply to an offer is not acceptance in most cases. This is true even if the offer says silence will be considered acceptance. There are, however, exceptions to this rule. If the relationship between the parties is such that it is not expected that the offeree reply, silence by the offeree may constitute acceptance. Another exception 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. Lastly, 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.

Example: I offer to paint your house for $100. If you do not respond to my offer, there is no acceptance. If, however, I specifically state that, “If I do not hear anything from you by Friday, I will assume you agree to my offer.” You reply, “That sounds good.” You now realize that silence become acceptance on Friday. Changing the scenario a bit, you are a contractor and I routinely provide you quotes on houses. You expect me to paint all of your houses. If our routine practice is that I provide a quote and am expected to paint the house if you do not object, silence may be acceptance.

Example: If we are both merchants dealing in expensive bicycles. You make a monthly order with me for the same inventory. One month, I send a shipment of inventory without receiving an order from you. If the goods arrive and you do not reject them for two weeks, your silence constitutes acceptance.

Discussion: How do you feel about the idea that, in some instances, an individual can accept and offer simply by failing to respond? Are you convinced that the applicable exceptions are justified? Why or why not?

Practice Question: Eric enters his email address to receive offers from a CD of the month club. The next week, Eric receives a CD in the mail with instructions state that he must return them within 10 days or he incurs an obligation to purchase the CD. What is the likely result?

Acceptance of a Contract – Mailbox Rule

The mailbox rule is a default rule that applies when the offeror does not place specific requirements on the manner of acceptance. Under this rule, the offeree accepts the offer when it is sent to the offeror. This could include dropping it in the mail or sending it with a courier. This may also include providing notice of acceptance via email or other electronic communication (regardless of whether the offeror actually checks or reads the email). As such, 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: You offer to sell me your car for $500. I immediately send you a letter accepting your offer and a $500 check. We have a contract as soon as I drop the letter in the mail.

Discussion: What do you think about the mailbox rule? Should it be the default rule in contracts? Why or why not?

Practice Question: Pamela is a musician and writer. She offers to sell her copyright to a popular song to Devon and Mark. Devon drops his acceptance of the offer in the mail on Friday evening. On Saturday morning, Pamela meets with Mark and signs an agreement transferring the copyright to him. What is the likely result in this situation?

What is “consideration” in the context of contract formation?

Consideration is anything of value. Recall that a valid contract must include an exchange of value between the offeror and offeree. The value should be the inducement or incentive for the other party entering into the agreement. That is, it must be the subject of the bargain between the parties. A promise to make a gift is not binding because the party receiving the gift gives no value in return for the promise. When the existence of consideration is not clear, the court will examine the transaction as a whole to determine if consideration exits and the contract is enforceable.

Types of Consideration – The amount or value of the consideration present does not matter. It need not be money or goods. Acceptable types of consideration include:

Agreement to Refrain: An agreement to refrain from doing something that you have the right and ability to do may constitute consideration.

Example: I really want to stand up and sing in the middle of a crowded restaurant. You would be very embarrassed if I do so. You offer me $5 to not stand up and start singing. My refraining form doing this may constitute consideration.

Agreement Not to Sue: An agreement not to sue the other party may be sufficient consideration when reasonable grounds exist to make a lawsuit possible.

Example: You claim that I owe you additional funds under a contract. I disagree and argue that all accounts are settled. You threaten to sue me. I offer to pay you a small sum of money in exchange for your agreement not to bring a legal action against me. Forgoing your right to sue me in exchange for money is a valid exchange of consideration.

Prior Consideration – Generally, consideration in a prior agreement is not valid consideration in a new agreement, except in very limited circumstances. The reason is because the individual is already obligated under the old agreement. Trying to promise to do the same thing does not provide a new form of value. Under the UCC, however, a preexisting obligation can constitute valid consideration if the offeror is a purchaser of $500 or more in goods, and she offers to pay more than an additional $500 for the same goods. This exception exists to protect certain business arrangement from failing.

Example: We are both merchants. You enter into a contract to purchase goods from me for $5,000. In the pendency of the contract, you realize that I am likely breach the contract. You really do not want to find another seller, so you offer to pay an additional $1,000 for me to perform the contract. May agreement to perform my existing contractual obligation (sell you the goods) is valid consideration – even though it is the consideration for a prior agreement.

Discussion: How do you feel about the requirement for consideration? Should there be a value requirement for the consideration? Why or why not? What do you think is the purpose or objective behind requiring any form of consideration, regardless of the nature or value?

Practice Question: Donna is merchant and enters into a contract with Ashley to purchase bricks from me for $10,000. In the pendency of the contract, the cost of bricks rises dramatically. Ashley will lose money by selling the bricks to Donna for $10,000. Donna realizes that Ashley is going to lose money and will likely breach the contract. Donna really needs the bricks and it is most convenient to purchase from Ashley. She offers to pay an additional $1,000 for the bricks. If, after Ashley ships the bricks, Donna decides not to pay the additional $1,000, what is the probable result?

Promissory Estoppel Exception to Consideration Requirement

A doctrine known as “promissory estoppel” may serve as a substitute for consideration to make an agreement into a valid contract. Promissory estoppel is an equitable doctrine. If the offeree reasonably relies on the offeror’s promise to her detriment, the doctrine of promissory estoppel may make the contract valid despite the absence of consideration. The two key elements are:

⁃ that the reliance must be reasonable in light of the situation, and

⁃ the relying party must suffer a tangible detriment.

Note: The court may also consider whether performance causes a hardship on the promising party.

Example: You are having erosion problems in your hard. You cannot afford to pay to have it fixed, so I offer to give you the materials necessary to build a retaining wall. You spend your available money grading out the ground and digging the dirt where the wall will go. After all of this, I back out of my promise. You have now spent your available money and, without installing the wall, made the situation far worse than it was before. A court may deem my promise to be an enforceable contract because you relied to your detriment on my promise.

Discussion: How do you feel about the idea that a person’s reliance on another person’s promise can substitute for consideration? How much of a detriment must the relying party suffer before you think a court should enforce the agreement? Should the promise be enforced if it would result in a significant hardship for the promising party?

Practice Question: Tina says that she will give Sam her car to drive across the country from Georgia to California. Sam relies on Tina’s promise by not purchasing a plane ticket. Tina fails to follow through with her promised gift. Sam has to purchase a plane ticket that is dramatically more expensive that it would have been if he had purchased the ticket at the time that Tina made her promise. If Sam wants to sue Tina for breach of contract, what is the likely result?

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