Contracts Agreement

The key points in this chapter include:

1. The requirements of an offer.

2. How an offer terminates.

3. The difference between offers and counteroffers.

4. How an offer is accepted.

5. How an offer is revoked.

An agreement is the essence of every contract. The parties to a contract are the offeror (who makes an offer) and the offeree (to whom the offer is made). If, through the process of offer and acceptance, an agreement is reached, and the other elements are present (consideration, capacity, legality), a valid contract is formed.

A contract must contain reasonably definite terms. Generally, a contract must include, either expressed in the contract or capable of being reasonably inferred from it, the following terms: identification of the parties; identification of the contract’s subject matter (also quantity); the consideration to be paid; and the time of performance.

I. REQUIREMENTS OF THE OFFER
An offer is a promise or commitment to do or refrain from doing some specified thing in the
future. An offer has three elements—

A. INTENTION
The offeror must intend to be bound by the offer.

1. How to Determine the Offeror’s Intent
The offeror’s intent is determined by what a reasonable person in the offeree’s position would conclude the offeror’s words and actions meant. Offers made in obvious anger,
jest, or undue excitement do not qualify.

2. Nonoffers
What appears to be an offer may not be
sufficient to form the basis of a contract. It is important to recognize what does not constitute
an offer. Nonoffers include: (1) expressions of opinion, (2) statements of intention, (3)
preliminary negotiations, and (4) advertisements, catalogues, price lists, and circulars. Auctions represent a special situation.

3. Agreements to Agree
Agreements to agree to a material term of a contract at some future date may be enforced
if the parties clearly intended to be bound.

B. DEFINITENESS

1. Major Terms
All of the major terms must be stated with reasonable definiteness in the offer (or, if the
offeror directs, in the offeree’s acceptance).

2. Missing Terms
Courts are sometimes willing to supply a missing term when the parties have clearly
manifested an intent to form a contract.

C. COMMUNICATION
The offer must be communicated to the offeree.

II. TERMINATION OF THE OFFER

A. TERMINATION BY ACTION OF THE PARTIES

1. Revocation of the Offer by the Offeror
The offeror usually can revoke the offer (even if he or she has promised to keep it open), by
express repudiation or by performance of acts that are inconsistent with the offer and that are
made known to the offeree.

a. Communicated to the Offeree
Revocation must be communicated to the offeree (or the offeree’s agent) before the
offeree accepts. A revocation becomes effective when the offeree or offeree’s agent
actually receives it.

b. Offers to the General Public
An offer made to the general public can be revoked in the same manner the offer was
originally communicated.

2. Irrevocable Offers

a. Option Contract

1) What an Option Contract Is
A promise to hold an offer open for a specified period of time. A separate
contract that takes away the offeror’s power to revoke the offer for the period
of time specified.

2) How Long an Offer Must Be Held Open
                   If no time is specified, a reasonable time is implied.

3) Death or Incompetence of a Party
Generally, the death or incompetence of a party does not terminate an option                     contract—unless the offeror’s personal performance is essential to the fulfillment
of the contract.

b) Detrimental Reliance

1) Promissory Estoppel
When the offeree justifiably relies on an offer to his or her detriment, this reliance
may make the offer irrevocable.

2) Unilateral Contracts
Many courts will not allow the offeror to revoke the offer after the offeree has
performed some substantial part of his or her duties under a unilateral contract. In
effect, partial performance renders the offer irrevocable, giving the original
offeree reasonable time to complete performance.

3. Rejection of the Offer by the Offeree
The offer may be rejected by the offeree by words or conduct evidencing an intent not to
accept the offer.

a. Subsequent Attempt by the Offeree to Accept Construed as a new offer.

b. Communicated to the Offeror
Rejection of an offer is effective only when it is actually received by the offeror or the
offeror’s agent.

c. Inquiring about an Offer
Asking about an offer is not rejecting it.

3. Counteroffer by the Offeree
The offeree’s attempt to include different terms is a rejection of the original offer and a
simultaneous making of a new offer. The mirror image rule requires the acceptance to
match the offer exactly.

B. TERMINATION BY OPERATION OF LAW

1. Lapse of Time
An offer terminates automatically by law when the period of time specified in the offer has
passed.

a. When the Time Begins to Run
When the offer is received by the offeree, not when it is sent. If the offer is delayed, the
period begins to run from the date the offeree would have received the offer (if the offeree           knows or should know that the offer is delayed).

b. If No Time Is Specified
If no time is specified, then a reasonable time is implied.

2. Destruction of the Subject Matter
An offer is automatically terminated.

3. Death or Incompetence of the Offeror or Offeree
An offeree’s power of acceptance is terminated. Exceptions include irrevocable
offers (see above).

4. Supervening Illegality of the Proposed Contract
When a statute or court decision makes an offer illegal, the offer is automatically
terminated.

III. ACCEPTANCE

A. UNEQUIVOCAL ACCEPTANCE
The offeree must accept the offer unequivocally. This is the mirror image rule
(see above).

B. SILENCE AS ACCEPTANCE
Ordinarily, silence cannot operate as an acceptance. Silence or inaction can constitute
acceptance under the following circumstances—

1. Receipt of Offered Services
If an offeree receives the benefit of offered services even though he or she had an
opportunity to reject them and knew that they were offered with the expectation of
compensation.

2. Prior Dealings
The offeree had prior dealings with the offeror that lead the offeror to understand that silence
will constitute acceptance.

C. COMMUNICATION OF ACCEPTANCE

1. Bilateral Contract
A contract is formed when acceptance is communicated. The offeree must use
reasonable efforts to communicate the acceptance to the offeror.

2. Unilateral Contract
Communication is unnecessary (because acceptance is by performance), unless the
offeror requests notice or has no adequate means of determining if the act has been
performed, or the law requires notice.

D. MODE AND TIMELINESS OF ACCEPTANCE IN BILATERAL CONTRACTS

1. Mode

a. Authorized Means of Acceptance
If an offeree uses a mode of communication expressly or impliedly authorized by the offeror,
acceptance is effective when sent. This is the mailbox rule (deposited acceptance rule).

1) Express
When an offeror specifies how acceptance should be made, a contract is
not formed unless the offeree uses that mode of acceptance. If the offeree uses
that mode, the acceptance is effective even if the offeror never receives it.

2) Implied
When an offeror does not specify how acceptance should be made or specifies
that the acceptance will be effective only when received, the offeree may use any
medium that is reasonable under the circumstances (which include the means
used by the offeror to make the offer).

3) Exception
If the acceptance is not properly dispatched (for example, it is not correctly
addressed), in most states it will not be effective until received by the offeror or
the offeror’s agent. (If timely sent and timely received, however, it is considered
to have been effective on dispatch.)

b. Unauthorized Means of Acceptance

1) Effective When Received
If an offeree uses a mode of communication that was not authorized by
the offeror, acceptance is effective when received.

2) Effective When Sent
If an acceptance is timely sent and timely received, however, despite the means by
which it is sent, it is considered to have been effective when sent.

c. Rejection and Acceptance
Sometimes an offeree sends a rejection first, then later changes his or her mind and sends an
acceptance. The first communication to be received by the offeror determines whether a
contract is formed. If the rejection is received first, there is no contract.

2. Timeliness
Acceptance is timely if it is made before the offer is terminated.

IV. CONTACT FORMATION IS AN ELECTRONIC AGE
Traditional contract principles also apply to new forms of communication.

A. FAXED OFFERS AND ACCEPTANCES
A signature on a faxed document is legally binding. When an acceptance is faxed but is
not received in a timely fashion, it will not be considered effective until it is received.

B. CLICK-ON ACCEPTANCES
Clicking on a computer screen constitutes a valid acceptance of a contractual offer (see
Chapter 21).