Agreement
excerpted from West Bus.Law
An essential element for contract formation is agreement the parties
must agree on the terms of the contract and manifest to each other
their mutual assent to the same bargain. Ordinarily, agreement
is evidenced by two events: an offer and an acceptance. One party
offers a certain bargain to another party, who then accepts that
bargain. The agreement does not necessarily have to be in writing.
Both parties, however, must manifest their assent to the same
bargain. Once an agreement is reached, if the other elements of
a contract are present (consideration, capacity, and legalitydiscussed
in subsequent chapters), a valid contract is formed, generally
creating enforceable rights and duties between the parties.
Note that not all agreements are contracts. John and Kevin may
agree to play golf on a certain day, but it is doubtful that a
court would hold that their agreement is an enforceable contract.
A contractual agreement only arises when the terms of the agreement
impose legally enforceable obligations on the parties.
Section 1: Requirement of the Offer
As mentioned in Chapter 12, the parties to a contract are the
offeror, the one who makes an offer or proposal to another party,
and the offeree, the one to whom the offer or proposal is made.
An offer is a promise or commitment to do or refrain from doing
some specified thing in the future. Under the common law, three
elements are necessary for an offer to be effective:
1. The offeror must have a serious intention to become
bound by the offer.
2. The terms of the offer must be reasonably certain, or
definite, so that the parties and the court can ascertain
the terms of the contract.
3. The offer must be communicated by the offeror to the
offeree, resulting in the offerees knowledge of the
offer.
Once an effective offer has been made, the offeree has the power
to accept the offer. If the offeree accepts, an agreement is formed
(and thus a contract, if other essential elements are present).
INTENTION
The first requirement for an effective offer is a serious intent
on the part of the offeror. Serious intent is not determined by
the subjective intentions, beliefs, and assumptions of the offeror.
As discussed in Chapter 12, courts generally adhere to the objective
theory of contracts in determining whether a contract has been
formed. Under this theory, a party's words and conduct are held
to mean whatever a reasonable person in the offerees position
would think they meant. The court will give words their usual
meaning even if "it were proved by twenty bishops that [the]
party . . . intended something else."(1)
Offers made in obvious anger, jest, or undue excitement do not
meet the intent test, because a reasonable person would realize
that a serious offer was not being made. Because these offers
are not effective, an offerees acceptance does not create an agreement.
For example, suppose you and three classmates ride to school each
day in Davinas new automobile, which has a market value of $20,000.
One cold morning, the four of you get into the car, but Davina
cannot get the car started. She yells in anger, Ill sell this
car to anyone for $500! You drop $500 in her lap. Given these
facts, a reasonable person, taking into consideration Davinas
frustration and the obvious difference in value between the market
value of the car and the proposed purchase price, would declare
that her offer was not made with serious intent and that you did
not have an agreement.
The concept of intention can be further clarified through an examination
of the types of expressions and statements that are not offers.
EXPRESSIONS OF OPINION An expression of opinion is not an offer.
It does not evidence an intention to enter into a binding agreement.
Consider an example. Hawkins took his son to McGee, a doctor,
and asked McGee to operate on the sons hand. McGee said that the
boy would be in the hospital three or four days and that the hand
would probably heal a few days later. The sons hand did not heal
for a month, but the father did not win a suit for breach of contract.
The court held that McGee had not made an offer to heal the sons
hand in three or four days. He had merely expressed an opinion
as to when the hand would heal.(2)
STATEMENTS OF INTENTION If Arif says I plan to sell my stock
in Novation, Inc., for $150 per share, a contract is not created
if John accepts and tenders the $150 per share for the stock.
Arif has merely expressed his intention to enter into a future
contract for the sale of the stock. If John accepts and tenders
the $150 per share, no contract is formed, because a reasonable
person would conclude that Arif was only thinking about selling
his stock, not promising to sell.
PRELIMINARY NEGOTIATIONS A request or invitation to negotiate
is not an offer. It only expresses a willingness to discuss the
possibility of entering into a contract. Included are statements
such as Will you sell Blythe Estate? or I wouldnt sell my car
for less than $1,000. A reasonable person in the offerees position
would not conclude that these statements evidenced an intention
to enter into a binding obligation. Likewise, when construction
work is done for the government and private firms, contractors
are invited to submit bids. The invitation to submit bids is not
an offer, and a contractor does not bind the government or private
firm by submitting a bid. (The bids that the contractors submit
are offers, however, and the government or private firm can bind
the contractor by accepting the bid.)
ADVERTISEMENTS, CATALOGUES, PRICE LISTS, AND CIRCULARS In general,
advertisements, mail order catalogues, price lists, and circular
letters are treated not as offers to contract but as invitations
to negotiate. Suppose that Loeser advertises a used paving machine.
The ad is mailed to hundreds of firms and reads, Used Loeser Construction
Co. paving machine. Builds curbs and finishes cement work all
in one process. Price $21,250. If Star Paving calls Loeser and
says, We accept your offer, no contract is formed. Any reasonable
person would conclude that Loeser was not promising to sell the
paving machine but rather was soliciting offers to buy it. If
such an ad were held to constitute a legal offer, and fifty people
accepted the offer, there would be no way for Loeser to perform
all fifty of the resulting contracts. He would have to breach
forty-nine contracts. Obviously, the law seeks to avoid such unfairness.
Price lists are another form of invitation to negotiate or trade.
A sellers price list is not an offer to sell at that price; it
merely invites the buyer to offer to buy at that price. In fact,
the seller usually puts prices subject to change on the price
list. Only in rare circumstances will a price quotation be construed
as an offer.(3)
Although most advertisements and the like are treated as invitations
to negotiate, this does not mean that an advertisement can never
be an offer. If the advertisement makes a promise so definite
in character that it is apparent that the offeror is binding himself
or herself to the conditions stated, the advertisement is treated
as an offer. In the following case, the court had to decide whether
a newspaper advertisement announcing a special sale in a department
store should be construed as an offer, the acceptance of which
would complete a contract. (Today, the Federal Trade Commission
has a set of rules governing such ads.)
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Case 13.1
LEFKOWITZ v. GREAT MINNEAPOLIS SURPLUS STORE, INC.
Supreme Court of Minnesota, 1957.
251 Minn. 188, 86 N.W.2d 689.
Business Law in Action: When is an Ad an Offer?
BACKGROUND AND FACTS The defendant, Great Minneapolis Surplus
Store, Inc., published the following advertisement in a Minneapolis
newspaper on April 13, 1956:
"Saturday 9 a.m.
2 Brand New Pastel
Mink 3-Skin Scarfs
Selling for $89.50
Out they go
Saturday. Each . . . $1.00
1 Black Lapin Stole
Beautiful,
worth $139.50 . . . $1.00
First Come
First Served"
Plaintiff Lefkowitz went to the store and was the first person
to demand the merchandise and indicate a readiness to pay the
sale price. The defendant department store refused to sell the
merchandise to the plaintiff, saying that the offer was intended
for women only, even though the advertisement was directed to
the general public. The plaintiff sued the store in a Minnesota
state court, alleging breach of contract, and the trial court
awarded him damages. The defendant appealed.
IN THE LANGUAGE OF THE COURT
MURPHY, Justice.
* * * *
Whether in any individual instance a newspaper advertisement is
an offer rather than an invitation to make an offer depends on
the legal intention of the parties and the surrounding circumstances.
We are of the view on the facts before us that the offer by the
defendant * * * was clear, definite, and explicit, and left nothing
open for negotiation. The plaintiff having successfully managed
to be the first one to appear at the sellers place of business
to be served, as requested by the advertisement, and having offered
the stated purchase price of the article, he was entitled to performance
on the part of the defendant. We think the trial court was correct
in holding that there was in the conduct of the parties a sufficient
mutuality of obligation to constitute a contract of sale.
The defendant contends that the offer was modified by a house
rule to the effect that only women were qualified to receive the
bargains advertised. The advertisement contained no such restriction.
This objection may be disposed of briefly by stating that, while
an advertiser has the right at any time before acceptance to modify
his offer, he does not have the right, after acceptance, to impose
new or arbitrary conditions not contained in the published offer.
DECISION AND REMEDY The Supreme Court of Minnesota affirmed
the trial courts judgment in favor of the plaintiff.
Full text of case
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AUCTIONS Sometimes what appears to be an offer is not sufficient
to serve as the basis for contract formation. Particularly problematic
in this respect are offers to sell goods at auctions. In an auction,
a seller offers goods for sale through an auctioneer. This is
not, however, a contractual offer. Instead, the seller is only
expressing a willingness to sell. Unless the terms of the auction
are explicitly stated to be without reserve, the seller (through
the auctioneer) may withdraw the goods at any time before the
sale is closed by announcement or by fall of the auctioneers hammer.
The sellers right to withdraw goods characterizes an auction with
reserve; all auctions are assumed to be of this type unless a
clear statement to the contrary is made.(4) At auctions without
reserve, the goods cannot be withdrawn and must be sold to the
highest bidder.
In an auction with reserve, there is no obligation to sell, and
the seller may refuse the highest bid. The bidder is actually
the offeror. Before the auctioneer strikes the hammer, which constitutes
acceptance of the bid, a bidder may revoke his or her bid, or
the auctioneer may reject that bid or all bids. Typically, an
auctioneer will reject a bid that is below the price the seller
is willing to accept. When the auctioneer accepts a higher bid,
he or she rejects all previous bids. Because rejection terminates
an offer (as pointed out below), if the highest bidder withdraws
his or her bid before the hammer falls, none of the previous bids
are reinstated. If the bid is not withdrawn or rejected, the contract
is formed when the auctioneer announces, Going once, going twice,
sold (or something similar) and lets the hammer fall.
Image: Offeror and Offeree
In auctions with reserve, the seller may reserve the right to
confirm or reject the sale even after the hammer has fallen. In
this situation, the seller is obligated to notify those attending
the auction that sales of goods made during the auction are not
final until confirmed by the seller.
AGREEMENTS TO AGREE Traditionally, agreements to agreethat
is, agreements to agree to a material term of a contract at some
future datewere not considered to be binding contracts. More recent
cases illustrate the view that agreements to agree serve valid
commercial purposes and can be enforced if the parties clearly
intended to be bound by such agreements. For example, suppose
Zahn Consulting leases office space from Leon Properties, Inc.
Their lease agreement includes a clause permitting Zahn to extend
the lease at an amount of rent to be agreed on when the lease
is extended. Under the traditional rule, because the amount of
rent is not specified in the lease clause itself, the clause would
be too indefinite in its terms to enforce. Under the modern view,
a court could hold that the parties intended the future rent to
be a reasonable amount and could enforce the clause.(5)
In other words, under the modern view, the emphasis is on the
parties' intent rather than on form. For example, when the Pennzoil
Company discussed with the Getty Oil Company the possible purchase
of Getty's stock, a "memorandum of agreement" was drafted
to reflect the terms of the conversations. After more negotiations
over the price, both companies issued press releases announcing
an agreement in principle on the terms of the memorandum. The
next day, Texaco, Inc., offered to buy all of Getty's stock at
a higher price. The day after that, Getty's board of directors
voted to accept Texaco's offer, and Texaco and Getty signed a
merger agreement. When Pennzoil sued Texaco for tortious interference
with its "contractual" relationship with Getty, a jury
concluded that Getty and Pennzoil had intended a binding contract
before Texaco made its offer, with only the details left to be
worked out. Texaco was held liable for interfering with this contract.(6)
DEFINITENESS OF TERMS
The second requirement for an effective offer involves the definiteness
of its terms. An offer must have reasonably definite terms so
that, if it is accepted and a contract formed, a court can determine
if a breach has occurred and can provide an appropriate remedy.
What specific terms are required depends, of course, on the type
of contract. Generally, a contract must include the following
terms, either expressed in the contract or capable of being reasonably
inferred from it:
1. The identification of the parties.
2. The identification of the object or subject matter of the
contract (also quantity, when appropriate), including the
work to be performed, with specific identification of
such items as goods, services, and land.
3. The consideration to be paid.
4. The time of payment, delivery, or performance.
Courts sometimes are willing to supply a missing term in a
contract when the parties have clearly manifested an intent to
form a contract. If, in contrast, the parties have attempted to
deal with a particular term of the contract but their expression
of intent is too vague or uncertain to be given any precise meaning,
the court will not supply a "reasonable" term, because
to do so might conflict with the intent of the parties. In other
words, the court will not rewrite the contract. (7)
An offer may invite an acceptance to be worded in such specific
terms that the contract is made definite. For example, suppose
that Marcus Business Machines contacts your corporation and offers
to sell "from one to ten MacCool copying machines for $1,600
each; state number desired in acceptance." Your corporation
agrees to buy two copiers. Because the quantity is specified in
the acceptance, the terms are definite, and the contract is enforceable.
Definiteness is also required when a contract is modified. The
terms of a contract as modified must be reasonably definite so
that a court can determine if there has been a breach. The following
case illustrates this point.
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Case 13.2
RUUD v. GREAT PLAINS SUPPLY, INC.
Supreme Court of Minnesota, 1995.
526 N.W.2d 369.
COMPANY PROFILE Michael Wigley bought Great Plains Supply,
Inc. (GPS), a building materials supplier, in 1989. GPS had suffered
losses in nine of the previous ten years. To turn GPS around,
Wigley closed unprofitable stores and concentrated business on
contractors. In 1994, sales exceeded $100 millionup more than
40 percent over 1993and sales from GPS's truss manufacturing facilities
doubled for the fifth straight year. GPS plants, lumberyards,
and distribution centers are located primarily in the Midwest.
Successful salespersons are promoted to management, and managers
are compensated according to their performance.
BACKGROUND AND FACTS The corporate manual of Great Plains Supply,
Inc., states that employees can be discharged at any time for
any reason. This manual constitutes an employment contract between
GPS and its employees. Kevin Ruud was a store manager for GPS.
Before accepting an offer to transfer to an unprofitable store,
he expressed worries about job security to Michael Wigley, GPS's
owner, and Ronald Nelson, a GPS vice president. Wigley and Nelson
each responded, "Good employees are taken care of."
Ruud accepted the transfer, but when the store closed as he had
feared, he was offered only lesser jobs at lower pay. Ruud quit
his job and filed a suit in a Minnesota state court against GPS,
Wigley, and Nelson for, among other things, breach of contract.
Ruud alleged that their statements modified the terms of his contract
with GPS to include permanent employment. The court dismissed
the claims against Wigley and Nelson and granted GPS's motion
for summary judgment. Ruud appealed, and the appellate court reversed
the trial court's summary judgment on the issue. The case was
then appealed to the state supreme court.
IN THE LANGUAGE OF THE COURT
GARDEBRING, Justice.
* * * *
* * * * We conclude that Wigley and Nelson did not intend that
GPS offer Kevin Ruud a "permanent" job, but rather were
simply making policy statements as to the general goodwill of
the company toward Kevin Ruud and its other employees. Furthermore,
even if there was an intention to modify the [terms of Ruud's
employment] contract, the statements of Wigley and Nelson are
so vague as to leave undeterminable the nature of that modification.
Therefore, we conclude that as a matter of law, the statements
of Nelson and Wigley are not sufficiently definite to create an
offer of permanent employment.
DECISION AND REMEDY The Supreme Court of Minnesota reinstated
the order for summary judgment in favor of GPS.
COMMUNICATION
A third requirement for an effective offer is communication of
the offer to the offeree, resulting in the offerees knowledge
of the offer. Ordinarily, one cannot agree to a bargain without
knowing that it exists. Suppose that Estrich advertises a reward
for the return of his lost dog. Hoban, not knowing of the reward,
finds the dog and returns it to Estrich. Hoban cannot recover
the reward, because she did not know it had been offered.(8)
Section 2: Termination of the Offer
The communication of an effective offer to an offeree gives the
offeree the power to transform the offer into a binding, legal
obligation (a contract) by an acceptance. This power of acceptance,
however, does not continue forever. It can be terminated either
by the action of the parties or by operation of law.
TERMINATION BY ACTION OF THE PARTIES
An offer can be terminated by the action of the parties in any
of three ways: by revocation, by rejection, or by counteroffer.
REVOCATION OF THE OFFER BY THE OFFEROR The offerors act of
withdrawing an offer is called revocation. Unless an offer is
irrevocable, the offeror usually can revoke the offer (even if
he or she has promised to keep it open), as long as the revocation
is communicated to the offeree before the offeree accepts. Revocation
may be accomplished by express repudiation of the offer (for example,
with a statement such as I withdraw my previous offer of October
17 ) or by performance of acts inconsistent with the existence
of the offer, which are made known to the offeree.
The general rule followed by most states is that a revocation
becomes effective when the offeree or offerees agent (a person
acting on behalf of the offeree) actually receives it. Therefore,
a letter of revocation mailed on April 1 and delivered at the
offerees residence or place of business on April 3 becomes effective
on April 3.
An offer made to the general public can be revoked in the same
manner the offer was originally communicated. Suppose that a department
store offers a $10,000 reward to anyone giving information leading
to the apprehension of the persons who burglarized the stores
downtown branch. The offer is published in three local papers
and four papers in neighboring communities. To revoke the offer,
the store must publish the revocation in all seven papers for
the same number of days it published the offer. The revocation
is then accessible to the general public, even if some particular
offeree does not know about it.
IRREVOCABLE OFFERS Although most offers are revocable, some
can be made irrevocable. One type of irrevocable offer involves
the option contract. Increasingly, courts also refuse to allow
an offeror to revoke an offer when the offeree has changed position
because of justifiable reliance on the offer. (In some circumstances,
an offer for the sale of goods made by a merchant may also be
considered irrevocablesee the discussion of the merchants firm
offer in Chapter 21.)
Option Contract. An option contract is created when an offeror
promises to hold an offer open for a specified period of time
in return for a payment (consideration) given by the offeree.
An option contract takes away the offerors power to revoke the
offer for the period of time specified in the option. If no time
is specified, then a reasonable period of time is implied. For
example, suppose that you are in the business of writing movie
scripts. Your agent contacts the head of development at New Line
Cinema and offers to sell New Line your new movie script. New
Line likes your script and agrees to pay you $5,000 for a six-month
option. In this situation, you (through your agent) are the offeror,
and New Line is the offeree. You cannot revoke your offer to sell
New Line your script for the next six months. If after six months
no contract has been formed, however, New Line loses the $5,000,
and you are free to sell the script to another firm.
Option contracts are also frequently used in conjunction with
the sale of real estate. For example, you might agree with a landowner
to lease a home and include in the lease contract a clause stating
that you will pay $2,000 for an option to purchase the home within
a specified period of time. If you decide not to purchase the
home after the specified period has lapsed, you forfeit the $2,000,
and the landlord is free to sell the property to another buyer.
Detrimental Reliance. When the offeree justifiably relies on
an offer to his or her detriment, the court may hold that this
detrimental reliance makes the offer irrevocable. For example,
assume that Arenella has rented commercial property from Jake
for the past thirty-three years under a series of five-year leases.
Under business conditions existing as their seventh lease nears
its end, the rental property market is more favorable for tenants
than landlords. Arenella tells Jake that she is going to look
at other, less expensive properties as possible sites for her
business. Wanting Arenella to remain a tenant, Jake promises to
reduce the rent in their next lease. In reliance on the promise,
Arenella does not look at other sites but continues to occupy
and do business on Jakes property. When they sit down to negotiate
a new lease, however, Jake says he has changed his mind and will
increase the rent. Can he effectively revoke his promise?
Normally, he cannot, because Arenella has been relying on his
promise to reduce the rent. Had the promise not been made, she
would have relocated her business. This is a case of detrimental
reliance on a promise, which therefore cannot be revoked. The
situation is normally called promissory estoppel. To estop means
to bar, impede, or preclude from doing something. Thus, promissory
estoppel means that the promisor (the offeror) is barred from
revoking the offer, in this case because the offeree has already
changed her actions in reliance on the offer. We look again at
the doctrine of promissory estoppel in Chapter 14, in the context
of consideration.
Detrimental reliance on the part of the offeree can also involve
partial performance by the offeree in response to an offer looking
toward formulation of a unilateral contract. As discussed in Chapter
12, the offer to form a unilateral contract invites acceptance
only by full performance; merely promising to perform does not
constitute acceptance. Injustice can result if an offeree expends
time and money in partial performance, and then the offeror revokes
the offer before performance can be completed. Many courts will
not allow the offeror to revoke the offer after the offeree has
performed some substantial part of his or her duties.(9) In effect,
partial performance renders the offer irrevocable, giving the
original offeree reasonable time to complete performance. Of course,
once the performance is complete, a unilateral contract exists.
REJECTION OF THE OFFER BY THE OFFEREE The offer may be rejected
by the offeree, in which case the offer is terminated. Any subsequent
attempt by the offeree to accept will be construed as a new offer,
giving the original offeror (now the offeree) the power of acceptance.
A rejection is ordinarily accomplished by words or conduct evidencing
an intent not to accept the offer. As with revocation, rejection
of an offer is effective only when it is actually received by
the offeror or the offerors agent.
Merely inquiring about an offer does not constitute rejection.
Suppose that a friend offers to buy your CD-ROM library for $300,
and you respond, Is that your best offer? or Will you pay me $375
for it? A reasonable person would conclude that you had not rejected
the offer but had merely made an inquiry for further consideration
of the offer. You can still accept and bind your friend to the
$300 purchase price. When the offeree merely inquires as to the
firmness of the offer, there is no reason to presume that he or
she intends to reject it.
COUNTEROFFER BY THE OFFEREE A rejection of the original offer
and the simultaneous making of a new offer is called a counteroffer.
Suppose that Duffy offers to sell her home to Wong for $170,000.
Wong responds, Your price is too high. Ill offer to purchase your
house for $160,000. Wongs response is a counteroffer, because
it terminates Duffys offer to sell at $170,000 and creates a new
offer by Wong to purchase at $160,000.
At common law, the mirror image rule requires the offerees acceptance
to match the offerors offer exactlyto mirror the offer. Any material
change in, or addition to, the terms of the original offer automatically
terminates that offer and substitutes the counteroffer. The counteroffer,
of course, need not be accepted; but if the original offeror does
accept the terms of the counteroffer, a valid contract is created.(10)
Drama of the Law: Offer and Acceptance
TERMINATION BY OPERATION OF LAW
The power of the offeree to transform the offer into a binding,
legal obligation can be terminated by operation of the law through
the occurrence of the following events:
1. Lapse of time.
2. Destruction of the subject matter of the offer.
3. Death or incompetence of the offeror or the offeree.
4. Supervening illegality of the proposed contract.
LAPSE OF TIME An offer terminates automatically by law when
the period of time specified in the offer has passed. For example,
suppose Alejandro offers to sell his camper to Kelly if she accepts
within twenty days. Kelly must accept within the twenty-day period,
or the offer will lapse (terminate). The time period specified
in an offer normally begins to run when the offer is actually
received by the offeree, not when it is sent or drawn up. When
the offer is delayed (through the misdelivery of mail, for example),
the period begins to run from the date the offeree would have
received the offer, but only if the offeree knows or should know
that the offer is delayed.(11)
If no time for acceptance is specified in the offer, the offer
terminates at the end of a reasonable period of time. What constitutes
a reasonable period of time depends on the subject matter of the
contract, business and market conditions, and other relevant circumstances.
An offer to sell farm produce, for example, will terminate sooner
than an offer to sell farm equipment because farm produce is perishable
and subject to greater fluctuations in market value.
DESTRUCTION OF THE SUBJECT MATTER An offer is automatically
terminated if the specific subject matter of the offer is destroyed
before the offer is accepted.(12) If Johnson offers to sell his
prize greyhound to Rizzo, for example, but the dog dies before
Rizzo can accept, the offer is automatically terminated. Johnson
does not have to tell Rizzo that the animal has died for the offer
to terminate.
DEATH OR INCOMPETENCE OF THE OFFEROR OR OFFEREE An offerees
power of acceptance is terminated when the offeror or offeree
dies or is deprived of legal capacity to enter into the proposed
contract.(13) An offer is personal to both parties and cannot
pass to the decedents heirs, guardian, or estate of either. Furthermore,
this rule applies whether or not the other party had notice of
the death or incompetence.
SUPERVENING ILLEGALITY OF THE PROPOSED CONTRACT When a statute
or court decision makes an offer illegal, the offer is automatically
terminated.(14) For example, Enker offers to loan Falcone $10,000
at an annual interest rate of 12 percent. Before Falcone can accept
the offer, a law is enacted that prohibits interest rates higher
than 8 percent. Enkers offer is automatically terminated. If the
law had been passed after Falcone accepted the offer, a valid
contract would have been formed, because the offer would still
have been legal when it was accepted. In some circumstances, such
a contract might be unenforceable, however, as when a statute
or law is retroactively applied.
Concept Summary 13-1
Section 3: The acceptance
Acceptance is a voluntary act (either words or conduct) by the
offeree that shows assent (agreement) to the terms of an offer.
The acceptance must be unequivocal and communicated to the offeror.
UNEQUIVOCAL ACCEPTANCE
To exercise the power of acceptance effectively, the offeree must
accept unequivocally. This is the mirror image rule previously
discussed. If the acceptance is subject to new conditions or if
the terms of the acceptance materially change the original offer,
the acceptance may be deemed a counteroffer that implicitly rejects
the original offer. An acceptance may be unequivocal even though
the offeree expresses dissatisfaction with the contract. For example,
I accept the offer, but I wish I could have gotten a better price
is an effective acceptance. So, too, is I accept, but can you
shave the price? In contrast, the statement I accept the offer
but only if I can pay on ninety days credit is not an unequivocal
acceptance and operates as a counteroffer, rejecting the original
offer.
Certain terms when added to an acceptance will not qualify the
acceptance sufficiently to constitute rejection of the offer.
Suppose that in response to an offer to sell a piano, the offeree
replies, I accept; please send written contract. The offeree is
requesting a written contract but is not making it a condition
for acceptance. Therefore, the acceptance is effective without
the written contract. If the offeree replies, I accept if you
send a written contract, however, the acceptance is expressly
conditioned on the request for a writing, and the statement is
not an acceptance but a counteroffer. (Notice how important each
word is!)(15)
SILENCE AS ACCEPTANCE
Ordinarily, silence cannot constitute acceptance, even if the
offeror states, By your silence and inaction you will be deemed
to have accepted this offer. This general rule applies because
an offeree should not be obligated to act affirmatively to reject
an offer when no consideration has passed to the offeree to impose
such a duty.
In some instances, however, the offeree does have a duty to speak,
in which case his or her silence or inaction will operate as an
acceptance. For example, silence may be an acceptance when an
offeree takes 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. Suppose that Sayre
watches while a stranger rakes his leaves, even though the stranger
has not been asked to rake the yard. Sayre knows the stranger
expects to be paid and does nothing to stop her. Here, his silence
constitutes an acceptance, and an implied-in-fact contract is
created. He is bound to pay a reasonable value for the strangers
work. This rule normally applies only when the offeree has received
a benefit from the goods or services rendered.
Silence can also operate as acceptance when the offeree has had
prior dealings with the offeror. Suppose that a merchant routinely
receives shipments from a certain supplier and always notifies
the supplier when defective goods are rejected. In this situation,
silence regarding a shipment will constitute acceptance. Additionally,
if a person solicits an offer specifying that certain terms and
conditions are acceptable, and the offeror makes the offer in
response to the solicitation, the offeree has a duty to rejectthat
is, a duty to tell the offeror that the offer is not acceptable.
Failure to reject (silence) operates as an acceptance.
COMMUNICATION OF ACCEPTANCE
Whether the offeror must be notified of the acceptance depends
on the nature of the contract. In a bilateral contract, communication
of acceptance is necessary because acceptance is in the form of
a promise (not performance) and the contract is formed when the
promise is made (rather than when the act is performed). The offeree
must communicate the acceptance to the offeror. Communication
of acceptance is not necessary, however, if the offer dispenses
with the requirement. Additionally, if the offer can be accepted
by silence, no communication is necessary.
Because in a unilateral contract the full performance of some
act is called for, acceptance is usually evident, and notification
is therefore unnecessary. Exceptions do exist, however. When the
offeror requests notice of acceptance or has no adequate means
of determining whether the requested act has been performed, or
when the law requires notice of acceptance, then notice is necessary.(16)
MODE AND TIMELINESS OF ACCEPTANCE
Acceptance in bilateral contracts must be timely. The general
rule is that acceptance in a bilateral contract is timely if it
is made before the offer is terminated. Problems arise, however,
when the parties involved are not dealing face to face. In such
cases, acceptance takes effect, thus completing formation of the
contract, at the time the acceptances is communicated via the
mode expressly or impliedly authorized by the offeror. According
to the Restatement (Second) of Contracts, unless the offeror provides
otherwise, an acceptance made in a manner and by a medium invited
by an offer is operative and completes the manifestation of mutual
assent as soon as put out of the offeree's possession, without
regard to whether it ever reaches the offeror.(17)
This rule traditionally has been referred to as the mailbox rule,
also called the "deposited acceptance rule," because
once an acceptance has been deposited into a mailbox, it is "out
of the offeree's possession." Under this rule, if the authorized
mode of communication is the mail, then an acceptance becomes
valid when it is dispatched by mail (even if it is never received
by the offeror). Thus, whereas a revocation becomes effective
only when it is received by the offeree, an acceptance becomes
effective upon dispatch, providing that authorized means of communication
are used.
AUTHORIZED MEANS OF ACCEPTANCE Authorized means of communication
may be either expressly authorizedthat is, expressly stipulated
in the offeror impliedly authorized by the facts and circumstances
surrounding the situation or by law. When an offeror specifies
how acceptance should be made (for example, by overnight delivery),
express authorization is said to exist, and the contract is not
formed unless the offeree uses that specified mode of acceptance.
Moreover, both offeror and offeree are bound in contract the moment
this means of acceptance is employed. If overnight delivery is
expressly authorized as the only means of acceptance, a contract
is created as soon as the offeree delivers the message to the
express delivery company. The contract would still exist even
if the delivery company failed to deliver the message.
Image: Communication of Acceptance
Most offerors, for one reason or another, do not indicate their
preferred method of acceptance. When the offeror does not specify
expressly that the offeree is to accept by a certain means, or
that the acceptance will be effective only when received, acceptance
of an offer may be made by any medium that is reasonable under
the circumstances.(18) When two parties are at a distance, for
example, mailing is impliedly authorized because it is a customary
mode of dispatch.(19) Several factors determine whether the acceptance
was reasonable: the nature of the circumstances as they existed
at the time the offer was made, the means used by the offeror
to transmit the offer to the offeree, and the reliability of the
offers delivery. If, for example, an offer was sent by Federal
Express overnight delivery because an acceptance was required
urgently, then the offerees attempt to accept via first-class
mail (which may take three days or more to deliver) might not
be deemed reasonable.(20)
Application: Law and the Offeror or Offeree - The Mailbox Rule
Doesn't Matter
An acceptance sent by means not expressly or impliedly authorized
is normally not effective until it is received by the offeror.
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 on its dispatch.(21) If, in the previous example,
the acceptance that was sent by first-class mail was actually
delivered to the offeror the next day (the same as Federal Express
overnight delivery), then the court would recognize the acceptance
as operative.
EXCEPTIONS There are three basic exceptions to the rule that
a contract is formed when an acceptance is sent by authorized
means.
1. If the acceptance is not properly dispatched by the
offeree (if it was sent to an incorrect address, for
example), in most states it will not be effective until it is
received by the offeror.(22) For example, if mail is
the authorized means for acceptance, the offerees
letter must be properly addressed and have the correct
postage. If acceptance is timely sent and timely
received, however, despite the offeree's carelessness in
sending it, it is considered to have been effective on
dispatch.(23)
2. The offeror can stipulate in the offer that an
acceptance will not be effective until it is received by
the offeror.
3. Sometimes an offeree sends a rejection first, then later
changes his or her mind and sends an acceptance.
Obviously, this chain of events could cause confusion
and even detriment to the offeror, depending on
whether the rejection or the acceptance arrived first.
Because of this, the law cancels the rule of acceptance
upon dispatch in such situations, and the first
communication to be received by the offeror
determines whether a contract is formed. If the
rejection is receive first, there is no contract.(24)
Concept Summary 13-2
Section 4: Contract Formation in an Electronic Age
In the last few years, courts have had to deal with such issues
as how the "mailbox rule" can be adapted to an electronic
age in which documents are transmitted virtually instantaneously
via electronic communications systems, such as fax machines and
the Internet. An emerging issue has to do with whether clicking
on a "Yes" or "Agreed" box (in response to
an online offer) constitutes acceptance by conduct. Generally,
the courts tend to extend traditional contract law principles
to offers and acceptances made via nontraditional modes of communication.
FAXED OFFERS AND ACCEPTANCES
Offers and acceptances commonly are communicated via fax. To date,
the courts have held that signatures on faxed documents are legally
binding (unless an "original" signature is specifically
required), and transmission by fax is now a preferred means of
communication for many contracting parties. Often, as part of
a contractual arrangement, the parties will provide that a faxed
signature is the equivalent of an original signature.
What happens when an acceptance is faxed to the offeror's office
but for some reason is not received by the offeror in a timely
fashion or is lost? This is similar to a situation in which a
letter goes astray because of an incorrect address. In such a
situation, the mailbox rule that an acceptance is effective on
dispatch does not apply, and the acceptance will not be effective
until received by the offeror. Very likely, if a fax transmitted
to the offeror failed to reach the offeror for some reason, a
court would look closely at the circumstances. For example, if
the offeror did not receive the fax because his or her fax machine
was out of paper, and the offeree had reason to suspect or know
that the offeror did not receive the fax, then the court might
hold that the faxed acceptance was not effective.
Similarly, what if an offer is faxed to the offeree's office but
the offeree is unaware that the offer has been received? In this
situation, has the offer been effectively communicated to the
offeree? The court addresses this question in the following case.
¾¾¨¾¾
Case 13.3
CLOW WATER SYSTEMS CO., DIVISION OF McWANE, INC. v. NATIONAL
LABOR RELATIONS BOARD
United States Court of Appeals, Sixth Circuit, 1996.
92 F.3d 441
HISTORICAL AND TECHNOLOGICAL SETTING Fax machines have been
in use for more than twenty years. Communication by fax has simplified
and streamlined the way in which business is conducted. Unlike
mail or courier deliveries, which generally arrive at certain
predictable times during the day, a fax can arrive, unsolicited
and unnoticed, at any time of the day or night. As a result, unless
a fax machine is constantly checked, a communication may easily
be overlooked. Thus, while technology permits almost instantaneous
transmission of information, the transmission may go unnoticed.
BACKGROUND AND FACTS The United Steelworkers of America represented
some of the employees of Clow Water Systems Company in negotiations
for a new contract. Bob Andrews and Steve Smith served as spokespersons
for the union and Clow, respectively. After six months of negotiations,
the employees began a strike. During the negotiations and the
strike, Andrews sent Smith four faxes of contract proposals. Most
times, he phoned to say that a fax was being sent, and once he
also sent a certified letter. Months later, with the employees
still on strike, Smith told Andrews that Clow was going to hire
permanent replacement workers. Andrews made an unconditional offer
for the strikers to return to work. Under federal labor regulations,
once such an offer is received by the employer, the employer is
not allowed to hire replacement workers. The offer was made in
a fax, but Andrews did not phone Smith or send a certified letter.
No one at Clow saw the fax until after the replacement workers
had been hired. The union complained to the National Labor Relations
Board, which ordered Clow to reinstate the strikers. Clow asked
the U.S. Court of Appeals for the Sixth Circuit to review the
order.
IN THE LANGUAGE OF THE COURT
JOINER, * * * Judge.
* * * *
* * * The key to this case is, simply, fair notice. * * * If the
parties did not agree to the method of communication utilized,
and if there is no pattern of conduct reflecting acquiescence
to the method of communication utilized, we will not impute notice
of the communication to the recipient. This is the situation presented
here. Andrews departed from the course of conduct he had established
with Smith in several ways. His use of an unannounced facsimile,
without additional communication by the methods regularly utilized
by him in the past, does not allow us reasonably to infer that
the offer to return to work was effectively communicated to Clow.
DECISION AND REMEDY The U.S. Court of Appeals for the Sixth
Circuit refused to enforce the order to reinstate the workers
and granted Clow's request for review.
Full text of case
¾¾¨¾¾
"CLICK-ON" ACCEPTANCES
As noted earlier, under the common law of contracts, an acceptance
can be made either expressly or by conduct. The Uniform Commercial
Code (UCC), which governs contracts for the sale of goods, also
provides for acceptance by conduct. One of the legal issues concerning
contracts formed online is whether clicking "Yes" or
"Agreed" on a computer screen constitutes a valid acceptance
of a contractual offer. After all, it is possible to click a box
on a computer screen accidentally, in which situation it would
be unfair to hold that the action bound the offeree in contract.
To date, only a few cases dealing with the validity of "click-on"
acceptances have come before the courts. In one case, a federal
appellate court held that the offeree had manifested his assent
to be bound by the terms and conditions of a Shareware Registration
Agreement offered by CompuServe, Inc., by typing "Agree"
at various points in the registration agreement.(25) In another
case, a different federal appellate court indicated that an online
seller, as the master of the offer, could invite online acceptance
by conduct in the form of clicking on the appropriate box on the
computer screen.(26) Generally, issues concerning the validity
of online "click-on" acceptances tend to arise in the
context of sales contracts, to which the UCC applies. (For a further
discussion of some of the issues that arise in electronic sales
contracts, see the Emerging Trends in Business Law
Accessing the Internet
ACCESSING THE INTERNET:
BUSINESS LAW AND LEGAL ENVIRONMENT
If you are interested in analyzing a document to see if meets
the contract requirement of agreement (offer and acceptance),
go to http://www.istorm.com/burningman/He/Contract.html
There you will find a document entitled Short Form Contract for
the Purchase of Soul. Read through its terms and determine whether
the requirements of offer and acceptance were met.
To learn more about the requirements of a valid contract, including
agreement, you can access the Law Offices site at http://www/thelawoffice.com/
Select the topic of Business Law from the USA Legal Topics list
in the left-hand column. Go to Guide to Business law and then
to Contracts.