Tuesday, February 23, 2010
4 - Contracts - Formation (Acceptance)
Contracts – Formation (Acceptance)
PLEASE NOTE THAT THE FOLLOWING IS TAKEN FROM SOME OF MY CLASS NOTES, SOME OF WHICH IS MY OWN PERSONAL WORK AND SOME OF WHICH BELONGS TO CONCORD LAW SCHOOL. IT IS POSTED TO HELP MY IL STUDENTS IN PARTICULAR. IT CANNOT BE DISSEMINATED WITHOUT EXPRESS, WRITTEN PERMISSION.
It is not enough that an offer be made and is not revoked. The offer must also be accepted. In accepting an offer, it is not enough that the offeree know of the offer. The offeree also must manifest an intent to accept it. An offeree must manifest an objectively recognized intent to be bound by the terms of an offer.
1. Bilateral or unilateral contract.
An offer may either request a promise (bilateral contract) or an act (unilateral contract). If an offer is ambiguous, the law favors a bilateral contract.
How is an offer accepted? It depends, then, or whether or not the contract is bilateral or unilateral. “I promise to pay if you promise to ride your tricycle from San Diego, California, to Bangor, Maine,” is bilateral – a promise for a promise. “I promise to pay if you will ride your tricycle from San Diego, California, to Bangor, Maine,” is unilateral - a promise for an act. What difference does that make?
If the agreement is bilateral, a promise for a promise, once the offeree accepts, the offeror is bound to pay and the offeree is bound to perform. A violation of either is a breach. If the agreement is unilateral, there is no promise from the offeree, so no one is bound. It is clear that if the offeree performs – rides his tricycle from San Diego to Bangor, the offeror is bound to pay. But what happens of the offeree begins his trek from San Diego to Bangor, but when he gets to St. Louis, Missouri, the offeror says to him, “I revoke.” Do you see the problem? The offeree has partially performed, but has not completely performed. Here is what happens:
It appears the majority rule (described in Restatement section 45) is that once the offeree has begun performance, the offer becomes irrevocable for a reasonable period of time, to allow the offeree to complete performance. Jurisdictions are somewhat split on the theory behind that rule, with some calling it an option contract and others saying that a bilateral contract is formed by the beginning of performance. Under either view, the offer is irrevocable, but the bilateral contract view binds the offeree to complete performance of the act, while the option contract view does not.
The Restatement view is that an option contract is formed upon the beginning of performance. The offeree has the option to complete the act and bind the offeror, but is not required to do so. The offeror has given up the right to revoke so long as the act is performed in accord with the offer (time of performance as specified) or if not specified, then within a reasonable time.
Once this portion of the problem is resolved, the next issue is what constitutes when performance has begun? The general rule is that mere preparation probably does not constitute a beginning of performance. However, once you pass from mere preparation (e.g. tuning up your tricycle) to the specific act (e.g. putting the pedal to the medal), performance begins. Where, however, an offeree relies to his detriment on the offer (e.g. undertaking substantial expenses or passing up other valuable opportunities) a court could deem that performance has begun.
2. Mirror image rule.
At common law, the acceptance must be the mirror image of the offer. If not, it is deemed a counteroffer and an implied rejection. Under UCC 2-207, a new or different term can still be an acceptance. Even if there is no agreement "on paper," the conduct of the parties can create a contract. So, when you see a new or different term, and the applicable law is the UCC, then apply 2-207.
a. Are both parties merchants?
b. Did the offer expressly limit acceptance to its own terms.
c. Do the new terms materially alter the terms of the offer? Did the added term result in surprise or hardship on the offeror?
d. Did the offeror notify the offeree within a reasonable time rejecting the new/different term in the acceptance/confirmation?
3. Mailbox Rule – Acceptance effective upon the post.
An offer for a bilateral contract is accepted at the time the acceptance is dispatched (by means specified by the offeror, or if not specified, by a reasonable means) even if it is never actually received. The main exception to the mailbox rule is that a rejection which is received first, and relied upon, will take precedence over the mailbox rule. Note that a rejection is valid when received.
Again, a rejection is valid when received. Once an offeree rejects, the offer cannot be accepted. Note that an offeror revokes. An offeree rejects.
You should take a look at UCC 2-206 – Shipment/Non-Conforming Goods.
Next we’ll look at “Consideration.”
Professor Doug Holden
© 2010 Douglas S. Holden. All Rights Reserved.