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CONTRACT FORMATION: OFFER &
ACCEPTANCE
§ 3.01
The Offer
With some exceptions, the Restatement (Second) of Contracts § 17 states
that contract formation “requires a bargain in which there is a manifestation
of mutual assent to the exchange and consideration.” We have talked about
the consideration requirement. Now we focus on the bargaining process,
namely offer and acceptance.
It is often said that a “contract” is formed by an “offer” plus an “acceptance.”
However, many legally enforceable agreements are made even though the
parties never use any of these words or even though there are no communications on either party’s behalf which could be labeled an “offer” or an “acceptance.” On the other hand, the classification of a communication as an “offer”
or an “acceptance” often has substantial legal consequences.
[A] What Is an Offer?
The Restatement (Second) of Contracts § 24 defines an offer as “the manifestation of willingness to enter into a bargain, so made as to justify another
person in understanding that his assent to that bargain is invited and will
conclude it.” So if we say that someone has made an offer to someone else,
the person making the offer will be bound to a contract if the offeree accepts
it. The next case deals with the question of whether advertisements are
“offers.”
LEONARD v. PEPSICO, INC.
United States District Court, Southern District of New York
88 F. Supp. 2d 116 (1999), affirmed per curiam 210 F.3d 88 (2d
Cir. 2000)
Plaintiff brought this action seeking, among other things, specific performance of an alleged offer of a Harrier Jet, featured in a television advertisement for defendant’s “Pepsi Stuff” promotion. Defendant has moved for
summary judgment. For the reasons stated below, defendant’s motion is
granted.
I. Background
This case arises out of a promotional campaign conducted by defendant, the
producer and distributor of the soft drinks Pepsi and Diet Pepsi. The promotion, entitled “Pepsi Stuff,” encouraged consumers to collect “Pepsi Points”
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from specially marked packages of Pepsi or Diet Pepsi and redeem these points
for merchandise featuring the Pepsi logo.
A. The Alleged Offer
Because whether the television commercial constituted an offer is the
central question in this case, the Court will describe the commercial in detail.
The commercial opens upon an idyllic, suburban morning, where the chirping
of birds in sun-dappled trees welcomes a paperboy on his morning route. As
the newspaper hits the stoop of a conventional two-story house, the tattoo of
a military drum introduces the subtitle, “MONDAY 7:58 AM.” The stirring
strains of a martial air mark the appearance of a well-coiffed teenager
preparing to leave for school, dressed in a shirt emblazoned with the Pepsi
logo, a red-white-and-blue ball. While the teenager confidently preens, the
military drumroll again sounds as the subtitle “T-SHIRT 75 PEPSI POINTS”
scrolls across the screen. Bursting from his room, the teenager strides down
the hallway wearing a leather jacket. The drumroll sounds again, as the
subtitle “LEATHER JACKET 1450 PEPSI POINTS” appears. The teenager
opens the door of his house and, unfazed by the glare of the early morning
sunshine, puts on a pair of sunglasses. The drumroll then accompanies the
subtitle “SHADES 175 PEPSI POINTS.” A voiceover then intones, “Introducing the new Pepsi Stuff catalog,” as the camera focuses on the cover of the
catalog.
The scene then shifts to three young boys sitting in front of a high school
building. The boy in the middle is intent on his Pepsi Stuff Catalog, while
the boys on either side are each drinking Pepsi. The three boys gaze in awe
at an object rushing overhead, as the military march builds to a crescendo.
The Harrier Jet is not yet visible, but the observer senses the presence of a
mighty plane as the extreme winds generated by its flight create a paper
maelstrom in a classroom devoted to an otherwise dull physics lesson. Finally,
the Harrier Jet swings into view and lands by the side of the school building,
next to a bicycle rack. Several students run for cover, and the velocity of the
wind strips one hapless faculty member down to his underwear. While the
faculty member is being deprived of his dignity, the voiceover announces:
“Now the more Pepsi you drink, the more great stuff you’re gonna get.”
The teenager opens the cockpit of the fighter and can be seen, helmetless,
holding a Pepsi. Looking very pleased with himself, the teenager exclaims,
“Sure beats the bus,” and chortles. The military drumroll sounds a final time,
as the following words appear: “HARRIER FIGHTER 7,000,000 PEPSI
POINTS.” A few seconds later, the following appears in more stylized script:
“Drink Pepsi — Get Stuff.” With that message, the music and the commercial
end with a triumphant flourish.
Inspired by this commercial, plaintiff set out to obtain a Harrier Jet.
Plaintiff explains that he is “typical of the ‘Pepsi Generation’ . . . he is young,
has an adventurous spirit, and the notion of obtaining a Harrier Jet appealed
to him enormously.” Plaintiff consulted the Pepsi Stuff Catalog. The Catalog
features youths dressed in Pepsi Stuff regalia or enjoying Pepsi Stuff accessories, such as “Blue Shades” (“As if you need another reason to look forward
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to sunny days.”), “Pepsi Tees” (“Live in’em. Laugh in’em. Get in’em.”), “Bag
of Balls” (“Three balls. One bag. No rules.”), and “Pepsi Phone Card” (“Call
your mom!”). The Catalog specifies the number of Pepsi Points required to
obtain promotional merchandise. The Catalog includes an Order Form which
lists, on one side, fifty-three items of Pepsi Stuff merchandise redeemable for
Pepsi Points (see id. (the “Order Form”)). Conspicuously absent from the Order
Form is any entry or description of a Harrier Jet. The amount of Pepsi Points
required to obtain the listed merchandise ranges from 15 (for a “Jacket Tattoo”
(“Sew’em on your jacket, not your arm.”)) to 3300 (for a “Fila Mountain Bike”
(“Rugged. All-terrain. Exclusively for Pepsi.”)). It should be noted that plaintiff
objects to the implication that because an item was not shown in the Catalog,
it was unavailable.
The rear foldout pages of the Catalog contain directions for redeeming Pepsi
Points for merchandise. These directions note that merchandise may be
ordered “only” with the original Order Form. The Catalog notes that in the
event that a consumer lacks enough Pepsi Points to obtain a desired item,
additional Pepsi Points may be purchased for ten cents each; however, at least
fifteen original Pepsi Points must accompany each order.
Although plaintiff initially set out to collect 7,000,000 Pepsi Points by
consuming Pepsi products, it soon became clear to him that he “would not be
able to buy (let alone drink) enough Pepsi to collect the necessary Pepsi Points
fast enough.” Reevaluating his strategy, plaintiff “focused for the first time
on the packaging materials in the Pepsi Stuff promotion,” and realized that
buying Pepsi Points would be a more promising option. Through acquaintances, plaintiff ultimately raised about $ 700,000.
B. Plaintiff’s Efforts to Redeem the Alleged Offer
On or about March 27, 1996, plaintiff submitted an Order Form, fifteen
original Pepsi Points, and a check for $ 700,008.50. Plaintiff appears to have
been represented by counsel at the time he mailed his check; the check is
drawn on an account of plaintiff’s first set of attorneys. At the bottom of the
Order Form, plaintiff wrote in “1 Harrier Jet” in the “Item” column and
“7,000,000” in the “Total Points” column. In a letter accompanying his submission, plaintiff stated that the check was to purchase additional Pepsi Points
“expressly for obtaining a new Harrier jet as advertised in your Pepsi Stuff
commercial.”
On or about May 7, 1996, defendant’s fulfillment house rejected plaintiff’s
submission and returned the check, explaining that:
The item that you have requested is not part of the Pepsi Stuff
collection. It is not included in the catalogue or on the order form, and
only catalogue merchandise can be redeemed under this program.
The Harrier jet in the Pepsi commercial is fanciful and is simply
included to create a humorous and entertaining ad. We apologize for
any misunderstanding or confusion that you may have experienced
and are enclosing some free product coupons for your use.
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II. Discussion
A. The Legal Framework
On a motion for summary judgment, a court cannot try issues of fact; it can
only determine whether there are issues to be tried. The moving party
therefore must show that there are no such genuine issues of material fact
to be tried, and that he or she is entitled to judgment as a matter of law.
The question of whether or not a contract was formed is appropriate for
resolution on summary judgment. Summary judgment is proper when the
words and actions that allegedly formed a contract [are] so clear themselves
that reasonable people could not differ over their meaning.
B. Defendant’s Advertisement Was Not An Offer
1. Advertisements as Offers
The general rule is that an advertisement does not constitute an offer.
Restatement (Second) of Contracts § 26 cmt. b (1979). Similarly, a leading
treatise notes that:
It is quite possible to make a definite and operative offer to buy or
sell goods by advertisement, in a newspaper, by a handbill, a catalog
or circular or on a placard in a store window. It is not customary to
do this, however; and the presumption is the other way. . . . Such
advertisements are understood to be mere requests to consider and
examine and negotiate; and no one can reasonably regard them as
otherwise unless the circumstances are exceptional and the words
used are very plain and clear.
1 Arthur Linton Corbin & Joseph M. Perillo, Corbin on Contracts § 2.4, at
116–17 (rev. ed. 1993).
An advertisement is not transformed into an enforceable offer merely by
a potential offeree’s expression of willingness to accept the offer through,
among other means, completion of an order form. Advertisements and order
forms are mere notices and solicitations for offers which create no power of
acceptance in the recipient. Under these principles, plaintiff’s letter of March
27, 1996, with the Order Form and the appropriate number of Pepsi Points,
constituted the offer. There would be no enforceable contract until defendant
accepted the Order Form and cashed the check.
The exception to the rule that advertisements do not create any power of
acceptance in potential offerees is where the advertisement is “clear, definite,
and explicit, and leaves nothing open for negotiation,” in that circumstance,
“it constitutes an offer, acceptance of which will complete the contract.”
Lefkowitz v. Great Minneapolis Surplus Store, 251 Minn. 188, 86 N.W.2d 689,
691 (Minn. 1957). In Lefkowitz, defendant had published a newspaper announcement stating: “Saturday 9 AM Sharp, 3 Brand New Fur Coats, Worth
to $ 100.00, First Come First Served $ 1 Each.” Mr. Morris Lefkowitz arrived
at the store, dollar in hand, but was informed that under defendant’s “house
rules,” the offer was open to ladies, but not gentlemen. The court ruled that
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because plaintiff had fulfilled all of the terms of the advertisement and the
advertisement was specific and left nothing open for negotiation, a contract
had been formed.
The present case is distinguishable from Lefkowitz. First, the commercial
cannot be regarded in itself as sufficiently definite, because it specifically
reserved the details of the offer to a separate writing, the Catalog. The
commercial itself made no mention of the steps a potential offeree would be
required to take to accept the alleged offer of a Harrier Jet. The advertisement
in Lefkowitz, in contrast, identified the person who could accept. Second, even
if the Catalog had included a Harrier Jet among the items that could be
obtained by redemption of Pepsi Points, the advertisement of a Harrier Jet
by both television commercial and catalog would still not constitute an offer.
The absence of any words of limitation such as “first come, first served,”
renders the alleged offer sufficiently indefinite that no contract could be
formed. A customer would not usually have reason to believe that the
shopkeeper intended exposure to the risk of a multitude of acceptances resulting in a number of contracts exceeding the shopkeeper’s inventory. There was
no such danger in Lefkowitz, owing to the limitation “first come, first served.”
The Court finds, in sum, that the Harrier Jet commercial was merely an
advertisement. The Court now turns to the line of cases upon which plaintiff
rests much of his argument.
2. Rewards as Offers
In opposing the present motion, plaintiff largely relies on a different species
of unilateral offer, involving public offers of a reward for performance of a
specified act. Because these cases generally involve public declarations
regarding the efficacy or trustworthiness of specific products, one court has
aptly characterized these authorities as “prove me wrong” cases. The most
venerable of these precedents is the case of Carlill v. Carbolic Smoke Ball Co.,
1 Q.B. 256 (Court of Appeal, 1892), a quote from which heads plaintiff’s memorandum of law: “If a person chooses to make extravagant promises . . . he
probably does so because it pays him to make them, and, if he has made them,
the extravagance of the promises is no reason in law why he should not be
bound by them.” Carbolic Smoke Ball, 1 Q.B. at 268 (Bowen, L.J.).
Long a staple of law school curricula, Carbolic Smoke Ball owes its fame
not merely to “the comic and slightly mysterious object involved,” A.W. Brian
Simpson, Quackery and Contract Law: Carlill v. Carbolic Smoke Ball Company (1893), in Leading Cases in the Common Law 259, 281 (1995), but also
to its role in developing the law of unilateral offers. The case arose during
the London influenza epidemic of the 1890s. Among other advertisements of
the time, for Clarke’s World Famous Blood Mixture, Towle’s Pennyroyal and
Steel Pills for Females, Sequah’s Prairie Flower, and Epp’s Glycerine JubeJubes, appeared solicitations for the Carbolic Smoke Ball. The specific
advertisement that Mrs. Carlill saw, and relied upon, read as follows:
100 £ reward will be paid by the Carbolic Smoke Ball Company to any
person who contracts the increasing epidemic influenza, colds, or any
diseases caused by taking cold, after having used the ball three times
daily for two weeks according to the printed directions supplied with
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each ball. 1000 £ is deposited with the Alliance Bank, Regent Street,
shewing our sincerity in the matter.
On the faith of this advertisement,” Mrs. Carlill purchased the smoke ball
and used it as directed, but contracted influenza nevertheless. The lower court
held that she was entitled to recover the promised reward.
Affirming the lower court’s decision, Lord Justice Lindley began by noting
that the advertisement was an express promise to pay £ 100 in the event that
a consumer of the Carbolic Smoke Ball was stricken with influenza. The
advertisement was construed as offering a reward because it sought to induce
performance, unlike an invitation to negotiate, which seeks a reciprocal
promise. As Lord Justice Lindley explained, “advertisements offering rewards
. . . are offers to anybody who performs the conditions named in the advertisement, and anybody who does perform the condition accepts the offer.” Because
Mrs. Carlill had complied with the terms of the offer, yet contracted influenza,
she was entitled to £ 100.
In the present case, the Harrier Jet commercial did not direct that anyone
who appeared at Pepsi headquarters with 7,000,000 Pepsi Points on the
Fourth of July would receive a Harrier Jet. Instead, the commercial urged
consumers to accumulate Pepsi Points and to refer to the Catalog to determine
how they could redeem their Pepsi Points. The commercial sought a reciprocal
promise, expressed through acceptance of, and compliance with, the terms of
the Order Form. As noted previously, the Catalog contains no mention of the
Harrier Jet. Plaintiff states that he “noted that the Harrier Jet was not among
the items described in the catalog, but this did not affect [his] understanding
of the offer.” It should have.
C. An Objective, Reasonable Person Would Not Have Considered
the Commercial an Offer
Plaintiff’s understanding of the commercial as an offer must also be rejected
because the Court finds that no objective person could reasonably have concluded that the commercial actually offered consumers a Harrier Jet.
1. Objective Reasonable Person Standard
In evaluating the commercial, the Court must not consider defendant’s subjective intent in making the commercial, or plaintiff’s subjective view of what
the commercial offered, but what an objective, reasonable person would have
understood the commercial to convey. A basic rule of contracts holds that
whether an offer has been made depends on the objective reasonableness of
the alleged offeree’s belief that the advertisement or solicitation was intended
as an offer. If it is clear that an offer was not serious, then no offer has been
made. On the other hand, if there is no indication that the offer is evidently
in jest, and that an objective, reasonable person would find that the offer was
serious, then there may be a valid offer.
2. Necessity of a Jury Determination
Plaintiff also contends that summary judgment is improper because the
question of whether the commercial conveyed a sincere offer can be answered
only by a jury. Plaintiff argues that a federal judge comes from a “narrow
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segment of the enormously broad American socio-economic spectrum” and,
thus, that the question whether the commercial constituted a serious offer
must be decided by a jury composed of, inter alia, members of the “Pepsi
Generation,” who are, as plaintiff puts it, “young, open to adventure, willing
to do the unconventional.” Plaintiff essentially argues that a federal judge
would view his claim differently than fellow members of the “Pepsi
Generation.”
Plaintiff’s argument that his claim must be put to a jury is without merit.
This case presents a question of whether there was an offer to enter into a
contract, requiring the Court to determine how a reasonable, objective person
would have understood defendant’s commercial. Such an inquiry is commonly
performed by courts on a motion for summary judgment.
3. Whether the Commercial Was “Evidently Done In Jest”
Plaintiff’s insistence that the commercial appears to be a serious offer
requires the Court to explain why the commercial is funny. Explaining why
a joke is funny is a daunting task; as the essayist E.B. White has remarked,
“Humor can be dissected, as a frog can, but the thing dies in the process . . . .”
The commercial is the embodiment of what defendant appropriately characterizes as “zany humor.”
First, the commercial suggests, as commercials often do, that use of the
advertised product will transform what, for most youth, can be a fairly routine
and ordinary experience. The military tattoo and stirring martial music, as
well as the use of subtitles in a Courier font that scroll terse messages across
the screen, such as “MONDAY 7:58 AM,” evoke military and espionage thrillers. The implication of the commercial is that Pepsi Stuff merchandise will
inject drama and moment into hitherto unexceptional lives. The commercial
in this case thus makes the exaggerated claims similar to those of many
television advertisements: that by consuming the featured clothing, car, beer,
or potato chips, one will become attractive, stylish, desirable, and admired
by all. A reasonable viewer would understand such advertisements as mere
puffery, not as statements of fact. Second, the callow youth featured in the
commercial is a highly improbable pilot, one who could barely be trusted with
the keys to his parents’ car, much less the prize aircraft of the United States
Marine Corps. Rather than checking the fuel gauges on his aircraft, the
teenager spends his precious preflight minutes preening. The youth’s concern
for his coiffure appears to extend to his flying without a helmet. Finally, the
teenager’s comment that flying a Harrier Jet to school “sure beats the bus”
evinces an improbably insouciant attitude toward the relative difficulty and
danger of piloting a fighter plane in a residential area, as opposed to taking
public transportation.
Third, the notion of traveling to school in a Harrier Jet is an exaggerated
adolescent fantasy. In this commercial, the fantasy is underscored by how the
teenager’s schoolmates gape in admiration, ignoring their physics lesson. The
force of the wind generated by the Harrier Jet blows off one teacher’s clothes,
literally defrocking an authority figure. As if to emphasize the fantastic
quality of having a Harrier Jet arrive at school, the Jet lands next to a plebeian
bike rack. This fantasy is, of course, extremely unrealistic. No school would
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provide landing space for a student’s fighter jet, or condone the disruption
the jet’s use would cause.
Fourth, the primary mission of a Harrier Jet, according to the United States
Marine Corps, is to “attack and destroy surface targets under day and night
visual conditions.” Depiction of such a jet as a way to get to school in the
morning is clearly not serious even if, as plaintiff contends, the jet is capable
of being acquired “in a form that eliminates [its] potential for military use.”
Fifth, the number of Pepsi Points the commercial mentions as required to
“purchase” the jet is 7,000,000. To amass that number of points, one would
have to drink 7,000,000 Pepsis (or roughly 190 Pepsis a day for the next
hundred years — an unlikely possibility), or one would have to purchase
approximately $ 700,000 worth of Pepsi Points. The cost of a Harrier Jet is
roughly $ 23 million dollars, a fact of which plaintiff was aware when he set
out to gather the amount he believed necessary to accept the alleged offer.
Even if an objective, reasonable person were not aware of this fact, he would
conclude that purchasing a fighter plane for $ 700,000 is a deal too good to
be true.
NOTES AND QUESTIONS
(1) If the advertisement had stated “the first person to bring 7,000,000 Pepsi
Points to Pepsi headquarters (at the stated address) before July 1, 2001 will
receive a Harrier Jet,” would an enforceable offer have been made?
(2) Note the number of “facts” the court relied on in assessing the advertisement even though “on a motion for summary judgment a court cannot try
issues of fact.” E.g., “the cost of a Harrier Jet is roughly $23 million” and
“plaintiff was aware” of this. Do you agree that a federal judge (presumably
not a teenager) is in as good a position as a jury “to determine how a
reasonable, objective person would have understood” a commercial directed
to a market of teenagers? Note the reference in Restatement § 26 to “the
person to whom [an alleged] offer is addressed.” Of what relevance was the
fact that “plaintiff appears to have been represented by counsel at the time
he mailed his check”?
(3) This case is an example of the objective theory of contract interpretation.
Sometimes you will see courts refer to a contract as involving a “meeting of
the minds.” An actual “meeting of the minds” is not necessary, however, for
contract formation. In the words of Justice Oliver Wendell Holmes, “the
making of a contract depends not on the agreement of two minds in one
intention, but on the agreement of two sets of external signs — not on the
parties’ having meant the same thing but on their having said the same thing.”
Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 464 (1897). Individuals
will be held to the objective, reasonable meaning of their words, even if
subjectively they harbored a different intent. There are exceptions to this rule
in cases where a party is mentally incapacitated. See Restatement (Second)
of Contracts § 15 and p. 243, infra. Why is the subjective intent of the parties
largely irrelevant in determining whether a contract was formed?
(4) Price Quotes, Advertisements and other Invitations to Bargain. See Restatement (Second) of Contracts § 26. Under this rule, advertisements and price
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“quotes” are generally not considered offers unless they are very detailed. For
example, a statement from a seller of flour stating “I can quote you flour at
$5 a barrel in carload lots” would not be considered an offer due to its
incompleteness. In determining whether an offer is made, relevant factors
include the terms of any previous inquiry, the completeness of the terms of
the suggested bargain, and the number of persons to whom a communication
is addressed. See Restatement (Second) of Contracts § 26, cmt. c. What is the
rationale behind the rule that advertisements and price quotes are generally
not offers?
PROBLEM A
THE CONCRETE QUOTE
The Board of Education advertised for bids for the construction of the
Western Heights Middle School. Maryland Supreme Corporation (“Supreme”)
learned through a trade journal what general contractors had bid on the job.
After examining the specifications relating to concrete for the project, Supreme, as a subcontractor, wrote The Blake Company (“Blake”), one of the
bidding contractors, about supplying the concrete required. In its letter to
Blake, Supreme wrote, “We are pleased to submit a quotation on ready mix
for the Western Heights Middle School project. Please note that the price will
be guaranteed to hold throughout the job. 3,000 p.s.i. concrete $21.00 per yard,
net.”
When Blake was awarded the contract, Blake notified Supreme that it was
to furnish the concrete for the job. From July, 1975 to October, 1975, Supreme
delivered concrete at the stated price. In October, however, Supreme notified
Blake that due to increased costs, it would be “forced” to raise its prices for
future deliveries to $27 per yard. Blake then purchased concrete from two
other firms and paid $12,590.24 more than it would have paid to Supreme
under its quoted price. Blake then sued Supreme for damages. Was Supreme’s
price quote an offer? Maryland Supreme Corporation v. Blake Co., 279 Md.
531, 369 A.2d 1017 (1977).
[B] Revocation of Offer Prior to Acceptance
The rules governing revocation of offers demonstrate why the definition of
a contract as a “meeting of the minds” is not entirely accurate. If I revoke
my offer before you accept it, our minds have not met and there is no contract.
My offer may expire by its terms without my having to revoke it. Even without
an express term of expiration, the offer may lapse after a reasonable time.
If I offered to sell you my car a year ago and you said nothing, it is probably
too late now for you to accept. Restatement (Second) of Contracts § 41.
Normally, revocation of an offer is not effective until it is communicated
to the offeree. If I offered to sell you my car on Monday morning and you
accepted Monday evening, I cannot avoid the agreement by saying I changed
my mind on Monday afternoon (or sold it to someone else) without telling you.
Restatement (Second) of Contracts § 42, comment b. In this respect the
“meeting of the minds” metaphor is misleading. Even though in the last
hypothetical our minds never “met,” the law protects a promisee’s reasonable
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reliance on a promisor’s statements. By the same token, I cannot renege on
my offer to sell my car by saying that I (secretly) never intended to sell my
car.
The cases in this section involve offers (often called by other names) which
the offeror expressly agreed to hold open and then attempted to revoke
(although without using the term “revoke”) before the stipulated time expired.
Can the offeror do this or are such “firm offers” or “options” binding?
ALLEN R. KRAUSS CO. v. FOX
Arizona Supreme Court
132 Ariz. 125, 644 P.2d 279 (1982)
Upon cross-motions for summary judgment, summary judgment was
granted appellee (Krauss) ordering appellant (Fox) to specifically perform a
land sales contract and sell the specified real estate to Krauss.
On May 27, 1981, through real estate agent Rick Carson, Krauss tendered
a written offer to purchase Fox’s land in Tucson for $265,000. On May 29,
through real estate agent Mike Riley, Fox executed and delivered a written
counter-proposal offering to sell for $486,000 cash and requiring acceptance
by 5 p.m. June 3. On the morning of the third, Krauss conferred with real
estate agent Carson and indicated that he would accept the counteroffer. The
acceptance portion of the counteroffer form was signed by Krauss at 11:58
a.m. on the third. Riley was contacted at approximately 3 p.m. at which time,
Riley told Krauss that Fox “was pulling her property off the market, or she
just didn’t want to sell it.” Krauss proceeded to deliver the executed acceptance
of the second counteroffer to the designated escrow agent at 4:15 p.m.
Krauss’ position is that the following language in the counteroffer required
that it remain open for the time specified:
This Counter Offer shall remain in full force and effect until 5:00
(p.m.) June 3, 1981.
He contends that the counteroffer was an option and, as such, binding upon
Fox during the option period.
An option constitutes a continuing offer, and may be based upon good or
valuable consideration. The difficulty with Krauss’ position arises on the
question of the consideration that he argues supports the option — the $5,000
earnest money tendered with his initial deposit receipt and agreement. It is
clear from the agreement that the earnest money was consideration for that
agreement, as a good faith tender of part of the purchase price subject to
forfeiture in the event of the purchaser’s default. No provision mentions that
any portion of the deposit was to serve as consideration to transform possible
counteroffers into options.
Because the counteroffer was not given for consideration and even though
it was specified for a definite period, it could be revoked at any time before
acceptance. The written counteroffer was orally revoked at 3:00, which was
before acceptance, by delivery of the executed acceptance to the escrow agent
at 4:15 p.m. Therefore, no contract was created. Restatement (Second)
Contracts § 36.
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Reversed and remanded with directions that judgment be entered on Fox’s
motion for summary judgment.
NOTES AND QUESTIONS
(1) What if Riley had said nothing to Krauss, but Krauss had heard “via the
grapevine” that the property was no longer for sale before he accepted the
offer? See Dickinson v. Dodd, 2 Ch. Div. 463 (1876); Restatement (Second) of
Contracts § 43.
(2) What if Fox had never revoked his offer, but Krauss had accepted it on
June 5?
(3) Most buyers of land require financing to make the purchase. Sometimes
they sign a contract to buy which is conditional on their being able to get a
loan. But the transaction may take other forms. What if Fox’s counter-proposal
had said “this option is given to enable you to obtain a loan and in consideration of your efforts to obtain one”? Cf. Keaster v. Bozick, 623 P.2d 1376 (Mont.
1981). What if Fox’s counterproposal had said “in exchange for $1, I give you
the option to purchase my land until June 3 at 5 P.M.”? See Restatement
(Second) of Contracts § 87.
(4) As noted on p. 2, supra, Article 2 of the Uniform Commercial Code applies
to contracts for the sale of goods. See U.C.C. §§ 2-102, 2-105, 2-106. What
result if UCC § 2-205 applied to this case? Why doesn’t it apply to this case?
(5) Professor Farnsworth notes that the rule permitting the offeror to revoke
the offer at any time before acceptance, even if the offeror has promised to
keep the offer open, is rooted in the policy against allowing one party to
speculate at the expense of the other. Farnsworth, Mutuality of Obligation
in Contract Law, 3 U. Dayton L. Rev. 271 (1978). He posits a hypothetical
in which an offer is made to sell cotton at $100,000. If there is a period of
time during which the seller is bound to sell the cotton for $100,000 but the
buyer does not have to buy, the buyer has the “option” to buy. If the market
price of cotton rises to $110,000 during the period of the option, the buyer
can take advantage of the lower option price. But if the market price falls to
$90,000, the buyer can refuse to exercise the option and can purchase the
cotton elsewhere at the lower price. Meanwhile, the seller is left to sell the
cotton at the depressed market. The transaction looks unfair because the
buyer can speculate while the seller cannot, at least unless the seller has been
paid a price for permitting the buyer to speculate.
According to Farnsworth, the policy supporting the rule permitting revocation of offers does not apply if the market for the goods or services being offered
does not fluctuate. The offeror may not need an immediate answer and the
offeree may need to spend time and effort to determine whether to accept.
For example, a purchaser of real estate may need to seek financing before
committing to purchase. Courts have recognized that sometimes options
should be enforceable even if supported by minimal consideration or false
recitals of consideration. The Restatement (Second) of Contracts § 87 relaxes
the requirement of consideration for option contracts and permits an offer to
be binding as an option contract if it is in writing, signed by the offeror, recites
a purported consideration for the making of the offer and proposes an
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exchange on fair terms within a reasonable time. The Uniform Commercial
Code “firm offer rule” in section 2-205 permits some offers to be irrevocable
without consideration.
While courts do not ordinarily examine the adequacy of consideration (see
Restatement (Second) of Contracts § 79), Restatement (Second) of Contracts
§ 87 requires an option contract under its provisions to propose an exchange
of fair terms within a reasonable time. In an illustration of an option contract
that would not be enforceable under section 87, the drafters of the Restatement
discuss a 10 year option given by a widow in exchange for $1.00 that permits
the optionee to take phosphate rock from the widow’s land for twenty-five
cents per ton. The optionee knows, but the widow does not, that the prevailing
royalty ranges from $1.00 to $1.10 per ton. Would the option be enforceable
if the royalty were $0.80 per ton? Why should the adequacy of consideration
be relevant in option contract cases but not in other cases?
(6) Many contracts for the international sale of goods are covered by the
United Nations Convention on Contracts for the International Sale of Goods
(referred to as the “CISG” or “Vienna Sales Convention”). At the time of this
writing, over 50 nations have acceded to the CISG, including the United
States. If a commercial buyer (not a consumer) or seller of goods is located
in the United States and the other party is located in another nation that has
adopted the CISG (e.g., China), the CISG will govern the transaction, not the
UCC or the domestic sales law of China. CISG Article 1. The parties are
permitted, however, to “opt out” of the CISG if they so choose (e.g., the parties
may decide that they would rather use the UCC or Chinese domestic sales
law instead). CISG Article 6. CISG rules represent a compromise between laws
of civil law countries (like the countries in continental Europe) and common
law countries (like the United States).
The CISG counterpart to UCC § 2-205 is Article 16. If the Allen R. Krauss
case were an international sale of goods case, would the offer have been
revocable?
PROBLEM B
THE UNPAID $20
The Fletchers listed their 400 acre farm for sale with a realtor. The Lewises
purchased 360 acres and obtained an option to purchase the remaining 40
acres which was exercisable for five years. The option contract (which was
separate from the contract to purchase the 360 acres) recited a consideration
of $20 for the option, but the payment was never made. Near the end of the
five year period, the Lewises attempted to exercise the option but the Fletchers
resisted. Should the option be enforceable? Would it make a difference if the
option was included in the contract to purchase the 360 acres? Lewis v.
Fletcher, 101 Idaho 530, 617 P.2d 834 (1980).
S.M. WILSON & CO. v. PREPAKT CONCRETE CO.
Illinois Court of Appeals
23 Ill.App.3d 137, 318 N.E.2d 722 (1974)
Appellee, a general contractor, submitted a successful bid for a construction
project involving an addition to the St. Elizabeth’s Hospital. Prior to
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submitting its bid, bid invitation cards were sent to approximately thirty
subcontractors, asking them to bid on portions of the work. The appellant,
which performs a specialized type of foundation work, received a bid invitation
card following which it made a telephone proposal to the appellee. This
proposal was made on June 24, 1968, and under the same date it confirmed
its proposal in writing. This written proposal contained the statement that
it would expire on July 31, 1968.
After appellee’s bid had been accepted by the hospital on July 16, 1968, there
was a delay in executing the contract. This resulted from the estimate
exceeding the amount budgeted and necessitated further negotiations between
the hospital and the Federal government, which was underwriting a portion
of the costs. This problem was resolved and the general contract was awarded
on September 24, 1968, to plaintiff-appellee. On October 17, 1968, appellant’s
treasurer notified appellee by letter that the appellant would not do the job.
The elements of promissory estoppel require that there be a promise
unambiguous in terms, that there be reliance on such promise by the party
to whom it is made, that this reliance be expected and foreseeable by the party
making the promise, and that the one to whom the promise is made in fact
rely upon it to his injury.
In the construction industry the relationship between contractor and subcontractor typically involves these facts: An owner puts a particular project
up for bid. Before interested general contractors submit bids, they solicit bids
from subcontractors and suppliers. Based upon the totals of low subcontractors and supplier bids and upon other considerations, general contractors,
then submit bids to the owner. Following a determination of the low bid, the
successful general contractor then sends subcontracts to each of the low-bidding
subcontractors based upon their initial estimates.
It is obvious to this court that a general contractor will suffer financial loss
if one or more of the subcontractors whose bids he used as a part of the total
bid which procured the job for him refuse to perform after the job is awarded
to the general contractor. We have no hesitancy in saying that the theory of
promissory estoppel was appropriate in this case and that the trial judge was
correct in so ruling.
Under the circumstances in this case, of what effect was the July 31
expiration date contained in appellant’s bid proposal? Following July 31
appellant and appellee communicated on several occasions regarding the job
on which appellant had bid. Appellant repeatedly indicated both willingness
and intention to do the work by direct assurances and by participating with
appellee in numerous details of the preliminary planning for the job. It was
not until October 17, 1968, that appellant notified appellee it would not
perform. Under these circumstances it would be an injustice to the appellee
and a serious threat to the basis upon which construction contracts are
implemented to hold that the appellant subcontractor is not bound.
NOTES AND QUESTIONS
(1) If the general contractor, after using the bid of the subcontractor, decides
not to enter into a contract with him, does the subcontractor have an action
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against the general contractor for breach of contract? Is it fair to bind the
subcontractor but not the general contractor?
(2) In 1951, Frederick Shulz sent a questionnaire to 137 general contractors
and 275 subcontractors in Indiana in order to determine how the parties
actually behaved in the bidding process. Shulz, The Firm Offer Puzzle: A Study
of Business Practice in the Construction Industry, 19 U. Chi. L. Rev. 237
(1952). Shulz’s findings were that the general contractors surveyed generally
felt obliged to give the subcontractor the job if the general contractor relied
on the subcontractor’s bid. On the other hand, if a subcontractor withdrew
a bid, none of the general contractors responding to the survey would sue.
Withdrawal of bids did not seem to be a widespread problem and in the event
that it happened, the general contractors would rely on business pressure,
such as placing the subcontractor on an “unreliable subs list”, rather than take
legal action.
Most of the subcontractors who responded to the survey felt obliged to do
a job on which they had bid for the price offered, even if their costs unexpectedly went up. They stated overwhelmingly that the reason they would do the
job is that they felt a moral or ethical obligation; very few stated that it was
because they felt legally bound. Shulz’s conclusion was that “contractors in
general are neither aware of nor significantly influenced by the law in this
area.” What conclusions do you draw from these findings? Do you think Shulz’s
findings would be the same today? Should the law translate feelings of moral
obligation into legal duties?
(3) Arguably, a contract of this type is a sale of goods covered by the UCC.
The materials provided by the contractor are “goods” as defined in UCC § 2105. The contract price will cover the cost of the materials (goods). But the
contractor is also providing labor (services), and the contract price covers that
as well. In mixed goods/services contracts, many courts will apply Article 2
if the “predominant aspect” of the contract is the provision of goods rather
than services. Other courts will apply Article 2 if the issue in the case involves
the quality of the goods themselves. Compare Milau Assoc. v. North Avenue
Development Corp., 42 N.Y.2d 482, 368 N.E.2d 1247, 398 N.Y.S.2d 882 (1977),
with Sheehan v. Anthony Pools, 50 Md. App. 614, 440 A.2d 1085 (1982).
If this case were governed by UCC § 2-205, what result? In a sale of goods
case, if the offer is not an enforceable firm offer under section 2-205, can
promissory estoppel nevertheless be used to make the offer irrevocable? See
UCC § 1-103; Knapp, Reliance in the Revised Restatement: The Proliferation
of Promissory Estoppel, 81 Colum. L. Rev. 52, 65–67 (1981).
(4) Assume that after the subcontractor withdraws its bid the general
contractor is allowed to withdraw its bid on the prime contract because
another subcontractor cannot be found. The general contractor contends that
it would have been the low bidder. Has the general contractor suffered sufficient “detrimental reliance” to recover under promissory estoppel? See Gerson
Elec. Const. Co. v. Honeywell, Inc., 117 Ill. App. 3d 309, 453 N.E.2d 726; cf.
Hudec, Restating the Reliance Interest, 67 Cornell L. Rev. 704, 719 (1982).
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NEWBERGER v. RIFKIND
California Court of Appeal
28 Cal. App. 3d 1070, 104 Cal. Rptr. 663 (1972)
The five plaintiffs, appellants herein, brought three actions for declaratory
relief against the executors of the estate of Robert Avnet. Plaintiffs sought
a declaration as to the validity or enforceability of five stock options granted
them by decedent, and plaintiffs sought damages caused by the executors’
refusal to honor the options. Clare Avnet, decedent’s widow, filed complaints
in intervention by way of answer and denied plaintiffs’ right to recover.
A non-jury trial was bifurcated on the court’s own motion and a consolidated
judgment on the issue of liability was entered in favor of the defendant
executors and the intervenor. Plaintiffs appeal.
In 1962, and for varying periods prior thereto, each of the five plaintiffs was
an employee of Avnet, Inc., an electronics corporation. In 1962 Charles Avnet
and his two sons, Lester and Robert, the decedent, were principal shareholders
of Avnet, Inc. Charles, Lester and Robert agreed to grant stock options to the
five plaintiffs individually out of their personal holdings of Avnet stock.
Written option agreements in favor of each of the five plaintiffs were executed
and were accepted by each plaintiff. Lester Avnet had written authority to
act as agent for Robert Avnet in the execution of four of the options.
The agreements provided that the optionees might exercise their options
up to 20 percent of the shares involved for each of the five years, i.e., 20 percent
after the first year, 40 percent after the second year, and so on. However, the
plaintiffs were not obligated to exercise their options in this manner and the
entire option could be exercised as to the entire amount after the full five
years.
The plaintiffs attempted to exercise their options in 1967 and remained in
Avnet’s employ long after that date. Each of the plaintiffs who appeared at
the trial testified that he relied on his option agreement by remaining an
employee of the corporation for the five-year period. Sheib, who did not appear,
testified to his reliance on the option at his deposition. Several plaintiffs
testified that they gave their ‘time’ or ‘effort’ in exchange for the option.
During the five-year period the value of the stock increased greatly. Two
years after the options were granted, Robert Avnet died, and three years after
his death, the plaintiffs herein attempted to exercise their options. The
executors applied to the probate court for instructions on whether to honor
the options. Proceedings in the probate court were dismissed without prejudice, and, in a court trial, the court found that although plaintiffs had attempted to exercise their options properly, and although it was unnecessary
for them to have filed creditors’ claims, the exercise of the options was invalid.
This judgment in favor of defendants and the intervenor was based on the
court’s finding that the options were not supported by consideration and
therefore had been revoked by the death of the grantor.
Plaintiffs’ argument on appeal is that there was consideration for the
options, and therefore the options were not revoked by the death of the
optionor. 1
1 [Death of the optionor revokes an option that was given without consideration. Accord,
Restatement (Second) of Contracts § 48. — Eds.]
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Plaintiffs allege that in written instruments consideration is presumed (Civ.
Code § 1614), that the burden is on the party attempting to invalidate the
written instrument to show lack of consideration ( Civ. Code, § 1615), and
that defendants did not sustain their burden of showing no consideration.
Defendants argue that they sustained the burden of proving that no consideration was given by plaintiffs for the options, and that plaintiffs do not show
insufficiency of evidence to support the lower court’s finding of no
consideration.
Defendants’ evidence that no money or property was given by the plaintiffs
in exchange for the options, does not show an absence of consideration.
Consideration is inherent where stock options are granted to employees and
the employee continues employment knowing of the options and no additional
consideration in money or property is required. “(A) bonus is not a gift or
gratuity, but a sum paid for services, or upon a consideration or in addition
to that which would ordinarily be given.” “It is well settled in this state that,
where the employer has a pension plan and the employee knows of it,
continued employment constitutes consideration for the promise to pay the
pension.”
Furthermore, in finding consideration for pensions or other benefits, the
courts do not distinguish between an inducement to continue employment and
an inducement to begin employment. Continuing an employment to which one
is not bound by contract is as clearly consideration as is entering the
employment in the first place. In the instant case plaintiffs testified that they
gave their time or effort in reliance on the options, and no other showing of
consideration was necessary.
Defendants argue that, although continued employment by plaintiffs might
have been consideration had it been bargained for, there is no showing in the
record that defendants ever requested that plaintiffs continue in employment
in exchange for defendants’ promise to grant the option. Defendants point out
that, in some of the cases relied on by plaintiffs those optionees were
specifically requested to remain in employment or asked to increase their
efforts, but in the instant case there was no similar request. In essence,
defendants are arguing that, since there was no evidence of an express request
by the optionor that the optionees either promise to continue employment,
or that the optionees do the act of continuing employment, the consideration
was not bargained for, and therefore there is an absence of consideration.
No express, formal request for either a promise or for an act is required
for us to find a contract supported by consideration. “It is the universal custom
of mankind to speak elliptically and to assume the existence and the understanding of things that are not expressed in words.” ( 3 Corbin on Contracts
(1963) § 568, p. 326.)
In the case before us the bargain was implied from the circumstances, and
there was an implied request by the optionors that the optionees continue the
act of remaining employees in exchange for the granting of the options. No
formal bargain or offer was necessary. The realities of the corporate market
place lead us to believe that stock options are given to employees as an inducement to continue employment or to put forth greater efforts, and they are not
granted as an act of philanthropy or as a magnanimous gesture.
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Furthermore there are cases in other jurisdictions in which the courts found
consideration for employee benefits where the employee continued employment, even though there was no evidence of formal bargain or of a formal
request for continued employment. In Hercules Powder Co. v. Brookfield
(1949), 189 Va. 531, 53 S.E.2d 804, the employer merely sent a notice to the
employees that a dismissal wage would be paid to employees who were laid
off because of a reduction in the force or a shut down. The court held this
to be an offer that was accepted by continuance in the service of the employer.
The court also held that the continuance in service constituted consideration
for the employer’s offer.
In our own jurisdiction the attitude is to consider the “additional advantages
to employees as being in effect offers of a unilateral contract which offer is
accepted if the employee continues in the employment, and not as being mere
offers of gifts. They make the employees more content and happier in their
jobs, cause the employees to forego their rights to seek other employment,
assist in avoiding labor turnover, and are considered of advantage to both the
employer and the employees. Thus, we hold plaintiffs’ act of continuing
employment was both acceptance and consideration for the option, even in
the absence of a formal bargain.
Defendants argue that the “part performance” resulting from the plaintiffs
continuance of service does not create a “promissory estoppel.” We do not rely
on the doctrine of promissory estoppel, since we hold that the offer for an
option was not a gratuitous promise to make a gift, but an offer for a unilateral
contract that was accepted by the act of continuing employment.
NOTES AND QUESTIONS
(1) The court applied a California statute presuming consideration in a written
contract. A number of other states have similar presumptions. The defendant
was unable to rebut the presumption. If the presumption did not exist, would
the case have been decided differently?
(2) The plaintiffs were allowed to exercise their options after the value of the
stock had increased dramatically. If the value of the stock had fallen below
the option price, the plaintiffs would not have been required to purchase any
stock. Isn’t this the type of speculation that the law frowns upon, i.e., the
person granting the option is bound while the optionees are not? See p. 57,
supra. Why did the court enforce the option?
(3) Why did the court reject the plaintiffs’ promissory estoppel theory?
(4) This case leads into the discussion of the next topic, which is the acceptance. The offeror is the master of the offer and may dictate the mode of
acceptance. The Restatement § 50 defines acceptance as “a manifestation of
assent to the terms [of the offer] made by the offeree in a manner invited or
required by the offer.” The offeror may invite acceptance only by promise, only
by performance or may give the offeree the option of accepting either way.
When in doubt, the offeree may accept by either a promise or by rendering
performance. Restatement (Second) of Contracts § 32. A contract that is
formed by a promise that is given in exchange for a promise is called a
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“bilateral contract” while a promise that is given in exchange for performance
is a “unilateral contract.”
In Newberger, the court considered Avnet as making an offer of a stock
option in exchange for the employees’ continuing to work, a unilateral
contract. The employees worked for over five years. How much work was
required, however, in order for the employees to exercise their options? If they
had quit one year after the options were granted, could they have exercised
them during the five year period?
As noted above, an offeror may dictate that the only mode of acceptance
is by full performance. An example of these types of offers are rewards. An
offer of $50 to someone for finishing the Boston Marathon contemplates
acceptance only by completion of the race; the offeror is clearly not looking
for a promissory acceptance. It is an offer for a unilateral contract. If the basic
rule is followed that an offer can be revoked at any time before acceptance,
this would mean that the offeror could revoke the offer midway through the
race. Restatement § 45(1), which applies only to offers for unilateral contracts,
attempts to deal with that seeming inequity by stating that an option contract
is created when the offeree tenders or begins the invited performance. So once
the offeree begins running the marathon, the offeror cannot revoke the offer.
The offeror need not perform, however, unless and until the offeree completes
the race. Restatement of Contracts § 45(2).
Professors Fuller and Perdue criticized the rule of section 45 as being unfair
in that once performance has begun, the offeror cannot revoke the offer but
also cannot compel the offeree to complete the performance. Fuller and Perdue
suggested that the offeror should be permitted to revoke the offer as long as
the offeree can be compensated monetarily for relying on the offer. Fuller and
Perdue, The Reliance Interest in Contract Damages, 46 Yale L.J. 386 (1936).
It may be difficult, however, in some cases to measure in dollars the amount
of reliance.
In some cases the offeror may permit the offeree to accept the offer by either
making a promise or by performing. In most such cases, the beginning of
performance also operates as a promise to complete the job. Restatement
(Second) of Contracts § 62. Once the offeree begins to perform, the offeror
reasonably believes that the offeree has agreed to complete performance. If
I offer you $50 to paint my house and you start painting, I reasonably expect
that you will finish the job. Restatement of Contracts § 50(2), Illustration 1.
This situation should be contrasted to the Boston Marathon hypothetical, in
which the offeror does not reasonably expect that the offeree will necessarily
complete the race and where no action for breach will lie in the event the
offeree quits before completion. The house painting hypothetical would be
treated the same as the Boston Marathon hypothetical if we had an understanding that you might not be able to finish the job and that you would be
paid only if you did finish. Restatement (Second) of Contracts § 50, illustration
2. If the employees in Newberger had quit during the option period, would
they have been liable to Avnet for breach of contract?
§ 3.02
The Acceptance
If the offeree says “I accept” before the offer is revoked there is clearly a
contract. But what if the offeror says “I revoke my offer” at about the same
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time? This hypothetical seems unrealistic, but it sometimes happens when
the parties negotiate by correspondence. The offeror sends a letter revoking
the offer which crosses in the mail a letter from the offeree which accepts.
Who wins?
Henthorn v. Fraser is a leading case establishing the “mailbox” rule which
favors the offeree in this race. Why are offerees treated so well? Note that
in Henthorn the offeror did not keep his promise to hold the offer open for
fourteen days. This promise was not binding absent consideration, see Allen
Krauss Co. v. Fox, p. 56, supra, but the mailbox rule sometimes provides relief
to offerees who thought they had time to accept in accordance with the terms
of the offer. Perhaps the mailbox rule should not be applied in other contexts
such as Worms v. Burgess, where an acceptance letter was lost in the mail.
[A] Acceptance by Correspondence
HENTHORN v. FRASER
Chancery Division
[1892] 2 Ch. Div. 27
In 1891 the Plaintiff was desirous of purchasing from the Huskisson Benefit
Building Society certain houses in Flamank Street, Birkenhead. On the 7th
of July he called at the office, and the secretary [of the society] verbally offered
to sell to him for 750 pounds. This offer was reduced into writing, and was
as follows:—
I hereby give you the refusal of the Flamank Street property at 750
pounds for fourteen days.
The secretary, after signing this, handed it to the Plaintiff, who took it away
with him for consideration.
On the morning of the 8th another person called at the office, and offered
760 pounds for the property, which was accepted.
Between 12 and 1 o’clock on that day the secretary posted to the Plaintiff,
who resided in Birkenhead, the following letter:—
Please take notice that my letter to you of the 7th instant, giving
you the option of purchasing the property, Flamank Street, Birkenhead, for 750 pounds, in fourteen days, is withdrawn, and the offer
cancelled.
This letter was delivered at the Plaintiff’s address between 5 and 6 in the
evening, but, as he was out, did not reach his hands till about 8 o’clock.
On the same 8th of July the Plaintiff’s solicitor, by the Plaintiff’s direction,
wrote to the secretary as follows:—
I am instructed by Mr. James Henthorn to write you, and accept
your offer to sell the property, 1 to 17, Flamank Street, Birkenhead,
at the price of 750 pounds. Kindly have contract prepared and forwarded to me.
This letter was addressed to the society’s office, and was posted in Birkenhead at 3:50 P.M., was delivered at 8:30 P.M. after the closing of the office,
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and was received by the secretary on the following morning. The secretary
replied, stating that the society’s offer had been withdrawn.
The Plaintiff brought this action in the Court of the County Palatine for
specific performance. The Vice-Chancellor dismissed the action, and the
Plaintiff appealed.
Where the circumstances are such that it must have been within the
contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance
of an offer, the acceptance is complete as soon as it is posted.
The grounds upon which it has been held that the acceptance of an offer
is complete when it is posted, have, I think, no application to the revocation
or modification of an offer. These can be no more effectual than the offer itself,
unless brought to the mind of the person to whom the offer is made.
For the reasons I have given, I think the judgment must be reversed and
the usual decree for specific performance made.
NOTES AND QUESTIONS
(1) For the relevant Restatement rules which follow the rule of Henthorn v.
Fraser, see §§ 42 & 63.
(2) Should the “Mailbox Rule” apply to faxes or e-mail? See Restatement of
Contracts § 64. Does the “mailbox rule” apply to international sales contracts
covered by the CISG (p. 58, supra) ? See CISG Articles 16, 18. Does the CISG
approach make more sense from a policy perspective?
(3) Was Allen Krauss Co. v. Fox, p. 56, supra, decided correctly under these
rules?
(4) If between 3:50 and 8:30 p.m. the defendant in Henthorn v. Fraser had
telephoned the plaintiff and said, “I have decided not to buy the property,”
would he have been bound by his acceptance? In Morrison v. Thoelke, 155 So.
2d 889 (Fla. App. 1963), the court on similar facts applied the “mailbox” rule
even though this hurt the offeree who was trying to get out of the contract
rather than enforce it. Does fairness require that the same rule be applied
in both cases? Not necessarily. The law of contracts protects persons who have
acted in reliance on a promise. How can an offeror have relied on an acceptance
which he knew nothing about? (Similarly, if I decide to sell you my car but
do not inform you of this, you have no enforceable right if I change my mind.)
The offeree in Henthorn, on the other hand, certainly knew of the offeror’s
promise to give him an option “for fourteen days” and quite possibly relied
on it. Arguably, therefore, the “mailbox” rule should work in favor of offerees
but not against them. But this might allow offerees to speculate at the offeror’s
expense, using the telephone or telegraph to overtake a letter of acceptance
in transit when the market shifts. Cf. Farnsworth, p. 57, supra. This is a
serious problem, however, only in contracts involving fluctuating markets.
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WORMS v. BURGESS
Oklahoma Court of Appeals
620 P.2d 455 (1980)
Plaintiff-Appellants (Optionee) are the successors in interest to the holder
of an option contract 2 with the Defendant-Appellees (Optionor). Under the
terms of the option contract if the Optionee “elects to exercise the option to
purchase [the Optionor] shall be notified by registered mail on or before
August 21, 1977, of the intention to so exercise said option.” The Optionee
dispatched its notice on August 20th but said notice was never received.
A narrow yet difficult issue is presented for review: where an option contract
provides for notification on or before a fixed date and the notification is timely
and properly mailed by the optionee but not timely received by the optionor,
is the option effectively exercised?
The issue is one of construction. No doubt can be raised that if the parties
wanted to require receipt of the notice of intent to exercise the option they
could have done so. Indeed, very few of the “rules” of contract law are not
capable of modification by agreement of the parties.
The Optionee principally relies on the familiar “mailbox” or “dispatch” rule
whereby an acceptance of an offer in which mail is an acceptable mode of
acceptance is effective when deposited in the mail properly addressed and with
sufficient postage affixed. In negotiations by mail one party must be in the
dark about his contractual relations during the period for transmission of the
letter. The “mailbox” rule imposes this uncertainty on the offeror. This risk
allocation is eminently reasonable when it is recognized that the offeror can
shift this risk by requiring receipt of acceptance when he makes the offer. The
reasonableness of this allocation is mirrored in the widespread commercial
acceptability of the rule.
By statute:
[c]onsent is deemed to be fully communicated between the parties
as soon as the party accepting the proposal has put his acceptance
in the course of transmission to the proposer . . . [provided the mode
of acceptance is authorized by the proposal. 15 O.S. 1971, § 68]. 15
O.S. 1971, § 69.
We believe the dispatch rule is so widely recognized that parties contemplating the question understand that timely dispatch is enough. The fact that
someone will not know of the new contract for a while after the option is
exercised is a risk attendant to the parties’ willingness to deal by mail. Where
the parties expressly agree that the risk of non-delivery will be borne by the
optionee, that allocation will be recognized. But where the risk has not been
expressly dealt with, we believe attributing the risk to the optionor best comports with the intent of the parties, especially in light of the universality of
the dispatch rule and the language of 15 O.S. 1971, § 69.
2 [n.1] Throughout this opinion we use the phrase “option contract” for an option supported
by consideration and, hence, binding in contrast to an offer stated to be open for a fixed or
reasonable period which is nevertheless revocable prior to the beginning of performance or
dispatch of an acceptance (except firm offers under [UCC] § 2-205).
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We hold the option was properly exercised and the summary judgment
should not have been entered for the Defendant-Optionor.
QUESTIONS
(1) How would Worms v. Burgess be decided under the Restatement?
(2) What if the optionee had sent his letter by ordinary mail?
(3) What if the option contract had said “the optionee shall give the optionor
written notice of exercise on or before August 21, 1977”? See Bartham v. Tikka,
50 Or. App. 217, 622 P.2d 1133 (1981).
[B] Acceptance Inferred From Silence
We have already seen in Newberger v. Rifkind, p. 61, supra, that acceptance
of an offer can be inferred from conduct. To what extent can an offeror
mandate that the offeree speak in order to avoid being bound to a contract?
CURTIS CO. v. MASON
Idaho Supreme Court
103 Idaho 476, 649 P.2d 1232 (1982)
D. R. Curtis Company sued Norman Mason in magistrate court to recover
$4,140 for the breach of an alleged oral agreement to sell 9,000 bushels of
spring wheat. After trial, the magistrate ruled that there was no oral
agreement for the sale of the wheat and granted judgment to Mason. We
affirm.
Norman Mason telephoned Curtis Company in April 1978 to inquire about
the company’s advertisement in a local newspaper, promoting soybean production in the Magic Valley area. He spoke with Bob Mai, a grain broker employed
by Curtis Company. The two discussed the soybean market, and then the
conversation switched to a discussion of Mason’s spring wheat crop. Mai
informed Mason of the current wheat market price and Curtis Company’s
commodity market contract procedure. Mason had already planted that year’s
spring wheat crop on previously unplanted acreage and he was not certain
how productive the land was. He was curious about Curtis Company’s
contracting procedure whereby a crop was purchased in the spring before a
farmer knew what his harvest would be. Mason had always sold his grain
after harvest. Mason told Mai he might be interested in contracting to sell
his spring wheat crop.
From the information Mason gave Mai about his acreage, Mai defined the
terms of an agreement to purchase Mason’s crop-price, purchaser’s responsibility to pay freight and ship the commodity to Portland, Oregon, delivery date
in August or September, and a quantity of 9,000 bushels. Mason asked to see
Curtis Company’s contract form, and Mai said that he would mail him one.
Following the telephone conversation, Mai apparently contacted a purchaser
of grain and sold 9,000 bushels of spring wheat, which he believed he had
just purchased from Mason by oral agreement.
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Mason received a written “confirmation memorandum” signed by Mai, as
agent for Curtis Company, a few weeks later. He read the memorandum, but
did not fully understand the delivery terms. When he read the 9,000 bushel
figure, he decided he could not comply with this quantity provision and did
not wish to further negotiate a sale to Curtis Company. He placed the memorandum in the glove box of his pickup, disregarding it until later that summer
when another agent of Curtis Company visited him to inquire about a
“contract.” Mason testified that he never felt he had a contract with Curtis
Company.
At the bottom of the memorandum is a clause stating that, “[i]t is understood that the retention of this confirmation without notifying us of error
therein, is an acknowledgment and acceptance of contract as above.” Mai did
not contact Mason again after the original phone call. Finally, in late September, after Mason had received phone calls from Curtis Company agents
threatening suit for breach of contract, he returned the one-page memorandum to the company with “Not Accepted” penned on the back side. Curtis
Company filed suit.
The trial court found from the facts of this case that an oral agreement was
never reached. There is substantial and competent evidence to support that
determination. We will not disturb it on appeal.
A party cannot state an agreement to purchase goods on his own terms,
and thereby unilaterally form a contract. The seller must agree to sell the
goods. Sending a memorandum of confirmation of purchase does not create
an enforceable contract unless there existed a previous oral agreement to be
confirmed. This is true notwithstanding an unconditional statement upon the
written confirmation form noting that failure to return the form would be
deemed an acceptance of the contract. No language in a “confirming memorandum” can create an agreement that did not previously exist. No such agreement existed in this case.
QUESTIONS
(1) How would Curtis Co. v. Mason be decided under the Restatement (Second)
of Contracts § 69?
(2) If the price of wheat had declined, could Mason have claimed that Curtis
was bound by the contract? How should Curtis’ forms be modified to eliminate
this risk?
(3) If the form had stated “to accept this offer, please sign at the bottom and
return” but the seller promptly shipped the goods without signing the form,
was a contract formed? See UCC § 2-206; Restatement (Second) of Contracts
§ 62. What result if the seller shipped on 7,000 bushels of wheat, never having
signed the form?
[C] Discrepancy Between Offer and Acceptance
Buyer sends seller an offer or order. Seller returns a document which may
be characterized as an acceptance. The two documents agree on basic terms
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such as price but disagree on details. Is there a contract? Does it matter
whether the case is governed by the UCC or the common law?
MINNEAPOLIS & ST. L. RY. CO. v. COLUMBUS ROLLINGMILL CO.
Supreme Court of the United States
119 U.S. 149 (1886)
This was an action by a railroad corporation established at Minneapolis,
in the state of Minnesota, against a manufacturing corporation established
at Columbus, in the state of Ohio. The petition alleged that on December 19,
1879, the parties made a contract by which the plaintiff agreed to buy of the
defendant, and the defendant sold to the plaintiff, 2,000 tons of iron rails, of
the weight of 50 pounds per yard, at the price of $54 per ton gross, to be
delivered free on board cars at the defendant’s rolling-mill in the month of
March, 1880, and to be paid for by the plaintiff in cash when so delivered.
The answer denied the making of the contract. It was admitted at the trial
that the following letters and telegrams were sent at their dates, and were
received in due course, by the parties, through their agents:
December 5, 1879. Letter from plaintiff to defendant: ‘Please quote
me prices for 500 to 3,000 tons 50-lb. steel rails, and for 2,000 to 5,000
tons 50-lb. iron rails, March, 1880, delivery.’
December 8, 1879. Letter from defendant to plaintiff: ‘Your favor
of the fifth inst. at hand. We do not make steel rails. For iron rails,
we will sell 2,000 to 5,000 tons of 50-lb. rails for fifty-four ($54) dollars
per gross ton, for spot cash, F. O. B. 3 cars at our mill, March delivery,
subject as follows: In case of strike among our workmen, destruction
of or serious damage to our works by fire or the elements, or any causes
of delay beyond our control, we shall not be held accountable in
damages. If our offer is accepted, shall expect to be notified of same
prior to December 20, 1879.’
December 16, 1879. Telegram from plaintiff to defendant: ‘Please
enter our order for twelve hundred tons rails, March delivery, as per
your favor of the eighth. Please reply.’
December 16, 1879. Letter from plaintiff to defendant: ‘Yours of the
8th came duly to hand. I telegraphed you to-day to enter our order
for twelve hundred (1,200) tons 50-lb. iron rails for next March
delivery, at fifty-four dollars, ($54,) F. O. B. cars at your mill. Please
send contract. Also please send me templet of your 50-lb. rail. Do you
make splices? If so, give me prices for splices for this lot of iron.’
December 18, 1879. Telegram from defendant to plaintiff, received
same day: ‘We cannot book your order at present at that price.’
3 [The term “F.O.B.” is shorthand for “free on board”, a term meaning that the seller will deliver
the goods to the place designated and then the buyer is responsible for shipment of the goods
from that point. In this case, the seller was proposing to load the rails on railroad cars at its
mill, with the buyer then paying shipping costs from that point. See UCC § 2-319. — Eds.]
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December 19, 1879. Telegram from plaintiff to defendant: ‘Please
enter an order for two thousand tons rails as per your letter of the
sixth. Please forward written contract. Reply.’ The word ‘sixth’ was
admitted to be a mistake for ‘eighth.’
December 22, 1879. Telegram from plaintiff to defendant: ‘Did you
enter my order for two thousand tons rails, as per my telegram of
December 19th? Answer.’
After repeated similar inquiries by the plaintiff, the defendant, on January
19, 1880, denied the existence of any contract between the parties.
The rules of law which govern this case are well settled. As no contract is
complete without the mutual consent of the parties, an offer to sell imposes
no obligation until it is accepted according to its terms. So long as the offer
has been neither accepted nor rejected, the negotiation remains open, and
imposes no obligation upon either party,—the one may decline to accept, or
the other may withdraw his offer; and either rejection or withdrawal leaves
the matter as if no offer had ever been made. A proposal to accept, or an
acceptance, upon terms varying from those offered, is a rejection of the offer,
and puts an end to the negotiation, unless the party who made the original
offer renews it, or assents to the modification suggested. The other party,
having once rejected the offer, cannot afterwards revive it by tendering an
acceptance of it. If the offer does not limit the time for its acceptance, it must
be accepted within a reasonable time. If it does, it may, at any time within
the limit, and so long as it remains open, be accepted or rejected by the party
to whom, or be withdrawn by the party by whom, it was made.
The defendant, by the letter of December 8th offered to sell to the plaintiff
2,000 to 5,000 tons of iron rails on certain terms specified, and added that
if the offer was accepted the defendant would expect to be notified prior to
December 20th. This offer, while it remained open, without having been
rejected by the plaintiff or revoked by the defendant, would authorize the
plaintiff to take, at his election, any number of tons not less than 2,000, nor
more than 5,000, on the terms specified. The offer, while unrevoked, might
be accepted or rejected by the plaintiff at any time before December 20th.
Instead of accepting the offer made, the plaintiff, on December 16th, by
telegram and letter, referring to the defendant’s letter of December 8th,
directed the defendant to enter an order for 1,200 tons on the same terms.
The mention, in both telegram and letter, of the date and the terms of the
defendant’s original offer, shows that the plaintiff’s order was not an independent proposal, but an answer to the defendant’s offer,—a qualified acceptance
of that offer, varying the number of tons, and therefore in law a rejection of
the offer. On December 18th, the defendant, by telegram, declined to fulfill
the plaintiff’s order. The negotiation between the parties was thus closed, and
the plaintiff could not afterwards fall back on the defendant’s original offer.
The plaintiff’s attempt to do so, by the telegram of December 19th, was
therefore ineffectual, and created no rights against the defendant.
NOTES AND QUESTIONS
The preceding case, decided long before the UCC was adopted, exemplifies
the classic “mirror image” rule; the acceptance of an offer must be the mirror
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image of the offer. If the acceptance in any way varies from the offer, it is
a rejection and a counteroffer. The making of the counteroffer terminates the
offeree’s power of acceptance of the original offer, unless the original offeror
has indicated that the original offer is still open or the counter-offer reserves
the right to accept the original offer. See Restatement (Second) of Contracts
§ 39. Illustration 1 to § 39 demonstrates these principles:
A offers B to sell him a parcel of land for $5,000, stating that the offer
will remain open for thirty days. B replies, “I will pay $4,800 for the
parcel,” and on A’s declining that, B writes, within the thirty day
period, “I accept your offer to sell for $5,000.” There is no contract . . .
unless A’s reply to the counter-offer manifested an intention to renew
his original offer. *
Under Restatement (Second) of Contracts § 61, an acceptance may also request a change or addition to the terms of the offer, as long as the acceptance
is not made to depend on an assent to the changed or added terms. Illustration
1 to § 61 demonstrates this rule:
A offers to sell B 100 tons of steel at a certain price. B replies, “I accept
your offer. I hope that if you can arrange to deliver the steel in weekly
installments of 25 tons you will do so.” There is a contract, but A is
not bound to deliver in installments. **
Would the preceding case be decided differently under the foregoing provisions? Should the defendant’s failure to reply to the plaintiffs’ telegrams of
December 19 and 22 be treated as an acceptance under Restatement of
Contracts § 69(1)(c)?
Sometimes after an exchange of forms with varying terms, the parties will
perform as though a contract existed. Even though the forms themselves do
not form a contract, the performance acts as an “acceptance” of the last form
that is sent. Restatement (Second) of Contracts § 50. The terms in the last
form thus determine the duties of the parties. This rule has come to be known
as the “last shot” doctrine.
The drafters of the UCC sought to change the “mirror image” rule and the
“last shot” doctrine by section 2-207. While the classical contract rules on offer
and acceptance may have made sense in a day when parties did not use form
contracts and carefully reviewed the writings prepared by the other side, the
drafters did not believe they reflected modern business practices in which fine
print form contracts are used which are not carefully reviewed by either side.
It was considered unfair to have a contract fail because of minor discrepancies
between forms or to permit the person sending the last form to win the “battle
of the forms” in the event that the parties performed. Subsection (1) of 2-207
indicates than an acceptance may contain terms that are different or additional from the offer and subsection (2) considers whether the varying terms
in the acceptance become part of the contract.
* Copyright © 1981 by the American Law Institute. Reproduced with permission. All rights
reserved.
** Copyright © 1981 by the American Law Institute. Reproduced with permission. All rights
reserved.
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Would the decision in the preceding case have been the same under § 2-207?
PROBLEM C
THE PROJECTED COTTON CROP
Growers of cotton tendered to buyer a contract to sell their “entire crop of
1973 cotton of 729.6 acres.” Price and necessary terms were included in the
contract. Growers’ understanding was that buyer would execute the proposed
contract out of their presence and they thereupon left for lunch, returning to
pick up their copy and discovering that prior to executing the document buyer
had added language to it. Specifically, the buyer added the following language
before signing: “Projected yields and farm numbers on back.” On the back of
the contract, buyer listed 15 farms by number, acreage of each and the
language “600 pounds per acre or approximately 875 b/c [bales of cotton].” The
growers vehemently objected to this addition and stated that no contract
existed. They stated their refusal to be bound by any estimate. Their 1971
crop on basically this acreage had been 756 bales of cotton and their 1972
crop had been 380 bales. As to the effect of the projected yield language, see
"UCC § 2-306. The buyer then added more language to the back of the
contract: “Buyer will accept all of the cotton produced on this acreage
regardless of whether it is more or less than the projected yield.” Growers still
refused to perform and buyers sued. Was a contract formed under Article 2?
If so, what are the terms? See Duval & Co. v. Malcolm, 233 Ga. 784, 214 S.E.2d
356 (1975). Should farmers be considered “merchants” for the purposes of § 2207? See Ohio Grain Co. v. Swisshelm, 40 Ohio App. 2d 203, 318 N.E.2d 428
(1973), p. 79, infra. What result if the growers did not say anything about
the buyer’s projected yield language and delivered only 380 bales of cotton?
Would they be liable for breach of contract? See UCC § 2-207(3).
BROWN MACHINE v. HERCULES, INC.
Missouri Court of Appeals
770 S.W.2d 416 (1989)
Hercules Inc. (“Hercules”) appeals from the judgment of the trial court
awarding respondent Brown Machine $157,911.55 plus interest after a jury
verdict in favor of Brown Machine in its action against Hercules for indemnification. We reverse.
In early 1976 Brown Machine had sold appellant Hercules a T-100 trim
press. The trim press was a piece of equipment apparently used in manufacturing Cool Whip bowls. The initial sales negotiations between the two
companies for the trim press began in October 1975. Bruce Boardman, an
engineer at Hercules, asked Jim Ryan, Brown Machine’s district sales manager, to send Hercules a quote for a trim press. On November 7, 1975, Brown
Machine submitted its original proposal No. 51054 for the model T-100 trim
press to Hercules. The proposal set out sixteen numbered paragraphs describing the machine to be sold. Attached to the proposal was a printed form of
fifteen paragraphs in boilerplate style captioned “TERMS AND CONDITIONS
OF SALE.” The eighth paragraph provided as follows:
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8. LIABILITY: The purchaser agrees to pay on behalf of BROWN all
sums which BROWN becomes legally obligated to pay because of
bodily injury or property damage caused by or resulting from the use
or misuse of the IOS [item of sale], including reasonable attorneys fees
and legal expenses. The purchaser agrees to indemnify and hold
BROWN harmless from all actions, claims, or demands arising out of
or in any way connected with the IOS, its operation, use or misuse,
or the design construction or composition of any product made or
handled by the IOS, including all such actions, claims, or demands
based in whole or in part on the default or negligence of BROWN.
Tim Wilson, Hercules’ purchasing agent, reviewed the proposal submitted
by Brown Machine. On January 7, 1976, he telephoned Jim Ryan at Brown
Machine. Mr. Ryan’s call report reflected that Hercules had prepared its purchase order No. 03361 in response to Brown Machine’s proposal but that
Hercules had objected to the payment term requiring a twenty percent deposit
be paid with the order. After talking with Mr. Fassett, Brown Machine’s
product manager, Mr. Ryan told Mr. Wilson that Brown Machine could not
waive the deposit and that an invoice for payment would be forwarded to
Hercules.
Mr. Fassett issued a work order that day giving the shop instructions
concerning the trim press equipment, followed by a written order the next
day. The written order noted that “customer gave verbal P.O. [purchase order]
for this stock machine. Will issue revision when formal purchase order
received.” On January 19, 1976, Brown Machine received Hercules’ written
purchase order No. 03361 dated January 6, 1976. The order was for a “Brown
T-100 Trimpress in accordance with Brown Machine quote # 51054. All
specifications cited within quote except item #6.1.1 which should read:
‘Reverse trim’ instead of ‘Standard regular forward trim.”’ In a blue box on
the bottom left of the purchase order form in bold print appeared “THIS
ORDER EXPRESSLY LIMITS ACCEPTANCE TO THE TERMS STATED
HEREIN INCLUDING THOSE PRINTED ON THE REVERSE SIDE. ANY
ADDITIONAL OR DIFFERENT TERMS PROPOSED BY THE SELLER ARE
REJECTED UNLESS EXPRESSLY AGREED TO IN WRITING.” The reverse
side of Hercules’ purchase order, captioned “TERMS AND CONDITIONS”
contained sixteen boilerplate paragraphs, the last of which provided:
16. OTHER TERMS: No oral agreement or other understanding
shall in any way modify this order, or the terms or the conditions
hereof. Seller’s action in (a) accepting this order, (b) delivering material; or (c) performing services called for hereunder shall constitute
an acceptance of the above terms and conditions.
The purchase order contained no indemnity provision.
Brown Machine received two copies of the purchase order. One had been
stamped “Vendor’s Copy” at the bottom; the other was marked “ACKNOWLEDGMENT”, with a space labeled “accepted by” for signature by Brown
Machine. Brown Machine did not return this prepared acknowledgment to
Hercules. The next day, on January 20, 1976, Mr. Fassett issued his second
machine order to the shop revising his description to reflect that Brown
Machine had received Hercules’ formal purchase order and that the machine
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was no longer inventoried as a Brown stock item. On January 21, 1976, Brown
Machine sent Hercules an invoice requesting payment of $4,882.00, the twenty
percent deposit for the trim press.
Rather than returning the acknowledgment of the purchase order prepared
by Hercules, Mr. Fassett of Brown Machine sent Hercules an “ORDER
ACKNOWLEDGEMENT” dated February 5, 1976. This letter stated as
follows:
Below in detail are the specifications covering the equipment ordered,
and the equipment will be manufactured to meet these specifications.
If these specifications and terms and conditions of Sale are not in
accordance with your understanding, please ADVISE US WITHIN
SEVEN (7) DAYS OF RECEIPT OF THIS ACKNOWLEDGEMENT.
If we do not hear from you within this period of time, we are proceeding
with the construction of the equipment as per these specifications and
terms as being agreed; and any changes occurring later may result
in additional charges.
ONE T-100 TRIM PRESS AS FOLLOWS . . .
The paragraphs following set out the same sixteen specifications contained
in Brown Machine’s original proposal. Paragraph 6.1.1 of the specifications
again provided for “Standard-regular forward trim”. Page four of the acknowledgment contained the same “TERMS AND CONDITIONS OF SALE” which
had accompanied Brown Machine’s paragraph eight on liability and indemnity. Only two minor changes had been penned in on page four, neither of
which has any bearing on the issues presented for appeal.
Hercules responded with a letter on February 9, 1976, to Mr. Fassett that
“This is to advise you that Provision 6.1 of your order acknowledgement dated
2/5/76 should read ‘Reverse Trim’ instead of ‘Standard-regular forward trim.’
All other specifications are correct.” On February 16, 1976, Mr. Fassett
confirmed the change in provision 6.1.1 and informed the shop that same day
of the requested modification to be made.
Hercules never paid the twenty percent deposit. Brown Machine sent
Hercules an invoice dated April 14, 1976, requesting final payment of the total
purchase price. Brown eventually shipped the trim press to Hercules and
Hercules paid the agreed-upon purchase price.
Sometime later, James Miller, an employee of Hercules, and his wife sued
Brown Machine because of injuries he sustained while operating the trim
press at Hercules’ plant in Union, Missouri. Brown Machine demanded that
Hercules defend the Miller lawsuit, but Hercules refused. Brown Machine
eventually settled the Millers’ lawsuit. Brown Machine later initiated this
action against Hercules for indemnification of the settlement amount paid the
Millers. Brown Machine claimed a condition of the original sales contract for
the trim press required Hercules to indemnify Brown Machine for any claims
arising from operation or misuse of the trim press.
The dispositive issue on appeal is whether the parties had agreed to an
indemnification provision in their contract for the sale of the T-100 trim press.
Hercules’ first point disputes Brown Machine’s contention that its initial
proposal on November 7, 1975, constitutes the offer and that Hercules verbally
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accepted the offer by the telephone call on January 7, 1976, followed by its
written purchase order dated January 6, 1976, which Brown Machine received
January 19, 1976. Article two of the Uniform Commercial Code governs
transactions involving the sale of goods. UCC § 2-102 (1977). Because the
term “offer” is not defined in the code, the common law definition remains
relevant. U.C.C. § 1-103. An offer is made when the offer leads the offeree
to reasonably believe that an offer has been made. Restatement (Second) of
Contracts § 24 (1981) defines “offer” as “the manifestation of willingness to
enter into a bargain, so made as to justify another person in understanding
that his assent to that bargain is invited and will conclude it.”
The general rule is that a price quotation is not an offer, but rather is an
invitation to enter into negotiations or a mere suggestion to induce offers by
others. However, price quotes, if detailed enough, can amount to an offer
creating the power of acceptance; to do so, it must reasonably appear from
the price quote that assent to the quote is all that is needed to ripen the offer
into a contract.
In this case Hercules could not have reasonably believed that Brown
Machine’s quotation was intended to be an offer, but rather an offer to enter
into negotiations for the trim press. 4 The cover letter accompanying the
proposal mentioned that Brown Machine’s sales representative would contact
Hercules “to discuss this quote” and that the quotation was submitted for
Hercules “approval.” The sale price as quoted also included the notation “We
have included a mechanical ejector (item 9.1.2) because we understand this
unit may be used for development of many items that would require this
option. However, if you decide this is not necessary $2,575.00 could be
deducted from the above price for a total of $21,835.00.” Most importantly,
paragraph three of the terms and conditions of sale attached to the proposal
expressly provided: “No order, sale, agreement for sale, accepted proposal,
offer to sell and/or contract of sale shall be binding upon BROWN unless
accepted by BROWN . . . on BROWN standard ‘Order Acknowlegment’ [sic]
form.” Thus, because the quotation reasonably appeared to be an offer to enter
into negotiations for the sale of a trim press with a mechanical ejector for
$24,410.00 with acceptance conditioned upon Brown’s order acknowledgment
form, no firm offer existed. Brown’s price quote was merely a proposal, not
an offer, because of its provision that Hercules’ acceptance was not binding
upon Brown until Brown acknowledged the acceptance.
Even if we were to accept Brown Machine’s characterization of its proposal
as an offer, the quotation by its own terms and conditions expired thirty days
after its issuance (“All quoted prices are subject to change without notice
except those written proposals which shall expire without notice . . . thirty
(30) calendar days from date issued . . .”). Hercules’ written purchase order
was dated January 6, 1976, and their telephone conversation of January 7,
1976, were both well beyond the expiration of the quote. Thus, even if the
quotation were construed as an offer, there was no timely acceptance.
If the acceptance of a price quotation, sufficiently detailed to constitute an
offer, is not binding on the seller because the time within which it could have
4 [Do you agree? If Hercules had said “we accept your proposal No. 51054 of November 7,” could
Brown Machine have backed out of the deal? — Eds.]
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been accepted has lapsed, the purchase order, not the price quotation, is
treated as the offer since the purchase order did not create an offer to
purchase. The question then arises whether Brown Machine’s acknowledgment containing the indemnity provision constitutes a counter offer or an
acceptance of Hercules’ offer with additional or different terms. Section 2-207
of the Uniform Commercial Code provides the workable rule of law addressing
the problem of the discrepancies in the independently drafted documents exchanged between the two parties.
Under subsection (1) an offeree’s response to an offer operates as a valid
acceptance of the offer even though it contains terms additional to, or different
from, the terms of the offer unless the “acceptance is expressly made conditional” on the offeror’s assent to the additional or different terms. Where the
offeree’s acceptance is made “expressly conditional” on the offeror’s assent,
the response operates not as an acceptance but as a counter offer which must
be accepted by the original offeror. Restatement (Second) of Contracts § 59
(1981) expresses it succinctly: “[A]n offeree’s reply which purports to accept
an offer but makes acceptance conditional on the offeror’s assent to terms not
contained in the original offer is effective as a counteroffer rather than
acceptance.”
The general view held by the majority of states is that, to convert an
acceptance to a counter offer under UCC § 2-207(1), the conditional nature
of the acceptance must be clearly expressed in a manner sufficient to notify
the offeror that the offeree is unwilling to proceed with the transaction unless
the additional or different terms are included in the contract. The conditional
assent provision has been construed narrowly to apply only to an acceptance
which clearly shows that the offeree is unwilling to proceed absent assent to
the additional or different terms.
We find nothing in Brown Machine’s acknowledgment of February 5, 1976,
which reflects its unwillingness to proceed unless it obtained Hercules’ assent
to the additional and different terms in Brown Machine’s acknowledgment,
that is, page four of the acknowledgment styled “TERMS AND CONDITIONS
OF SALE” which contained the indemnity provision. Brown Machine’s acknowledgment was not “expressly made conditional” on Hercules’ assent to
the additional or different terms as provided for under § 2-207(1). We conclude
Brown Machine’s acknowledgment did not operate as a counter offer within
the scope of section 2-207(1).
Having determined that Brown Machine’s order acknowledgment is not a
counter offer, we believe that Brown Machine’s acknowledgment operates as
acceptance with additional or different terms from the offer, since the
purchase order contained no indemnity provision. Under § 2-207(2), additional terms become a part of the contract between merchants unless (a) the
offer expressly limits acceptance to the terms of the offer; (b) they materially
alter it; or (c) notification of objection to them has already been given or is
given within a reasonable time after notice of them is given. Hercules’
purchase order here expressly limited acceptance to the terms of its offer.
Given such an express limitation, the additional terms, including the indemnification provision, failed to become part of the contract between the parties.
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We can conclude Hercules intended the indemnity provision to become a
part of the parties’ contract only if Hercules, as offeror, expressly assented
to the additional terms, and, thus, effectively waived its condition that
acceptance be limited to the terms of its offer, the purchase order. While the
text of § 2-207 does not incorporate such a provision, Official Comment 3 to
§ 2-207 states: “Whether or not additional or different terms will become part
of the agreement depends upon the provisions of subsection (2). If they are
such as materially to alter the original bargain, they will not be included
unless expressly agreed to by the other party.” The indemnification provision
was clearly a material alteration to the parties’ agreement.
The evidence does not establish that Hercules expressly assented to the
additional terms contained in Brown Machine’s order acknowledgment. Brown
Machine’s order acknowledgment of February 5, 1976, indicated that “[i]f
these specifications and terms and conditions of Sale are not in accordance
with your understanding, please ADVISE US WITHIN SEVEN (7) DAYS OF
RECEIPT OF THIS ACKNOWLEDGEMENT.” Hercules replied by letter four
days later advising Brown Machine that provision 6.1.1 should provide for
reverse trim instead of standard regular forward trim, followed by “all other
specifications are correct.” Hercules’ use of the term “specifications” is unambiguous and clearly refers only to the protocol for the machine’s manufacture.
Nothing in its response can be construed as express assent to Brown Machine’s
additional “terms and conditions of sale.” Express assent under section 2207(2) cannot be presumed by silence or mere failure to object.
We believe it is clear as a matter of law that the indemnification clause
cannot be held to be part of the contract agreed upon by the parties. The
judgment of the trial court is reversed.
NOTES AND QUESTIONS
(1) What is the difference between this case and Minneapolis & St. L. Ry. Co.?
(2) Could Brown Machine have backed out of the contract because of the
buyer’s failure to pay the $4,882 deposit? Does your answer depend upon the
January 7 phone discussion described at p. 74, supra? When would payment
have been due if the contract was silent on this question? See UCC § 2-310.
(3) While section 2-207 may have been spawned by good intentions, it is very
difficult to implement in practice. It has been called a friend of law professors
and an enemy of students, practitioners and judges. Professors White &
Summers have described it as being “like the amphibious tank that was originally designed to fight in the swamps but was ultimately sent to fight in the
desert.” WHITE & SUMMERS, UNIFORM COMMERCIAL CODE 6 (4th ed. 1995).
Professor Grant Gilmore referred to section 2-207 as “arguably the greatest
statutory mess of all time.” Roszkowski, Revised Article 2 of the Uniform
Commercial Code — Section-by-Section Analysis, 54 SMU L. Rev. 927, 932
(2001) (quoting from Gilmore).
As noted on p. 3, supra, Article 2 of the UCC has been in the revision process
for a number of years. The drafters of proposed amendments to Article 2 have
attempted to improve on 2-207 by separating out the question of whether a
contract had been formed from the determination of the terms. The question
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of whether a contract has been formed is determined by proposed amendments
to §§ 2-204 & 2-206 which expressly state that a contract may be formed even
if parties’ forms are in disagreement. When terms in the parties’ writings vary
from each other, the terms of the contract are determined under proposed
amendments to § 2-207. Under the proposed amendments to that section, the
terms of the contract are those on which (i) the parties are in express
agreement; (ii) the parties’ forms are in agreement; and (iii) terms supplied
by the Code. How should Brown Machine be decided under the proposed
amendments to §§ 2-204, 2-206 & 2-207? Is the proposal an improvement
under the current law?
(4) The CISG has its own rules dealing with the “battle of the forms”, Articles
18 & 19. Would Brown Machine be decided differently under those provisions?
Are the CISG provisions more like the traditional common law rule or § 2-207?
(5) What advice would you give to Brown Machine in drafting its forms or
otherwise in dealing with its customers if it wants to make certain that the
indemnity provision is part of the contract? How should its “Price Quotes” be
drafted? How should its “Acknowledgments” be drafted?
(6) Is the following case distinguishable?
OHIO GRAIN CO. v. SWISSHELM
Court of Appeals of Ohio
40 Ohio App. 2d 203, 318 N.E.2d 428 (1973)
Plaintiff alleged that it purchased 1500 bushels of soybeans, at five dollars
per bushel, to be picked up at defendant’s farm; that defendant sold the beans
to another and plaintiff was required to replace them in the market at $6.12
per bushel; that the cost of trucking and handling would have been twelve
cents per bushel; that plaintiff has therefore suffered damage of one dollar
per bushel, or a total of $1,500, for which a judgment was demanded. The
case was tried to the court, who entered judgment for the defendant.
The court found that on February 9, 1973, a telephone conversation occurred
between defendant and plaintiff’s agent concerning the possibility of plaintiff’s
purchasing the beans from the defendant; that merely the price of five dollars
per bushel was discussed, and plaintiff had never seen the beans; that a
written confirmation of sale was sent to defendant by plaintiff, which was not
signed or returned by the defendant; that defendant sold the beans to another
after receiving the written confirmation of sale and before the time when
plaintiff, according to its confirmation, called to arrange for delivery.
The court concluded that there was no meeting of the minds and no valid
offer and acceptance and that plaintiff had failed to establish its case by a
preponderance of the evidence.
Under date of February 9, 1973, the same day as the telephone conversations, the plaintiff sent and defendant duly received a “Grain Purchase Confirmation” signed by plaintiff’s agent, affirming the purchase by plaintiff from
defendant “of 1500 bushels of Soybeans at $5.00 per bushel, to be delivered
to at the farm loaded in our truck, Ohio, basis No. * * *.”
Then, followed provisions signifying 54 1b. test weight, 13 per cent moisture,
2 per cent damage, and 1 per cent foreign material and “Grain delivered
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grading lower than this grade will be discounted at prevailing discount schedules.” After the signature by plaintiff’s agent, the confirmation concluded with
a blank for the signature of the seller and the words:
“Delivery date: by Feb. 20, 1973 Settlement date: Upon del.
“Please sign and return attached copy promptly to The Ohio Grain Company. Keep original for your records.
“It is understood that the retention of this confirmation by Seller, without
immediately notifying Buyer of error therein, is an acknowledgment and
acceptance of a contract exactly as stated above.”
It is the argument of the plaintiff that, a contract of sale having been entered
into, the confirmation added only the usual and necessary specifications,
which were added to the contract and became binding upon the defendant
when he failed to give notification of objection to them within a reasonable
time.
Defendant argues that any agreement that may have been made was for
a price of $5 and that the confirmation differed from that figure, and proposed
an entirely new arrangement. His counsel argues further that UCC 2-207
applies to dealings between merchants. He would represent defendant as a
simple tiller of the soil, unaccustomed to the affairs of business and the market-place. Farming is no longer confined to simple labor. Only an agribusinessman may hope to survive.
This defendant was clearly familiar with farm markets and their operation
and followed them with some care. For example, he was familiar with the bean
market in Cincinnati, as well as that in his local community. In his many years
of farming, he knew that corn was sold for varying prices, depending upon
its moisture, quality and condition, and admitted having some idea that the
same was true of beans. He had sold some beans a number of years before.
He claims to be a livestock farmer rather than a grain farmer. The price
obtained in the livestock market also varies with the quality and condition
of the animal. It is inconceivable that he would not know that it is the
exceptional produce or livestock which brings the top market price and that
neither is to be accepted at top price without examination and analysis.
Hence, it was necessary to specify that the proposed price of $5 should apply
to certain standards which needed, in all fairness to both parties, to be
carefully defined. That is what plaintiff’s confirmation did. If these specifications were not acceptable to the defendant, it was his duty, and he had the
opportunity within a reasonable time, to reject them. Then he failed to do so,
they became binding upon him.
We return then to the question of whether or not, in the telephone conversations of February 9, 1973, there was a meeting of the minds or mutual assent.
Plaintiff’s agent’s testimony was positive that there was. Defendant’s testimony is a little less precise, but it nevertheless clearly appears that defendant
offered to sell for $5 in immediate cash, that is, upon delivery, and that
plaintiff accepted his offer.
Defendant’s brief does not challenge this. In fact, his counsel affirms it
throughout his brief. His argument is, not that there was no agreement but
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that there was an agreement to sell the beans for $5 in cash. He contends
that the confirmation “changed the sum substantially,” and states: “The
confirmation actually amounts to a counter-offer.”
Plaintiff’s assignments of error: (1) entering judgment for the defendant
despite the fact that the written confirmation received and not disputed
established as a matter of law that there was a binding contract between the
parties; and (2) finding that there was no contract, have been adequately
supported.
Plaintiff claims that in reliance upon the contract, it committed itself to sell
the beans and was compelled upon defendant’s default to procure others in
the market at an increased price. Plaintiff logically asserts that the contract
would have been enforceable against it if the market had gone down instead
of up. Both parties to a contract must be bound or neither is bound.
We find the contract valid and the assignments of error well made. The
judgment for the defendant will be reversed, judgment entered for the
plaintiff, and the cause remanded to the Court of Common Pleas for an
assessment of damages.
Judgment reversed.
QUESTIONS
(1) Is this case consistent with the general principle that silence does not equal
acceptance? Cf. Restatement (Second) of Contracts § 69.
(2) If Ohio Grain Company’s forms had a clause that required that all disputes
between the parties be submitted to arbitration, would Swisshelm be required
to arbitrate any disputes it had with Ohio Grain? See Chapter 7, infra.
PROBLEM D
THE LATE LIMESTONE
Indiana Limestone submitted a bid to Luedtke Engineering Company to
provide breakwater stone to Luedtke pursuant to a contract that Luedtke had
with the Army Corps of Engineers to repair the breakwater in Milwaukee
harbor. Indiana Limestone had previously been informed by the Army Corps
that it anticipated starting the project in March 1978 and completing it by
November 1979. Indiana Limestone and Luedtke had engaged in at least five
other projects together. Indiana Limestone’s bid on this project provided as
follows:
(1) It would supply Luedtke with 70,000 tons of stone at $10.15 per
net ton; and
(2) The price would apply to shipments made during 1978 and 1979.
On July 1, 1978, Luedtke issued a purchase order to Indiana Limestone for
70,000 tons of stone. The order stated that Indiana Limestone should “ship
at 1500 tons/day starting 24 July 1978.” At this rate, shipping would be
completed by November 1978. Indiana Limestone did not ship at that rate,
however, and the last delivery occurred in August 1979. In its past dealings
with Luedtke, it had never shipped at a consistent rate such as 1500 tons/day.
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Luedtke was nevertheless able to complete the breakwater project well before
the November 1979 deadline. Luedtke claims, however, that Indiana Limestone breached its contract in failing to deliver at 1500 tons/day and that this
breach caused damages of $797,700. Is Indiana Limestone liable under § 2207? See also UCC §§ 1-205, 2-309. Luedtke Engineering Co. v. Indiana
Limestone Co., 740 F.2d 598 (7th Cir. 1984).
PROCD, INC. v. ZEIDENBERG
United States Court of Appeals, Seventh Circuit
86 F.3d 1447 (1996)
Easterbrook, J. Must buyers of computer software obey the terms of
shrinkwrap licenses? The district court held not, for two reasons: first, they
are not contracts because the licenses are inside the box rather than printed
on the outside; second, federal law forbids enforcement even if the licenses
are contracts. The parties and numerous amici curiae have briefed many other
issues, but these are the only two that matter—and we disagree with the
district judge’s conclusion on each.
I
ProCD, the plaintiff, has compiled information from more than 3,000
telephone directories into a computer database. ProCD sells a version of the
database, called SelectPhone (trademark), on CD-ROM discs. (CD-ROM
means “compact disc—read only memory.” The “shrinkwrap license” gets its
name from the fact that retail software packages are covered in plastic or
cellophane “shrinkwrap,” and some vendors, though not ProCD, have written
licenses that become effective as soon as the customer tears the wrapping from
the package. Vendors prefer “end user license,” but we use the more common
term.) A proprietary method of compressing the data serves as effective
encryption too. Customers decrypt and use the data with the aid of an application program that ProCD has written. This program, which is copyrighted,
searches the database in response to users’ criteria (such as “find all people
named Tatum in Tennessee, plus all firms with ‘Door Systems’ in the corporate
name”). The resulting lists (or, as ProCD prefers, “listings”) can be read and
manipulated by other software, such as word processing programs.
The database in SelectPhone (trademark) cost more than $10 million to
compile and is expensive to keep current. It is much more valuable to some
users than to others. The combination of names, addresses, and sic codes
enables manufacturers to compile lists of potential customers. Manufacturers
and retailers pay high prices to specialized information intermediaries for
such mailing lists; ProCD offers a potentially cheaper alternative. People with
nothing to sell could use the database as a substitute for calling long distance
information, or as a way to look up old friends who have moved to unknown
towns, or just as a electronic substitute for the local phone book. ProCD
decided to engage in price discrimination, selling its database to the general
public for personal use at a low price (approximately $150 for the set of five
discs) while selling information to the trade for a higher price. It has adopted
some intermediate strategies too: access to the SelectPhone (trademark)
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database is available via the America On-line service for the price America
Online charges to its clients (approximately $3 per hour), but this service has
been tailored to be useful only to the general public.
If ProCD had to recover all of its costs and make a profit by charging a single
price—that is, if it could not charge more to commercial users than to the
general public—it would have to raise the price substantially over $150. The
ensuing reduction in sales would harm consumers who value the information
at, say, $200. They get consumer surplus of $50 under the current arrangement but would cease to buy if the price rose substantially. If because of high
elasticity of demand in the consumer segment of the market the only way to
make a profit turned out to be a price attractive to commercial users alone,
then all consumers would lose out—and so would the commercial clients, who
would have to pay more for the listings because ProCD could not obtain any
contribution toward costs from the consumer market.
To make price discrimination work, however, the seller must be able to
control arbitrage. An air carrier sells tickets for less to vacationers than to
business travelers, using advance purchase and Saturday-night-stay requirements to distinguish the categories. A producer of movies segments the market
by time, releasing first to theaters, then to pay-per-view services, next to the
videotape and laserdisc market, and finally to cable and commercial tv.
Vendors of computer software have a harder task. Anyone can walk into a
retail store and buy a box. Customers do not wear tags saying “commercial
user” or “consumer user.” Anyway, even a commercial-user-detector at the
door would not work, because a consumer could buy the software and resell
to a commercial user. That arbitrage would break down the price discrimination and drive up the minimum price at which ProCD would sell to anyone.
Instead of tinkering with the product and letting users sort themselves—for
example, furnishing current data at a high price that would be attractive only
to commercial customers, and two-year-old data at a low price—ProCD turned
to the institution of contract. Every box containing its consumer product
declares that the software comes with restrictions stated in an enclosed
license. This license, which is encoded on the CD-ROM disks as well as printed
in the manual, and which appears on a user’s screen every time the software
runs, limits use of the application program and listings to non-commercial
purposes.
Matthew Zeidenberg bought a consumer package of SelectPhone (trademark) in 1994 from a retail outlet in Madison, Wisconsin, but decided to ignore
the license. He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone (trademark) database. The corporation makes the
database available on the Internet to anyone willing to pay its price—which,
needless to say, is less than ProCD charges its commercial customers.
Zeidenberg has purchased two additional SelectPhone (trademark) packages,
each with an updated version of the database, and made the latest information
available over the World Wide Web, for a price, through his corporation.
ProCD filed this suit seeking an injunction against further dissemination that
exceeds the rights specified in the licenses (identical in each of the three
packages Zeidenberg purchased). The district court held the licenses ineffectual because their terms do not appear on the outside of the packages. The
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court added that the second and third licenses stand no different from the
first, even though they are identical, because they might have been different,
and a purchaser does not agree to—and cannot be bound by—terms that were
secret at the time of purchase.
II
Following the district court, we treat the licenses as ordinary contracts
accompanying the sale of products, and therefore as governed by the common
law of contracts and the Uniform Commercial Code. Zeidenberg does not argue
that Silken Mountain Web Services is free of any restrictions that apply to
Zeidenberg himself, because any effort to treat the two parties as distinct
would put Silken Mountain behind the eight ball on ProCD’s argument that
copying the application program onto its hard disk violates the copyright laws.
Zeidenberg does argue, and the district court held, that placing the package
of software on the shelf is an “offer,” which the customer “accepts” by paying
the asking price and leaving the store with the goods. In Wisconsin, as
elsewhere, a contract includes only the terms on which the parties have
agreed. One cannot agree to hidden terms, the judge concluded. So far, so
good—but one of the terms to which Zeidenberg agreed by purchasing the
software is that the transaction was subject to a license. Zeidenberg’s position
therefore must be that the printed terms on the outside of a box are the parties’
contract—except for printed terms that refer to or incorporate other terms.
But why would Wisconsin fetter the parties’ choice in this way? Vendors can
put the entire terms of a contract on the outside of a box only by using
microscopic type, removing other information that buyers might find more
useful (such as what the software does, and on which computers it works),
or both. The “Read Me” file included with most software, describing system
requirements and potential incompatibilities, may be equivalent to ten pages
of type; warranties and license restrictions take still more space. Notice on
the outside, terms on the inside, and a right to return the software for a refund
if the terms are unacceptable (a right that the license expressly extends), may
be a means of doing business valuable to buyers and sellers alike. Restatement
(2d) of Contracts § 211 comment a (1981) (“Standardization of agreements
serves many of the same functions as standardization of goods and services;
both are essential to a system of mass production and distribution. Scarce and
costly time and skill can be devoted to a class of transactions rather than the
details of individual transactions.”). Doubtless a state could forbid the use of
standard contracts in the software business, but we do not think that
Wisconsin has done so.
Transactions in which the exchange of money precedes the communication
of detailed terms are common. Consider the purchase of insurance. The buyer
goes to an agent, who explains the essentials (amount of coverage, number
of years) and remits the premium to the home office, which sends back a policy.
On the district judge’s understanding, the terms of the policy are irrelevant
because the insured paid before receiving them. Yet the device of payment,
often with a “binder” (so that the insurance takes effect immediately even
though the home office reserves the right to withdraw coverage later), in
advance of the policy, serves buyers’ interests by accelerating effectiveness
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and reducing transactions costs. Or consider the purchase of an airline ticket.
The traveler calls the carrier or an agent, is quoted a price, reserves a seat,
pays, and gets a ticket, in that order. The ticket contains elaborate terms,
which the traveler can reject by canceling the reservation. To use the ticket
is to accept the terms, even terms that in retrospect are disadvantageous. Just
so with a ticket to a concert. The back of the ticket states that the patron
promises not to record the concert; to attend is to agree. A theater that detects
a violation will confiscate the tape and escort the violator to the exit. One could
arrange things so that every concertgoer signs this promise before forking over
the money, but that cumbersome way of doing things not only would lengthen
queues and raise prices but also would scotch the sale of tickets by phone or
electronic data service.
Consumer goods work the same way. Someone who wants to buy a radio
set visits a store, pays, and walks out with a box. Inside the box is a leaflet
containing some terms, the most important of which usually is the warranty,
read for the first time in the comfort of home. By Zeidenberg’s lights, the
warranty in the box is irrelevant; every consumer gets the standard warranty
implied by the UCC in the event the contract is silent; yet so far as we are
aware no state disregards warranties furnished with consumer products.
Drugs come with a list of ingredients on the outside and an elaborate package
insert on the inside. The package insert describes drug interactions, contraindications, and other vital information—but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract.
Next consider the software industry itself. Only a minority of sales take
place over the counter, where there are boxes to peruse. A customer may place
an order by phone in response to a line item in a catalog or a review in a
magazine. Much software is ordered over the Internet by purchasers who have
never seen a box. Increasingly software arrives by wire. There is no box; there
is only a stream of electrons, a collection of information that includes data,
an application program, instructions, many limitations (“MegaPixel 3.14159
cannot be used with BytePusher 2.718”), and the terms of sale. The user
purchases a serial number, which activates the software’s features. On
Zeidenberg’s arguments, these unboxed sales are unfettered by terms—so the
seller has made a broad warranty and must pay consequential damages for
any shortfalls in performance, two “promises” that if taken seriously would
drive prices through the ceiling or return transactions to the horse-and-buggy
age.
According to the district court, the UCC does not countenance the sequence
of money now, terms later.
We think that the place to start is § 2-204(1): “A contract for sale of goods
may be made in any manner sufficient to show agreement, including conduct
by both parties which recognizes the existence of such a contract.” A vendor,
as master of the offer, may invite acceptance by conduct, and may propose
limitations on the kind of conduct that constitutes acceptance. A buyer may
accept by performing the acts the vendor proposes to treat as acceptance. And
that is what happened. ProCD proposed a contract that a buyer would accept
by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed
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the license on the screen and would not let him proceed without indicating
acceptance. So although the district judge was right to say that a contract
can be, and often is, formed simply by paying the price and walking out of
the store, the UCC permits contracts to be formed in other ways.
ProCD proposed such a different way, and without protest Zeidenberg
agreed. Ours is not a case in which a consumer opens a package to find an
insert saying “you owe us an extra $10,000” and the seller files suit to collect.
Any buyer finding such a demand can prevent formation of the contract by
returning the package, as can any consumer who concludes that the terms
of the license make the software worth less than the purchase price. Nothing
in the UCC requires a seller to maximize the buyer’s net gains.
Section 2-606, which defines “acceptance of goods”, reinforces this understanding. A buyer accepts goods under § 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under § 2-602(1). ProCD
extended an opportunity to reject if a buyer should find the license terms
unsatisfactory; Zeidenberg inspected the package, tried out the software,
learned of the license, and did not reject the goods. We refer to § 2-606 only
to show that the opportunity to return goods can be important; acceptance
of an offer differs from acceptance of goods after delivery; but the UCC
consistently permits the parties to structure their relations so that the buyer
has a chance to make a final decision after a detailed review.
Some portions of the UCC impose additional requirements on the way
parties agree on terms. A disclaimer of the implied warranty of merchantability must be “conspicuous.” UCC § 2-316(2), incorporating UCC § 1-201(10).
Promises to make firm offers, or to negate oral modifications, must be
“separately signed.” UCC §§ 2-205, 2-209(2). These special provisos reinforce
the impression that, so far as the UCC is concerned, other terms may be
inconspicuous. Zeidenberg has not located any Wisconsin case—for that
matter, any case in any state—holding that under the UCC the ordinary terms
found in shrinkwrap licenses require any special prominence, or otherwise are
to be undercut rather than enforced. In the end, the terms of the license are
conceptually identical to the contents of the package. Just as no court would
dream of saying that SelectPhone (trademark) must contain 3,100 phone
books rather than 3,000, or must have data no more than 30 days old, or must
sell for $100 rather than $150—although any of these changes would be welcomed by the customer, if all other things were held constant—so, we believe,
Wisconsin would not let the buyer pick and choose among terms. Terms of
use are no less a part of “the product” than are the size of the database and
the speed with which the software compiles listings. Competition among
vendors, not judicial revision of a package’s contents, is how consumers are
protected in a market economy. ProCD has rivals, which may elect to compete
by offering superior software, monthly updates, improved terms of use, lower
price, or a better compromise among these elements. As we stressed above,
adjusting terms in buyers’ favor might help Matthew Zeidenberg today (he
already has the software) but would lead to a response, such as a higher price,
that might make consumers as a whole worse off.
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III
[In this part of the opinion, the court holds that the contractual provision in
question is not preempted by the federal Copyright Act, 17 U.S.C. § 301(a)]
REVERSED AND REMANDED.
NOTES AND QUESTIONS
(1) Since ProCD was decided, the National Conference of Commissioners on
Uniform State Laws (NCCUSL) approved for consideration by the states the
Uniform Computer Information Transactions Act (UCITA). If UCITA has been
adopted by the state providing the law governing the contract, it will apply
to computer software licenses. It contains provisions largely validating the
terms of shrinkwrap or “click through” licenses, in accord with the reasoning
in ProCD. See UCITA §§ 208 (official comment 3), 209. If UCITA has not been
adopted, such transactions may or may not be covered by UCC Article 2,
depending on whether the court views the contract as a sale of goods contract
or some other type of contract. See p. 2, supra.
Do you agree with the court that § 2-207 does not apply to this transaction
(assuming it is a sale of goods case)? See UCC § 2-207, official comment 1.
(2) Would the case be decided differently if there was no language on the
outside of the box stating that the product was subject to the terms of a license
on the inside? Why should any of the terms of a shrinkwrap license be upheld
without express agreement by the licensee? Is it appropriate to impose terms
on the licensee that could not be reviewed before the licensee paid for the
software? What are the limits on the enforceability of the terms? See Pitet,
The Problem with “Money Now, Terms Later”: ProCD, Inc. v. Zeidenberg and
the Enforceability of “Shrinkwrap” Software Licenses, 31 Loy. L.A. L. Rev. 325
(1997). The matter will be further considered in Chapter 7, infra.
(3) Why did Judge Easterbrook devote so much time to explaining the
economic justification for the controverted clause? Could you formulate a
comparable justification for the seller’s indemnity clause in Brown Machine?
Would that have changed the result?
(4) What is the reason for the UCC requirement that certain contractual
provisions be “conspicuous?” In some situations the parties to a “contract” may
have divergent understandings as to the terms. If both parties are reasonable
in their respective understandings, is it always an appropriate resolution to
say there is no contract, give the buyer his money back (on condition that he
return the goods)? See Restatement of Contracts § 153, illus. 5. Would this
have been a reasonable solution in Brown Machine? These matters will be
taken up in Chapter 7, infra.
PROBLEM E
THE DEFECTIVE HOME COMPUTER
In response to advertising, buyers purchased a computer for household purposes by ordering it from the manufacturer. The computer was paid for by
credit card over the telephone. The terms of the contract of sale were not
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discussed. When the computer arrived, it was accompanied by a form contract
that contained, among other things, an agreement to arbitrate all disputes.
The contract indicated that it was binding on the purchaser unless the
computer was returned within 30 days. The buyers did not object, but when
the computer proved not to be to their liking, they sued. The manufacturer/
seller demanded arbitration per the contract that was enclosed with the
computer. Is the dispute subject to arbitration? Hill v. Gateway 2000, Inc.,
105 F.3d 1147 (7th Cir. 1997). Contra Klocek v. Gateway, Inc., 104 F. Supp.
2d 1332 (D. Kan. 2000). See Chapter 7 infra. Should it matter if the buyer
is attempting to rescind the contract or is instead suing for breach of express
warranty? See Section 1.03, supra.
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