THE OFFER--THE BARGAINING PROCESS BEGINS
OR
HAVE I GOT A DEAL FOR YOU
INTRODUCTION
BEGINNING THE BARGAINING PROCESS
Every true contract is the result of a bargaining process. That process may be very complex involving extensive negotiations, or it may be very short--"take it or leave it".
Whatever form the bargaining process takes, the final contract formation stage must begin with an OFFER.
An offer is the part of the bargaining process where one party communicates to the other: "Have I got a deal for you; here are the terms--if you accept, I promise to keep my part of the bargain." However communicated, whether by words or deeds, an offer creates a situation where acceptance will bind the OFFEROR to keep her promise. This
Chapter will focus on this beginning part of the bargaining process--the OFFER. We will examine the requirements of an offer and how an offer terminates.
REQUIREMENTS OF AN OFFER
1. INTENT TO CONTRACT--THE OBJECTIVE THEORY OF CONTRACTS
The primary requirement of an offer is that it contain, by words or conduct, the intention to be presently bound—the intention to form a contract. Whether a particular set of circumstances meets this requirement is determined by the answer to the following question: "Does this communication create in the mind of an average reasonable person in the position of the offeree an expectation that acceptance will form a binding contract. In short, it is the reasonable expectations of the offeree that determine whether an offer has been made.
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This is the objective theory of contracts. Simply, an offeror is responsible for the reasonable expectations her words or conduct foster in the offeree. The offeror's subjective intention--her undisclosed intention--can not prevent an offer from being made where the offeree reasonably believes an offer has been made. For example, where an offer is made in jest or in anger, a contract will still result from acceptance provided a reasonable person would have believed the offer to be seriously intended.
Case 1: Sidney Spite had just been informed by his wife that she was going to seek a divorce. He was angry as could be, and he was going to make sure she wouldn't get his new Porsche as part of the settlement.
Walking down the street he met an acquaintance, Freddy Fortunate, who
Sidney knew to have great admiration for the Porsche. Sidney stated the following to Freddy: "I know you like my Porsche; I've decided to sell it to get some cash. You can have it for $5,000." Freddy readily accepted and gave Sidney $100.00 to seal the deal; the remainder to be paid within ten days. Later that afternoon, Sidney's wife told him that she had changed her mind about the divorce. Sidney immediately went to Freedy and tendered back the $100.00. Sidney told Freddy he had only offered the car for sale because he was mad at his wife, and now that everything had changed, he didn't want to sell the car. Freddy told Sidney that he intended to go through with the deal and would sue if Sidney refused to transfer the car. Three days later, Freedy offered Sidney a check for the remaining
$4,900 which Sidney refused. Freddy sued.
Freddy would most likely win unless there were something in the circumstances that would warn a reasonable person in Freddy's position that
Sidney did not intend to contract. Them court would follow the objective theory of contracts and examine the reasonable expectations created in
Freddy by Sidney's words and conduct. The fact that Freddy was acting out of is anger at his wife would not prevent a contract from being formed.
NOTE : It is the totality of the circumstances that determine the reasonable expectations of the offeree. Although the words and conduct of the offeror may be the most important of the circumstances, other circumstances may prove the critical. For example, if Freddy were aware of Sidney's marital discord, of Sidney's habit of acting impetuously when angry, and of the market value of the Porsche being $25,000, he might well have reason to question whether the "offer" was seriously intended.
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There are certain situations that have been traditionally recognized as non-offer circumstances. Among these are preliminary negotiations, advertisements, and auctions.
These are discussed below.
PRELIMINARY NEGOTIATIONS
Any part of the bargaining process that does not contain a present intention to be bound may be considered as Preliminary Negotiations. Preliminary negotiations are not
offers. This includes such circumstances as: (1) statements of future intention--"I'm thinking of selling my stock for $100.00 per share" or "I wouldn't sell my hot tub for less than $3,500.00"; (2) invitations for the submission of bids on construction projects
[the bid itself would be an offer, however]; and (3) agreements to agree--"Next week we'll get together to work out a contract".
ADVERTISEMENTS
Generally, advertisements such as newspaper advertisements, price quotations, catalogues, etc. are not offers. They are regarded as invitations to make an offer or enter into negotiations. For example, if there were an advertisement in the newspaper such as the following: "1979 Honda 750, like new, $750.00 firm", you could not create a binding contract by calling the advertiser and "accepting". The advertiser would have to accept your "offer" to pay $750.00 (or whatever amount you agree upon) before a contract could be formed.
The general principle that advertisements are not offers has been somewhat modified by state and federal laws regulating truth in advertising. For example,
Michigan has a law that requires advertisers of consumer goods to give rainchecks for all
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advertised items unless the advertisement discloses a limitation on the number of items available and that number of items has actually be sold. Another Michigan statute (based on the Federal Trade Commission Act) provides that it is an unfair and deceptive trade practice for an advertiser of consumer goods to advertise goods while not having on hand a sufficient numbers of the advertised items to satisfy reasonably expected consumer demand.
Even in the absence of a statute, an advertisement may be treated as an offer under certain circumstances. Where an advertisement has all the "earmarks" of a unilateral offer--where the advertisement requires the performance of an act in order to be able to purchase the goods--it may be held to be an offer.
Case 2: Goffrey Goodson, a young man of 12, read the following advertisement in the newspaper: "GRAND OPENING SPECIAL--Jack
Hardware is opening a new store on 6th Street--We will sell a new Toro
Weedeater, regularly selling at our other stores for $89.00, to each of the first three customers to come to our new store for only $5.00". Goffrey, wanting to buy his father a present for Father's Day, took his camping equipment and camped out overnight in front of the 6th Street Jack
Hardware Store. When the store opened, Goffrey was the first customer, and even though he tendered his $5.00, the store manager would not sell him the weedeater for $5.00 saying that the only homeowners could buy the item.
If Goffrey were to sue, it is most likely that the court would hold the Jack Hardware advertisement to be an offer for a unilateral contract, and that Goffrey accepted the offer by performing the act of being one of the first three customers to come to the new store tendering the $5.00.
AUCTIONS
Generally, when an item is put on the block at an auction, it may be withdrawn should the highest bid be unacceptable to the seller. This general principle treats the bids as offers which may be accepted or rejected by the seller. An exception
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to this rule is an auction held "without reserve". In an auction without reserve, the item must be sold to the highest bidder. See UCC 2-328.
2. DEFINITENESS AND CERTAINTY—(EXCEPT UNDER THE CODE WHERE
THINGS ARE FAST AND LOOSE
Prior to the enactment of the UCC, there was but one principle of law as to the certainty of terms in an offer--an offer, to be valid, had to be definite and certain. With the UCC came a new set of rules, rules that could supply terms left out by the parties.
This section will discuss these two sets of rules--those that apply to contracts governed by the Common Law, and those involving contracts for the sale of goods under the UCC.
DEFINITENESS AND CERTAINTY UNDER THE COMMON LAW
Under Common Law, an offer was required to be definite and certain. If material terms were left out of an offer or the meaning of significant terms was uncertain under the circumstances, courts would hold that no valid offer had been made. The reasoning was that in order to have a valid contract, there had to be a "meeting of the minds" on all essential terms. If the bargaining process of the parties had resulted in uncertainty, courts would hold that they did not have the power to create a "meeting of the minds" for the parties; therefore, no valid contract could be found. This rule--that an offer must be definite and certain--applies to all contracts governed by the Common Law.
There are two modifications of this Common Law rule. One concerns offers that invite the acceptance to supply certain essential terms; the other, offers in the alternative. The following offer invites the acceptance to supply essential terms: "We will provide security services at any or all of your fifteen locations for $1,500.00 per month, per location; specify which locations in your acceptance." If the acceptance
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specified the locations desired, there would be a contract for those locations. If the acceptance did not specify which locations, there would be no contract. The following is an example of an offer in the alternative: "I will mow your lawn for $10.00 or wash your windows for $25.00." If the acceptance merely says "I accept", there would be a contract obligating the offeree to pay for either of the two services the offeror performs.
In the event the contract was breached before any services were performed, the court would calculate damages based on the lower cost services.
DEFINITENESS (OR LACK OF IT) UNDER THE UCC
To put it moderately, the requirement of definiteness was relaxed under the
UCC. Section 2-204 entitled "Formation in General" illustrates the UCC's change of the definiteness requirement. It reads as follows:
(1) A contract for the sale of goods may be made in any manner to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
Basically, under the UCC, if the parties "intend" to make a contract for the sale of goods, a contract can be found even though important terms are left open or left out completely. For example, the parties may leave out the price term; if so, “the price is a reasonable price at the time for delivery" (2-305). The UCC provides a rule for determining the time for delivery if the parties leave that out (2-309); and a place for delivery should none be specified (2-308). There is also a provision governing the time
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and place for payment where the parties do not specify these terms [2-310(a)]. As to quantity terms, the UCC specifically validates contracts which measure the quantity as the seller's total "output" or the buyer's total "requirements" (2-306).
Case 3: Tightlip Toranaga, a man of few words, was interested in purchasing an antique fan. Tightlip went to the owner, Anjin Pilot, and made the following offer: “I will buy your fan for any reasonable price".
Anjin simply replied: "I accept your offer". Even if these parties said nothing more, there would be a contract as long they intended for there to be one and there was a reasonably certain basis for giving a remedy. The price would be a reasonable one at the time for delivery (2-305); the time for delivery would be a reasonable time (2-309); the place for delivery would be Anjin's, the seller's, place of business, or if he had none, his residence (2-308); and payment would be due at the time and place
Tightlip, the buyer, is to receive the goods (2-310).
3. COMMUNICATION OF THE OFFER
An offer is not effective until communicated. It must be communicated by the offeror or someone authorized by the offeror to communicate the offer on her behalf. If an offeree learns of an offer by some other means than that intended by the offeror, the offeree has no power to accept.
Case 4: While Ollie Offeror and Busby Bisybody were out on the golfcourse one day, Ollie told Busby that he had sent Otto Offeree an offer in which he had agreed to buy Otto's farm for $75,000.00. Shortly after the game, Busby went to Otto and told him of Ollie's offer. Even though Otto had not yet received Ollie's offer, he immediately sent an acceptance. This acceptance would not be effective because Otto did not have the power to accept in that Ollie's offer had not been communicated to him by Ollie or someone authorized by Ollie to communicate the offer.
In addition to the requirement that an offer be communicated by the offeror or her agent, an offer must be communicated in such a manner that the offeree knows or ought to know its terms. For example, terms on tickets, claimchecks, receipts, or the like have been held not to be offers where, under the circumstances, the possible
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offeree did not know, and would not ordinarily realize, that the item contained contractual terms.
HOW AN OFFER TERMINATES
INTRODUCTION
When an offer is made, it creates a power of acceptance in the offeree. This power to accept continues until the offer terminates. An offer will terminate either through action or inaction on the part of the parties or a change in circumstances preventing the formation of a contract. Inaction by the offeree in the form of a failure to accept will result in the termination of the offer through lapse of time. Termination of an offer through action of the parties can be accomplished as follows: (1) revocation of the offer by the offeror; (2) rejection of the offer by the offeree; or (3) Counteroffer by the offeree.
Changes in circumstances which will terminate the offer by preventing the formation of a contract are: (1) destruction of the subject matter of the contract; (2) death or incompetentcy of the offeror or offeree; and (3) supervening illegality. All these ways in which an offer may be terminated will be discussed below.
TERMINATION THROUGH INACTION OR ACTION OF THE PARTIES
FAILURE OF THE OFFEREE TO ACCEPT--LAPSE OF TIME
The power of the offeree to accept cannot continue indefinitely. Once the offer is made, the offeror's options have become limited by way of giving the offeree the power to accept. It would be unreasonable to curtail the offeror's freedom indefinitely.
Therefore, it is necessary to have rules which determine the time within which an offer
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must be accepted, and after which a failure to act by the offeree will result in the termination of the offer.
The time within which an offer must be accepted can be specified by the offeror in the offer. If so, the offer must be accepted within that time or it will terminate through lapse of time. If the offer does not specify a time within which the offeree must accept, the law allows the offeree a reasonable time within which to do so.
Failure to accept within such a reasonable time will also result in termination.
A one sentence statement of the rule on the termination of offers through lapse of time is as follows: Unless revoked, an offer will terminate at the end of the time stated therein, and if no time is stated therein, within a reasonable period of time under the circumstances.
There are several ways in which an offer may establish the length of time an offer will remain open. For example, the offeror may specify a particular date upon which the offer will terminate—“you must accept on or before June 10 th ”—or she may set a time period during which the offer will remain open--"this offer will remain open for 10 days". Where the offeror sets a time period for acceptance, the time period will begin from the date of the offer if the offer so states--"this offer will remain open for 10 days from the date of this offer". If the offeror does not specify a particular starting date-
-"you have ten days to accept"--the beginning of the period will be when the offeree receives the offer unless the offer is delayed in transmission and the offeree has reason to know of the delay. In such a case the time period will begin when the offeree would have received the offer if there were no delay. For example, if the offeree receives a "you have ten days to accept" offer in an envelope which indicates that it has been
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forwarded, the time period would begin when she would have received it had it not been forwarded.
When the offeror does not specify a time within which the offeree must accept, all the circumstances are examined to determine what an appropriate "reasonable time" would be. Significant items to consider in determining a reasonable time are the subject matter of the offer, the relationship of the parties, and the means of communicating the offer. For example, if the subject matter of the offer was gold or some other kind of goods subject to swift price fluctuations, a speedy reply would be required. If the parties have a history of dealing with one another, the time they gave each other in the past would be relevant in determining a reasonable time for lapse in the present case. As to the means of communication, an offer by telegram implies more speed than one by mail, and a face-to-face offer is generally held to terminate at the end of the conversation. Remember, no one fact is totally determinative as all the circumstances of the parties must be considered; the above items are only guidelines.
REVOCATION OF THE OFFER BY THE OFFEROR
As a general rule, the offeror may revoke her offer at any time prior to its acceptance. A revocation is a manifestation that the offeror no longer intends to contract; its effect is to terminate the offer. It makes no difference that the offer states that it will remain open. Thus, an offer that states it will remain open until June 15th can be revoked on June 10th.
This principle may appear unfair at first, however, it is soundly based on the idea that an offeree should not be permitted to accept an offer after she knows the offeror no longer has the intention to contract. It necessarily flows from this rationale
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that a revocation is not effective until received by the offeree. However, the revocation need not be received directly from the offeror. Any manner in which the offeree learns that the offeror no longer intends to contract will terminate the offer.
Case 5: Billie Bluegrass received a letter from Fernando Fikle wherein Fernando offered to sell his horse, Pleasant Settlement, for
$500,000.00. The offer stated that it would remain open for ten days. The next day while at lunch with his friend, Issador Insider, Billie mentions
Fernando's offer. Issador says, "That’s strange, I saw Fernando sell
Pleasant Settlement to Buford Bucks yesterday afternoon. Billie immediately runs home and mails an acceptance to Fernando. When
Fernando refuses to sell the horse, Billie sues for breach of contract.
The court would hold for Fernando because the offerwas revoked the moment Billie learned the horse had already been sold. Billie cannot bind Fernando once he knows Fernando no longer intends to contract with him.
Firm Offers Under The UCC
An exception to the general rule that an offer may be revoked at any time is contained in Section 2-205 of the UCC. Under 2-205, entitled "Firm Offers", a signed, written offer by a merchant to buy or sell goods which gives assurance that
it will be held open is not revocable for the time stated therein, or if no time is stated, for a reasonable time not to exceed three months. If in Case 5 above, Fernando were a merchant (see 2-104) with regard to horses and his offer to Billie was signed, then his offer would be irrevocable for ten days under 2-205.
Unilateral Offers--Irrevocability After Substantial Performance
Another exception to the general rule that an offer can be revoked at any time concerns unilateral offers. A unilateral offer requests an act as acceptance. The contract is not formed until the act is completed. If the offeror could revoke her offer after the offeree
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had expended time and money performing part of the required act, injustice to the offeree would result. To prevent such an injustice, many courts hold that a unilateral offer becomes irrevocable after the offeree has substantially performed the required act. Additionally, in those states that do not hold the unilateral offer irrevocable or where the offeree has partly but not substantially performed, the offeree may generally recover in quasi contract to the extent that the part performance has unjustly enriched the offeror.
Case 6: Ronnie Reneg made the following offer to Lucy
Landscaper: "If you mow my lawn, I will pay you $10.00." After Lucy had finished the front and was preparing to start on the backyard, Ronnie told Lucy he had changed his mind and was revoking his offer. Assuming
Lucy has substantially performed the required act, many states would hold
Ronnie's offer irrevocable. In any event, Lucy should be able to recover in quasi contract for the work she performed.
Options--Contracts To Keep Offers Open
Although with the above exceptions, offers can be revoked at any time, an offeree can always make a contract with the offeror where the offeror agrees to keep the offer open. A contract which has as its subject matter the length of time an offer will remain open is called an Option contract. In order for such a contract to be valid so as to keep an offer open for the time specified, the offeree must give the offeror some consideration for her promise to keep the offer open. If in Case 5, Billie had paid
Fernando $10.00 for Fernando's agreement to keep his offer open for ten days, then an option contract would have been formed which would made the offer irrevocable for that period.
REJECTION OF THE OFFER BY THE OFFEREE
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A rejection by the offeree terminates the offer. A rejection is a communication by the offeree which manifests an intention of refusal to contract--"I'm not interested, forget it". A rejection is effective only when received. Since the rejection is effective only when received, an offeree may accept an offer after having sent a rejection; however, such an acceptance is effective only if it is received by the offeror prior to the rejection.
After a rejection has been received, a later attempt to accept will be ineffective as a acceptance because there is no longer any offer to accept. Such a later attempt to accept will be treated as an offer giving the power of acceptance to the original offeror.
COUNTEROFFER BY THE OFFEREE
A counteroffer is a proposal by the offeree to contract under terms different than those contained in the offer--"I will not give you the $500.00 you requested in your offer, but I will give you $450.00". If the offeree makes a counteroffer, the offer is terminated and the parties change positions. The party that was the offeree under the original offer becomes the offeror as to the counteroffer. Except for the change of position of the parties, counteroffers are treated the same as rejections, e.g., they are effective when received. Also, where the offeree first sends a counteroffer and then an acceptance, a contract results where the acceptance is received first. Where the counteroffer is received first, no contract results as the offer terminated on the offeror's receipt of the counteroffer.
Under the common law rule, known as the "mirror image" rule, the acceptance must exactly match the offer--any new terms or conditions will result in a counteroffer.
This has been changed under the UCC for contracts involving the sale of goods.
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Under Section 2-207, an unconditional acceptance which contains new or additional terms is treated as an acceptance rather than a counteroffer.
NOTE : An INQUIRY must be distinguished from a rejection or a counteroffer. An inquiry from the offeree indicates neither an intention to reject nor an intention to make an unconditional counter-proposal, instead, it merely inquiries of the offeror whether she will consider changes. For Example, "I am considering your offer, however, I wonder whether you might consider accepting less" would be an inquiry. An inquiry does not terminate an offer as would be the case with a rejection or counteroffer.
TERMINATION WHERE CIRCUMSTANCES PREVENT CONTRACT
FORMATION
DESTRUCTION OF THE SUBJECT MATTER OF THE CONTRACT
No contract can be formed regarding something that is no longer in existence.
Therefore, if the specific subject matter of an offer is destroyed after the offer is made but prior to acceptance, the offer is terminated. For example, if I were to offer to sell you my car, and before you accepted the car was destroyed by fire, my offer would automatically terminate.
DEATH OR INCOMPETENTCY OF THE OFFEROR OR OFFEREE
The death or incompetentcy of the offeror prior to acceptance will terminate the offer. This is true whether or not the offeree has notice of the death or incompetence. An offer being personal to the offeree, it will also terminate on the death of the offeree and cannot be accepted by her executor. Additionally, the incompetence of the offeree will eliminate the offeree's capacity to contract thereby terminating the offer.
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NOTE : An option, being itself a contract, survives the death or incompetence of the offeror or offeree. An option can be exercised by the dead offeree's executor or incompetent offeree's conservator. An exercised option is binding on the offeror's estate.
SUPERVENING ILLEGALITY
If the proposed contract becomes illegal either by statute or court decision, the offer terminates. For example, if Ted offers to rent his store to Sally for use as an adult book store, and prior to acceptance, a law is enacted prohibiting adult book stores in the area in which Ted's store is located, Ted's offer would terminate.
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