FORMATION OF CONTRACTS:FORMATION OF CONTRACTS:OFFER AND ACCEPTANCEOFFER AND ACCEPTANCE

Used by permission. For Educational purposes

only.

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• The offer must have contractual The offer must have contractual intentintent. .

• This intent is lacking if the statement is This intent is lacking if the statement is merely an invitation to negotiate, a merely an invitation to negotiate, a statement of intention, or an statement of intention, or an agreement to agree at a later date. agreement to agree at a later date.

• Newspaper ads, price quotations, and Newspaper ads, price quotations, and catalog prices are ordinarily invitations catalog prices are ordinarily invitations to negotiate.to negotiate.

Requirements of an Requirements of an OfferOffer

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Requirements of an Requirements of an OfferOffer

• An offer must be An offer must be definitedefinite, with terms , with terms that are clear and spelled out.that are clear and spelled out.

• Definite by incorporation.Definite by incorporation.

• Implied Terms (by law or conduct).Implied Terms (by law or conduct).

• Exceptions: good faith performance, Exceptions: good faith performance, requirements and output contracts.requirements and output contracts.

• Offer must be Offer must be communicatedcommunicated to to Offeree.Offeree.

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Termination of OfferTermination of Offer

• RevocationRevocation. The ordinary offer may . The ordinary offer may be revoked at any time by the be revoked at any time by the offeror. All that is required is the offeror. All that is required is the showing of intent to revoke and the showing of intent to revoke and the communication of that intent to the communication of that intent to the offeree. offeree.

• By definition, an attempted By definition, an attempted acceptance made after the offer has acceptance made after the offer has been terminated has no effect. been terminated has no effect.

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Termination of OfferTermination of Offer• An offer is also terminated by:An offer is also terminated by:

• Counteroffer is the express rejection of Counteroffer is the express rejection of the offer with a new offer. the offer with a new offer.

• Lapse of the time stated in the offer or Lapse of the time stated in the offer or of a reasonable time when none is of a reasonable time when none is stated.stated.

• Death or disability of either party.Death or disability of either party.

• Change of law that makes illegal a Change of law that makes illegal a contract based on the particular offer.contract based on the particular offer.

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Termination of an Termination of an OfferOffer

By Offeree

Rejection

Counteroffer

Death or Incapacity

By Offeror

Revocation Prior to Acceptance*

Death or IncapacityTime Limitations Placed in

the Offer

*Options and firm offers excepted

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• When the offer is accepted, a contract When the offer is accepted, a contract arises. arises.

• Only the offeree can accept an offer, and Only the offeree can accept an offer, and the acceptance must be of the offer the acceptance must be of the offer exactly as made without any exactly as made without any qualification or change. qualification or change.

• The acceptance is any manifestation of The acceptance is any manifestation of intent to agree to the terms of the offer. intent to agree to the terms of the offer.

• Ordinarily, silence or failure to act does Ordinarily, silence or failure to act does not constitute acceptance.not constitute acceptance.

Acceptance of OfferAcceptance of Offer

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Offeror makesan offer

Offeree accepts offer unconditionally

Offeree changes oradds terms

Offeree rejects offer

ContractArises Counteroffer

No contractexists

Original offeroraccepts counteroffer

unconditionallyOriginal offeror changes

or adds termsOriginal offeror

rejects counteroffer

Counteroffer

Acceptance of an Acceptance of an OfferOffer

Acceptance of an Acceptance of an OfferOffer

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Acceptance of an Acceptance of an OfferOffer

• An acceptance does not exist until the An acceptance does not exist until the words or conduct demonstrating assent to words or conduct demonstrating assent to the offer is the offer is communicatedcommunicated to the offeror. to the offeror.

• Mailbox RuleMailbox Rule: Acceptance by mail takes : Acceptance by mail takes effect at the time and place when and effect at the time and place when and where the letter is mailed or the fax is where the letter is mailed or the fax is transmitted.transmitted.

• RULE: Acceptance upon dispatch, RULE: Acceptance upon dispatch, revocation upon receipt. revocation upon receipt.

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Mailbox Rule: Is There a Mailbox Rule: Is There a Contract?Contract?FACTS:

September 1, 1997 Seller mails an offer to Buyer

September 2, 1997 Buyer receives offer

Buyer mails acceptance

September 3, 1997 Seller calls to revoke offer

Buyer says he has already accepted

September 4, 1997 The acceptance arrives

Is there a contract?

Yes, in both cases. Proper acceptance is effective when sent, even if never received.

Assume the same scenario as above, but the buyer’s acceptance never arrives. Assuming the buyer has adequate proof of mailing the acceptance, is there a

contract?

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Acceptance of an OfferAcceptance of an Offer

What method of acceptance is reasonable?What method of acceptance is reasonable?

Telephone and Electronic Acceptance.Telephone and Electronic Acceptance.

Telephone: acceptance upon phone call. Telephone: acceptance upon phone call.

Email? Upon dispatch of email (send).Email? Upon dispatch of email (send).

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AuctionsAuctions

• In an auction sale, asking for bids is an In an auction sale, asking for bids is an invitation to negotiate. invitation to negotiate.

• A person making a bid is making an A person making a bid is making an offer, and the acceptance of the highest offer, and the acceptance of the highest bid by the auctioneer is an acceptance bid by the auctioneer is an acceptance of that offer and gives rise to a contract. of that offer and gives rise to a contract.

• When the auction sale is without When the auction sale is without reserve, the auctioneer must accept the reserve, the auctioneer must accept the highest bid. highest bid.