Chapter 9: Offer and Acceptance

89 Chapter 9: Offer and Acceptance As we have already seen, a contract is a legally enforceable agreement between two or more parties. As this definition implies, a contract depends upon the consent of the parties to enter into a binding agreement. Assuming that the other requisite criteria are present (consideration, capacity, genuine assent, legality and, where required, specific form) a binding contract is formed at the moment that a valid offer to enter into a contract is accepted. When a valid offer is accepted, the parties involved are obligated to render the agreed upon performance and can be sued for breach of contract if they fail to do so. Requirements of a Valid Offer A valid offer must contain an unqualified, unambiguous promise to enter into a contract and must be communicated by the offeror (the person making the offer) to the offeree (the person to whom the offer is made). An offer that contains the requisite unqualified, unambiguous promise to enter into a contract and is communicated to the offeree can be accepted by the offeree to form a binding contract. In analyzing whether a valid offer exists, it s important to carefully examine the language and the circumstances surrounding the offer to determine whether the offer is unqualified, unambiguous, contains a valid promise, and has been communicated to the offeree. The following examples will illustrate some common problem areas. Rachel tells Ron, "I am considering selling my house for $100,000." Ron immediately replies, "I accept your offer." Stacy, angry that her motorcycle has broken down for the third time in two months, cries out, "I will sell this piece of junk motorcycle to the first person that gives me a nickel." Helen, who hears the statement, promptly tenders 5 to Stacy for the motorcycle. 89

90 Arthur tells his friend Ranji, "I'll sell you my portable television set for $50." Before Ranji has a chance to reply, Sandy, who overheard the statement, cries out, "I accept your offer." Although each of the last three examples seems to contain a valid offer, in fact none will form a valid contract when accepted under the facts given. In the first example, Rachel's statement does not contain a valid offer because it does not contain an unequivocal promise: Rachel says that she is considering selling her house, not that she promises to sell her house. Her statement is therefore not a clear offer, and no contract will be formed when Ron tries to accept it. In the second example, Stacy's statement certainly seems clear enough, yet under the circumstances it too is not an unequivocal offer, because the statement is made in anger or frustration and should not be interpreted as seriously intended by any offeree; in addition, the offer to sell a working motorcycle for a nickel also puts any potential offerees on notice that it is unlikely to be seriously intended. In the last example, Arthur's statement is a clear, unequivocal offer, but it cannot be accepted by Sandy because it was not communicated to her, but rather was made to Ranji. Only a person to whom an offer is communicated can accept it. (In that example, Ranji does have the power to accept Arthur's offer, since it is an unambiguous promise that was communicated to him.) Revocation of an Offer In general, a valid offer can be accepted at any time until it is either revoked or lapses. The offeror may revoke her offer at any time before it is accepted by communicating her intention to revoke to the offeree. Notice of revocation is effective when it is received by the offeree, whether or not he actually hears or reads it. The offer is also revoked if the offeree receives information from any source that clearly indicates the intention of the offeror to revoke the offer; an example of this is an offeree learning that a car that the offeror had offered to sell him has been sold to another party. An offer may also be made to expire after a set period of time; if that is the case, the offeree must accept the offer during the stated time period that it is held open in order to form a contract. If Anne tells Bob, "I will sell you my stereo for $75. I ll give you 24 hours to think about it," then Bob must act within the stated time period or the offer will expire. Even when a time period is specified, however, the offeror may still revoke the offer at any time before it automatically expires by communicating the desire to revoke the offer to the offeree. An exception to this rule is made if the offeree has given consideration for the offeror keeping the offer open. When such consideration is given, the offeree has a firm offer (also called an option) that is irrevocable by the offeror for its stated duration. Under Article 2 of the Uniform Commercial Code (UCC), a firm offer made by a merchant in a signed writing is also irrevocable, even if no additional consideration is given the merchant by the offeree for keeping the offer open. 90

91 When no time period is specified for acceptance by the offeree, an offer will terminate after the expiration of a reasonable period of time even if the offeror does not revoke it. What is a reasonable time period depends on the surrounding circumstances and hinges largely on the nature of the subject matter of the contract. If the subject matter of the contract is something with a fairly constant value, such as real estate in a stable housing market, a reasonable time might be six months or even longer. On the other hand, when the subject matter of the contract is subject to swift market fluctuations or has a limited useful life, the time period for acceptance of the offer can be very short. It can be measured in seconds when dealing with potentially volatile commodities such as pork belly, soybean or crude oil futures, or be a day or so when highly perishable goods for immediate shipment, such as some fruits, vegetables or flowers, are the subject of the offer. Finally, an offer may automatically lapse by operation of law in a number of instances, such as the accidental destruction of the subject matter of the offer before it is accepted, or the death or incapacity of the offeror prior to acceptance of the offer by the offeree. Thus, if Sandy offers to sell her sailboat to Beatrice for $10,000 and the sailboat sinks in a storm before Beatrice accepts the offer, it automatically lapses; likewise if Sanji offers to paint Beana's portrait for $500 and Sanji dies or becomes permanently incapacitated before Beana accepts the offer, Sanji s offer would lapse. Acceptance An offer is accepted by an offeree signaling his or her unqualified, unambiguous assent to the terms of the offeror's offer. In order to be valid, the offeree must communicate the acceptance to the offeror. In addition, the offeree s acceptance must be under the exact terms offered by the offeror; the terms in the acceptance must exactly mirror the terms in the offer for the acceptance to be valid. This requirement is referred to as the common law mirror image rule, which holds that any material deviation in the acceptance from the terms of the offer constitutes a rejection of the offer. The following example will illustrate. Steve offers to sell Barbara his English Racer for $350. Bernice can only accept the offer by agreeing to buy the bicycle under the offeror s terms. ("I accept." "I agree to your terms." "I'll take the bicycle." "Agreed." or any similar unequivocal, unambiguous response would constitute valid acceptance.) In the last example, any of the following answers would violate the mirror image rule and automatically reject the offer, since each contains either additional or different terms from the original offer: "I'll take the bike for $300." "I'll take the bike provided you agree to coach me on racing for 20 hours at no additional cost." 91

92 "I accept your offer provided you replace the worn front tire on the bike." A counteroffer serves as an automatic rejection of the offer. Once a counteroffer is made, the original offeror now becomes the offeree of the counteroffer and can choose to either accept the counteroffer or reject it. The original offeree loses his ability to accept the original offer after making a counteroffer, as the next example illustrates. Celine offers to sell Biff her comic book collection for $1,500. Biff says he'll buy it for $1,250. Celine now has the right to accept Biff's counteroffer on his terms, reject it, or make another counteroffer of her own. If she rejects the counteroffer, Biff will no longer be able to accept the original offer to buy the comics for $1,500 to form a contract, since a counteroffer serves as a rejection of the original offer. Like an offer, an acceptance must be unqualified and unambiguous. Although the word "accept" need not be used in a valid acceptance, the intent to accept must be unquestionably clear in order for a contract to be formed. Such responses as "I'm interested," "that sounds good," or "I could go for that" are all too ambiguous to form a valid acceptance. Modes of Acceptance An offer can be accepted through any reasonable means that communicates to the offeror the offeree's assent to the terms of the offer. As previously noted, acceptance of a valid offer immediately gives rise to a contract, provided that the other requirements for a valid contract are also present. This is not a problem in face to face negotiations, since the acceptance is immediately communicated to the offeror by the offeree and both parties are aware that a contract is formed. But what if an offeree decides to communicate his acceptance through the mail, by telegraph or by use of email? In such cases, the acceptance is effective as of the moment that it is sent regardless of when or even whether it is received by the offeror. When acceptance is made by letter, it is effective as soon as a properly addressed envelope with sufficient postage is dropped in a mailbox or handed over to a postal employee for delivery. This is referred to as the mailbox rule. A similar rule applies in most states to letters carried by carrier services, telegraphs and electronic or voice mail. The fact that an acceptance is valid when sent, rather than when received, can cause potential problems for offerors, as can be seen in the next example: Jim calls ten friends offering to sell them his piano for $450 -- a bargain since its market value is $5,000. He tells them each to let him know within a week if they want to accept his offer. The next day, three of his friends write their acceptance in a letter that they deposit in a mailbox, properly addressed to Jim and containing the proper postage; three other friends leave him messages of acceptance on his answering machine at home; one sends him an electronic mail message of acceptance, one leaves an accep- 92

93 tance message with James's secretary and one calls him at work and personally signals her acceptance. What result? Jim in our last example had better hope that his friends are very understanding, for he has ten valid contracts to sell his one piano. While only one of his friends will be able to successfully sue for the actual piano (the one who can prove he or she accepted first), the other nine friends are entitled to money damages (the difference between what they would have paid for the piano and its market value, in this case $4,550 each.) This example illustrates the danger of making multiple general offers. How could Jim have protected himself in our last example? He could (and should) have done so by limiting acceptance to a specific means, such as "I will sell my piano to the first person who accepts my offer in person at my home." Note that even if the friend that called in her acceptance to Jim in person was the first to answer and therefore entitled to receive the piano, her acceptance would not revoke Jim s offer to the other nine offerees unless they independently learned of it prior to signaling their own acceptance of the offer. Acceptance of a Unilateral Contract As previously noted, a unilateral contract is an exchange of a promise for an act. What the offeror in a unilateral contract wants is not a promise by the offeree in return for her own promise, but rather for the offeree to accept the contract by performing the requested act. Acceptance of a unilateral contract, then, is made by the offeree only by beginning performance of the promisor s requested act. Once performance begins by the offeree, the offeror cannot withdraw the offer in most states and must allow the offeree to complete the task that is the subject matter of the contract. Acceptance by the offeree is complete when the task is finished, and the offeree is at that time entitled to receive the offeror's promised performance under the contract. Sherman offers to pay Sari $500 if she paints his garage within the next 72 hours. Sari says nothing, but goes out to purchase the required supplies and begins performing the work the next morning. Once Sari takes a substantial step towards rendering the requested performance, such as by purchasing the required supplies and preparing the garage for painting, Sherman may not withdraw the offer and must give Sari the opportunity to complete the work. If Sari does not complete the work on time, she will not be entitled to any payment, since she can accept the offer for a unilateral contract only by her full timely performance. On the other hand, if she completes the work on time, she will have accepted Sherman's offer and be entitled to payment of the $500. 93

94 QUESTIONS 1. What are the requirements of a valid offer? 2. What are four ways in which a valid offer can be revoked? 3. What effect does a counteroffer have on an offer? 4. What are the elements of a valid acceptance? 5. What means can be used by an offeree to communicate acceptance to the offeror? HYPOTHETICAL CASES 1. Steve, while walking down the street, tells his friend Basili, "I would seriously consider selling you my antique gold Longines watch for $1,000." Basili does not answer. A month later, he writes Steve a letter stating that he accepts his offer to sell the Longines watch for $1,000. Is a contract formed? What is the effect of Basili s offer? Explain fully. 2. Assume the same facts as the last case. Would it make a difference if Basili had accepted the offer the next day? Do you think that a 30-day period is reasonable to accept an offer for the sale of an antique gold watch? Explain fully. 3. Olivia tells Bob, "If you agree to fix the leaky gutters in my house next week, I will agree to babysit your daughter next weekend for up to 10 hours." Bob replies, "You've got a deal, provided that you give me $10 for the parts I'll need to do the work." Under these facts, is there a valid contract? Explain. 4. Osvaldo, an accountant, tells Luisa, "I'll gladly keep the books for your business for a yearly fee of $1,000." Ted, who overhears the offer, promptly answers, "I accept, Osvaldo". a. Is there a valid contract between Osvaldo and Ted? Explain. b. What is the proper legal term for Osvaldo s statement? c. If Luisa writes Osvaldo a letter of acceptance and mails it the next day but forgets to put a stamp on the envelope, will a valid contract be formed? Explain. 94