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Formation of a Contract

 

Offer

An offer occurs when there is a willingness to enter an agreement.

  • The offeror (or "master of the offer") invites an acceptance. Such an acceptance must conclude the deal.

  • If the offeree can respond, "yes, I accept," then an offer has been made.

Manifestation of Intent

Intention forms contracts, but parties (the offeror and offeree) must manifest their intentions objectively to enter into a bargain. Concealed intentions do not form contracts. To determine whether intent has been manifested by either party, the following must be examined:

  • Definite propositions

    Example: "I will pay you $100 to paint my house" is more indicative of intent to form a contract than, "I would like my house painted."

  • Method of communication

    Example: A published advertisement is less likely to indicate intent to make a deal than a personal conversation.

  • Actions consistent with the intent to enter into an agreement

    Example: After Roger asks Fred to paint Roger’s house, Fred arrives at Roger’s house with paintbrushes.

  • Previous dealings between the parties

    Example: Every time Lori leaves crates of apples on Jenny’s loading dock, Jenny sells them in the grocery store.

  • Custom or trade usage

    Example: A grocery store customer who picks up a frozen pizza and takes it to the cashier expresses intent to enter into a deal because that is how grocery stores customarily work.

Certainty of Terms

An offer must be definite in its terms, particularly as to:

  • Subject matter

  • Price

  • Time of performance

  • Quantity

Not all terms need to be detailed completely—only well enough to make the agreement clear.

  • Advertisements usually are considered invitations to deal, and not offers, because they lack definite terms, such as quantity.

Termination of Offers

Offers may be revoked in several ways:

  1. Revocation: An offer is freely revocable, except when:

    • The offeree gives consideration to the offeror to keep the offer open (e.g., an option contract).

    • Firm offers: If a merchant makes an offer in a signed writing, then that offer is irrevocable for a maximum of three months. If the offer is promised to be held open for more than three months, the time will be reduced to three months (see UCC §2-205).

    • Foreseeable detrimental reliance: An offer cannot be revoked if there has been reliance by the offeree that is reasonably foreseeable (e.g., a subcontractor’s bid upon which a general contractor relies.)

    • The party attempting to accept a unilateral contract by performance began performance.When some value has been conferred on the offeror, the offeror must give the offeree a reasonable time to perform. Until value has been conferred, the offeror may revoke the offer.

  2. Rejection by the offeree.

  3. Lapse due to time. If the offer does not specify a time, a reasonable time must be established.

    • Determining a reasonable time depends on:

      • Subject matter;

      • Price fluctuation;

      • Medium of the offer; and

      • Business custom.

    • A reasonable time often expires with the end of the conversation.

  4. Counteroffer, which expresses a willingness to enter into different terms, and implicitly, an unwillingness to enter into the proposed terms.

    Note: Not all responses are counteroffers. Sometimes an offeree may respond with acceptance, but ask for additional terms.

    Example: "I agree to buy the car for $5,000, but can you also include the ski-rack," is a request for further dealings, whereas "I agree to pay $5,000 for the car only if you include the ski-rack," is a counteroffer.

  5. Supervening illegality by the passage of a law making the contract illegal.

  6. Death or incapacity of the offeror.

 
 

Acceptance

An offeree finalizes contract formation by unequivocally accepting the terms of the offer. Acceptance of an offer may be communicated by:

  • Promise: A party may accept an offer to enter into a bilateral contract by giving a promise in return.

    Example: An offeree stating, "I accept your proposal and promise to perform."

  • Performance:

    Example: A bounty hunter bringing back a wanted criminal.

  • Silence: This can happen only when custom between the particular parties makes silent acceptance reasonable.

    Example: Allowing a supplier to leave the goods on a loading dock.

  • Mailbox rule: Acceptance is effective on dispatch. A revocation of an offer or acceptance is effective on receipt.

    • Exceptions:

      • Offer otherwise expressly provides

      • Rejection mailed, then acceptance mailed: If rejection is mailed, then acceptance is mailed, whichever arrives first controls.

      • Acceptance mailed, then rejection mailed: The mailbox rule applies, unless the rejection is received first and relied upon by the offeror.

      • Option deadlines: The mailbox rule does not apply to the deadline for an option contract. Acceptance is valid only upon receipt.

  • Mirror image rule: Under the common law, the terms of the acceptance must be exactly the same (the "mirror image") as the terms of the offer.

  • Form contracts (UCC §2-207): The UCC modifies the Common Law rules by allowing courts to enforce contracts even when the parties do not agree exactly on the terms. The following are possible rules to determine which terms of a contract to enforce:

    • First shot: Contract formed on the terms of the offer.

    • Last shot: Contract formed on the terms of the acceptance.

    • Knock-out and gap filler: The conflicting terms are eliminated and UCC default rules are applied.

Rules for contradictory terms

 
 

Consideration

Consideration is a bargained-for exchange of legal value. The adequacy of consideration cannot be questioned as long as the parties bargained for it (e.g., you cannot go to court because you got a bad deal on a car, or because you regret buying an expensive blouse). The parties are assumed to be the best judges of value (e.g., a court will not allow a party to argue, "I agreed to pay more than I should have").

To better understand consideration, compare it with promises that are not bargained-for exchanges and not enforceable:

  • Gifts

    Example: "I will give you $1,000 on your birthday."

  • Past consideration

    Example: "I will pay you $1,000 for many years of loyal service."

  • Illusory promises: These give the promisor absolute freedom of action.

    Example: "I will buy your painting if I feel like it."

"A WORD IS NOT A CRYSTAL, TRANSPARENT AND UNCHANGED; IT IS THE SKIN OF A LIVING THOUGHT AND MAY VARY GREATLY IN COLOR AND CONTENT ACCORDING TO THE CIRCUMSTANCES AND TIME IN WHICH IT IS USED." OLIVER WENDELL HOLMES

Substitute for Consideration

When only one party makes a promise, the promisee may not enforce the promise as a contract, but may seek redress on a theory of promissory estoppel (§90 2nd Restatement).

  • Promissory estoppel can occur when a promise, on which the promisor should reasonably expect to induce action or forbearance (and actually causes action or forbearance), requires enforcement.

  • The party relying on the promise will be put back where he or she would have been had the promise never been made, not where she would have been had the promise been fulfilled.

 
 

Implied Contracts

Contracts may be implied. Even if the parties did not agree explicitly with words or actions, a court can find that one party owes the other party damages. Contracts may be implied in fact or implied in law.

  • Implied in fact contracts are real contracts formed by implicit assent rather than explicit consent.

    Example: If a person raises his or her hand during an auction, consent to pay the price is implied.

  • Implied in law contracts are not real contracts but merely a label given to certain actions that give rise to liability for unjust enrichment.

    • Theoretically the difference is clear, but in practical terms, these two kinds of contracts are very similar.

    • The status of the plaintiff may determine the availability of recovery on a contract implied in law.

  • Officious intermeddler: A plaintiff who confers benefit without consent or request from the defendant. The officious intermeddler recovers nothing because retaining the benefit is not unjust.

    Example: Mark paints Nancy’s car while Nancy sleeps, without Nancy’s actual or implied consent, and can recover nothing.

  • Self-serving intermeddler: A plaintiff who helps himself and must confer benefit on the defendant.

    Example: Mark builds a wall between his property and Nancy’s. Nancy did not ask for the wall to be built but receives some benefit nonetheless.

    • The self-serving intermeddler recovers if the defendant had the opportunity to disclaim responsibility.

      Example: If Mark builds the wall during Nancy’s vacation, Mark may not recover because Nancy had no opportunity to clarify the situation. If Mark builds the wall while Nancy watches, Mark may recover. Nancy had ample opportunity to ask that she not be responsible for the wall.

  • Altruistic intermeddler: A plaintiff who helps the defendant when the defendant cannot consent. The altruistic intermeddler receives fair value for the services because consent is implied.

    Example: Mark treats Nancy after Nancy is knocked unconscious in a car accident. Mark recovers the fair market value of the services.