Chapter 13Chapter 13FORMATION OF CONTRACTS:FORMATION OF CONTRACTS:

OFFER AND ACCEPTANCEOFFER AND ACCEPTANCE

2

The offer must have contractual The offer must have contractual intentintent. . This intent is lacking if the statement is merely an This intent is lacking if the statement is merely an

invitation to negotiate, a statement of intention, or invitation to negotiate, a statement of intention, or an agreement to agree at a later date. an agreement to agree at a later date.

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

Requirements of an OfferRequirements of an Offer

3

Requirements of an OfferRequirements of an Offer

An offer must be An offer must be definitedefinite, with terms that are , with terms that are clear and spelled out.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, requirements Exceptions: good faith performance, requirements and output contracts.and output contracts.

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

4

Termination of OfferTermination of Offer

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

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

5

Termination of OfferTermination of Offer

An offer is also terminated by:An offer is also terminated by: Counteroffer is the express rejection of the offer Counteroffer is the express rejection of the offer

with a new offer. with a new offer. Lapse of the time stated in the offer or of a Lapse of the time stated in the offer or of a

reasonable time when none is stated.reasonable time when none is stated. Death or disability of either party.Death or disability of either party. Change of law that makes illegal a contract based Change of law that makes illegal a contract based

on the particular offer.on the particular offer.

6

Termination of an OfferTermination of an Offer

By Offeree

Rejection

Counteroffer

Death or Incapacity

By Offeror

Revocation Prior to Acceptance*

Death or Incapacity

Time Limitations Placed in the Offer

*Options and firm offers excepted

7

When the offer is accepted, a contract arises. When the offer is accepted, a contract arises. Only the offeree can accept an offer, and the Only the offeree can accept an offer, and the

acceptance must be of the offer exactly as acceptance must be of the offer exactly as made without any qualification or change. made without any qualification or change.

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

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

Acceptance of OfferAcceptance of Offer

8

Offeror makesan offer

Offeree accepts offer unconditionally

Offeree changes oradds terms

Offeree rejects offer

ContractArises Counteroffer No contract

exists

Original offeroraccepts counteroffer

unconditionallyOriginal offeror changes

or adds termsOriginal offeror

rejects counteroffer

Counteroffer

Acceptance of an OfferAcceptance of an Offer

9

Acceptance of an OfferAcceptance of an Offer

An acceptance does not exist until the words or An acceptance does not exist until the words or conduct demonstrating assent to the offer is conduct demonstrating assent to the offer is communicatedcommunicated to the offeror. to the offeror. Mailbox RuleMailbox Rule: Acceptance by mail takes effect at : Acceptance by mail takes effect at

the time and place when and where the letter is the time and place when and where the letter is mailed or the fax is transmitted.mailed or the fax is transmitted.

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

10

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

FACTS:September 1, 1997 Seller mails an offer to BuyerSeptember 2, 1997 Buyer receives offer

Buyer mails acceptanceSeptember 3, 1997 Seller calls to revoke offer

Buyer says he has already acceptedSeptember 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?

11

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).

12

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

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