Outline: Contracts - II - Contract Formation

Contracts (Spring 2006, Hull)

II. CONTRACT FORMATION

1. Offer - An offer must be sufficiently definite and made in such a manner that a reasonable person receiving the offer would believe that all he must do is accept the offer in order for a contract to be formed (or that acceptance will form a contract).
   1. Leonard v. Pepsico - An advertisement is not an offer, but an invitation to begin negotiations, unless it has words of limitation, or is otherwise “clear, definite, and explicit, and leaves nothing open for negotiation.”
   2. The offeror is the master of the offer
   3. Revocation - Offer can be revoked at any time before acceptance [R.2d 42, Allen R. Krauss Co. v. Fox – Arizona land deal, seller took property off market before buyer closed escrow] unless:
      1. Option supported by consideration. R.2d 45.
      2. Firm offer rule - UCC 2-205
      3. Option contract - R.2d 87 applies (purported consideration, fair terms, reasonable time) [Newberger v. Rifkind – Stock option agreements constituted enforceable contracts in consideration of the continued employment.]
      4. Promissory estoppel - R.2d 87(2) [S.M. Wilson & Co. v. Prepakt Concrete Co. – Because the two parties remained in communication after the expiration of the original proposal, the original proposal is enforceable.]
   4. Revocation learned "through the grapevine" still counts. R.2d 43.
2. Acceptance - A manifestation of assent of the terms made by the offeree in a manner invited or required by the offer.
   1. Forms of acceptance – R.2d 50
      1. Bilateral - By promise. R.2d 50(3).
      2. Unilateral - By performance. R.2d 45.
         1. No revocation once performance begins. R.2d 45(1).
         2. No enforcement until performance completed. R.2d 45(2).
      3. Where unspecified, offeree chooses. R.2d 32
      4. Where unspecified, and offeree begins performance, (1) he has chosen acceptance by performance, with (2) a promise to render complete performance. R.2d 62.
   2. Mailbox Rule - Acceptance is complete once the mail is posted. R.2d 63(a).
      1. Henthorn v. Fraser – When it is reasonable to communicate by post, an acceptance is complete as soon as it is posted.
      2. Worms v. Burgess – If the acceptance is lost in the mail, it is still effective.
   3. Expiration of Offer
      1. Lapse of time – If no expiration time specified, reasonable time. R.2d 41. 3 months max. 2-206(3).
      2. Death/Incapacity – No power of acceptance if either party is dead or incapacitated. R.2d 48.
   4. Rejection is effective when offeror learns of it. R.2d 40.
   5. Acceptance by Silence
      1. Generally, silence does not equal acceptance. [Curtis v. Mason]
      2. Exceptions (R.2d 69):
         1. Offeree takes benefit with reasonable opportunity to reject.
         2. Offer gives notice that silence equals acceptance, and offeree intends to accept.
         3. Prior dealings create reasonable expectation that offeree will object unless he intends to accept.
      3. Contrast UCC 2-206(1)(b)
3. Formation under UCC
   1. 2-204 – In General
      1. 2-204(1) - Any manner sufficient to show agreement, including conduct.
      2. 2-204(2) – Sufficient agreement may be found even if moment of making it is unknown.
   2. 2-205 - Firm Offer (no consideration required)
      1. In signed writing
      2. Explicit assurance to hold offer open
      3. Irrevocability cannot exceed 3 months
   3. 2-206 - Acceptance
      1. (1)(a) General – Acceptance can be in any reasonable manner unless offer specifies mode of acceptance. (Silence can be acceptance.)
      2. (1)(b) Prompt Shipout – For offers including prompt shipment, acceptance is manifested by prompt shipment or prompt promise to ship.
      3. (2) Time Lapse Rule - If there has been no notification to offeror within a reasonable time, the offer may be voided.
4. Discrepancy Between Offer and Acceptance
   1. Common Law
      1. "Mirror Image Rule" – Acceptance must mirror offer. Discrepancies mean “acceptance” is really a rejection and counteroffer. R.2d 39.
      2. "Last Chance Doctrine" - Performance indicates acceptance of counteroffer. Terms in the counteroffer thus “win” the battle of the forms. R.2d 50.
   2. Change of Terms – Acceptance invalidates contract only if proposals make contract dependent on changed or additional terms. R.2d 61.

      UCC

   3. 2-207 - Additional Terms
      1. 2-207(1) - An acceptance can contain additional terms unless the acceptance expressly limits assent to those terms. [Brown Machine v. Hercules, Inc. – The order acknowledgement did not make acceptance of indemnification clause a condition for shipment, therefore indemnification is not a term of the contract.]
      2. 2-207(2) - Additional terms are proposals for addition to the contract; between merchants, they become part of the contract unless:
         1. (a) Offer expressly limits acceptance to terms of offer.
         2. (b) Proposals materially alter terms (there is surprise or hardship to offeror). [Ohio Grain Co. v. Swisshelm – Agricultural commodities are typically subject to conditions, so proposal to add terms are not material alterations.]
         3. (c) Party proposing additional terms reasonably notified of objection.
      3. 2-207(3) - If the writings do not establish a contract, conduct by both parties consistent with existence of a contract establishes a contract.
      4. Contrast “Rolling Contract Theory” – “money now, terms later”. If you buy it, and you keep it, you have accepted the terms of the contract. [ProCD – Shrinkwrap license is an ordinary contract. UCITA § 209. UCITA view on software license is in the minority.] This approach is favorable to manufacturers, not consumers.
   4. Proposed 2-207 - If there’s a contract, the terms are:
      1. terms that appear in the records of both parties;
      2. terms, whether in a record or not, to which both parties agree; and
      3. terms supplied or incorporated under any provision of this Act.
   5. 2-208(2) - Practical Construction - If the following are not reasonably consistent with each other, construction follows this order of priority:
      1. express terms
      2. course of performance
      3. course of dealing
      4. usage of trade (1-205)
      5. other implied terms (e.g., good faith obligation)