Contracts Unit 2 ReviewContract Formation – Offer and Acceptance

Key Concepts

• Offer a proposal to enter into a contract, creating the power of acceptance in the offeree
• Acceptance an unequivocal assent to the terms of an offer, creating a binding contract
• Consideration something of value exchanged by both parties, necessary for a contract to be enforceable
• Meeting of the minds both parties must have a common understanding of the essential terms of the contract
• Intention to create legal relations parties must intend to be legally bound by the agreement
• Invitation to treat a mere declaration of willingness to enter into negotiations, not an offer (advertisements, price quotations)
• Counter-offer a response to an offer that changes the terms, effectively rejecting the original offer and making a new offer

Elements of a Valid Offer

• Communication the offer must be communicated to the offeree
• Clear and definite terms the offer must be sufficiently clear and definite for a contract to be formed
  • Essential terms (price, subject matter, parties) must be included or determinable
• Intention to be bound the offeror must intend to be legally bound upon acceptance
• Addressed to a specific person or group offers cannot be made to the world at large (with some exceptions)
• Differentiated from an invitation to treat must be distinguished from a mere invitation to negotiate or submit offers
• Revocable until accepted offers are generally revocable until accepted, unless they are option contracts or firm offers under the UCC
• Lapse after a reasonable time offers lapse if not accepted within a reasonable time, depending on the circumstances

Types of Offers

• Express offers clearly stated orally or in writing
• Implied offers inferred from the conduct of the parties or the circumstances
• Bilateral offers propose a promise for a promise, requiring a return promise to accept (typical in most contracts)
• Unilateral offers propose a promise for an act, requiring performance to accept (rewards, contests)
  • Generally cannot be revoked once performance has begun
• Option contracts irrevocable offers, usually supported by separate consideration (option to purchase real estate)
• Firm offers under the UCC irrevocable offers by merchants, in a signed writing, for up to 3 months (sale of goods)
• Tenders offers to multiple parties, with acceptance by the highest bidder or most suitable candidate (construction contracts)

Communication of Offers

• Effective upon receipt offers are effective only when received by the offeree, not when sent by the offeror
• Means of communication any means of communication can be used (oral, written, electronic), as long as it is reasonable under the circumstances
• Prescribed method if the offeror prescribes a specific method of acceptance, the offer can only be accepted by that method
• Indirect communication offers can be communicated through an authorized third party (brokers, agents)
• Rejected if not properly communicated offers are considered rejected if not communicated through a proper means
• Death of offeror or offeree an offer is terminated upon the death of either party before acceptance
• Incapacity of offeror an offer is void if the offeror lacks contractual capacity (minors, mentally ill)

Termination of Offers

• Revocation by the offeror before acceptance, unless it is an irrevocable offer
  • Effective upon receipt by the offeree
• Rejection by the offeree, either expressly or by making a counter-offer
• Lapse of time after a reasonable time, depending on the circumstances
• Death or incapacity of either party before acceptance
• Destruction of subject matter if the subject matter of the contract is destroyed before acceptance
• Supervening illegality if the contract becomes illegal before acceptance (change in law)
• Failure of a condition if the offer is conditional and the condition is not satisfied

Elements of Acceptance

• Unequivocal assent to the terms of the offer, without any changes or conditions
• Communicated to the offeror acceptance must be communicated to be effective, with some exceptions
• Intention to be bound the offeree must intend to be legally bound by the contract
• Compliance with the method of acceptance if the offer prescribes a specific method, it must be followed
• Timeliness acceptance must occur before the offer lapses or is terminated
• By a person with contractual capacity minors and mentally ill persons generally cannot enter into contracts
• Mirror image rule acceptance must mirror the terms of the offer (UCC 2-207 is an exception for sale of goods)

Methods of Acceptance

• Express acceptance clearly stated orally or in writing
• Implied acceptance inferred from the conduct of the offeree (performing the requested act)
• Silence generally not acceptance, unless the parties have a prior course of dealing or the offeree takes the benefit of the offer
• Performance of the requested act in unilateral contracts, performance constitutes acceptance
• Acceptance by post the mailbox rule, acceptance is effective upon dispatch (with some exceptions)
  • Does not apply to instantaneous means of communication (phone, email)
• Acceptance by electronic means follows the same rules as other forms of acceptance (receipt, dispatch)
• Acceptance by conduct any act that indicates assent to the terms of the offer (shipping goods)

Special Cases and Exceptions

• Battle of the forms (UCC 2-207) for sale of goods, additional or different terms in the acceptance become part of the contract unless they materially alter the offer
• Auctions with reserve seller is not obligated to accept the highest bid
  • Auctions without reserve seller must accept the highest bid
• Tenders offers to multiple parties, acceptance by the most suitable candidate
• Preliminary agreements parties may agree to be bound by a preliminary agreement, with further terms to be negotiated
• Agreements to agree generally not enforceable, as the terms are too indefinite
• Mistake, misrepresentation, duress, undue influence, and unconscionability may make a contract voidable
• Statute of Frauds certain types of contracts must be in writing to be enforceable (sale of land, contracts lasting more than one year)