#11260 - Formation - Contracts

1. FORMATION? (Or: Do we have a Contract?)

   1. Offer and Acceptance

      1. The Mailbox Rule

In the era when contracts were executed in the mail, the following standards were developed to control offer and acceptance:

• An offer is effective upon receipt of the document in the mail, and revocable until delivery.

• Acceptance of an offer is effective upon dispatch. Once it’s in the mailbox, it operates as acceptance, even if it never arrives.

• Revocation following dispatch is ineffective.

• Rejection is effective upon receipt (i.e., if rejection is in the mail and you accept verbally before it arrives, the acceptance is valid).

• If rejection and acceptance are both sent, the first one to arrive controls.

• Acceptance under an option contract isn’t effective until receipt.

• Notices are effective only upon receipt.

• Exchange by electronic transmission is treated the same as when the parties are in one another’s presence.

  1. An offer is…

• Objectively reasonable. It must sound serious to the court.

• Objectively valid. The offeror’s intention not to bind himself is immaterial if his offer looks like an offer to the offeree. (Cobaugh v. Klick-Lewis)

• More than a mere invitation to deal; a definite expression of a party’s intent to be bound. (Moulton v. Kershaw: advertisement to sell salt no an offer).

• Revocable until the offeree accepts it (generally). (Petterson v. Pattberg: offer to reduce mortgage principal was revocable until offeree tendered performance).

  1. How an Offer Becomes an Option

An option is an offer that is irrevocable for a period of time. Options are made in five ways:

• Put and Call: A pays B money to hold an offer open.

• Rest. § 87(1): A and B make an agreement to hold B’s offer open in exchange for nominal or fictional consideration. (Thomason v. Bescher)

• Rest. § 87(2): B makes A an offer which reasonably induces some detrimental reliance by A. (See: PROMISSORY ESTOPPEL). (Drennan v. Star Paving)

• Rest. § 45: B makes an offer to form a unilateral contract with A, and A begins the requested performance.

• UCC § 2-205: Merchant’s Firm Offer Rule. Where a merchant makes an offer to buy or sell goods in a signed writing, it is not revocable for the time stated, or if no time is stated, for a reasonable time not exceeding three months.

  1. Unilateral and Bilateral Contracts

• Unilateral contract: A promises to pay B $100 if he will cross Brooklyn Bridge. There is no return promise from B. A may revoke his offer until B tenders performance. Performance does double duty as both acceptance and consideration.

• Bilateral contract: A promises to pay B $100 if B will promise to give A his lawnmower. A may revoke his promise until B accepts.

  1. What is Acceptance?

• The offeree must know about the offer in order to accept it.

• In a bilateral contract, the offeree accepts by making a return promise.

• In a unilateral contract, tendering performance may operate as acceptance.

• Rest. § 32: Where a contract is ambiguous as to the means of acceptance, either tendering performance or making the requested promise is sufficient. (Allied Steel v. Ford Motor Co.)

• Rest. § 62: But tendering performance then binds the offeree to the promise.

• Notification of acceptance is necessary in bilateral contracts, but not unilateral contracts. (Carlill v. Carbolic Smoke Ball).

• Rest. § 69: Silence operates as acceptance when:

  • The offeree takes the benefit of the thing offered with reasonable opportunity to refuse it and reason to know the offeror expects compensation in return.

  • The offeror has given offeree reason to know that assent may be manifested by silence or inaction, and the offeree intends to accept by silence or inaction.

  • Due to previous dealings between the parties, it is reasonable to expect the offeree to notify the offeror if he intends not to accept.

• Rest. § 36: The power to accept is terminated by:

  • Rejection or counteroffer by the offeree;

  • Lapse of time;

  • Revocation by the offeror; or

  • Death or incapacity of the offeror or offeree.

• UCC § 2-206:

  • (1) Unless otherwise unambiguously indicated by the language or circumstances:

    • (a) An offer to make a contract shall be construed as inviting acceptance in any manner and any medium reasonable in the circumstances.

    • (b) An order to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt shipment of conforming goods.

  • (2) If the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

    1. Acceptance by Silence

In certain circumstances, it is sufficient for a party to express acceptance by silence, rather than by making a return promise, beginning performance, or otherwise acknowledging acceptance.

• Rest. § 69: Silence as Acceptance

  • (1) Where an offeree fails to reply to an offer, his silence is acceptance ONLY when:

    • (a) The offeree takes the benefit of the thing offered wit reasonable opportunity to refuse it and reason to know the offeror expects compensation in return.

    • (b) The offeror has given the offeree reason to know that assent may be manifested by silence or inaction, and the offeree intends to accept by silence or inaction.

    • (c) Due to previous dealings between the parties, it is reasonable to expect the offeree to notify the offeror if he intends not to accept.

• With Past Conduct: Past conduct between the parties which suggests silence is a legitimate form of acceptance makes it so, provided the party can return the goods if he desires. (Hobbs v. Massassoit Whip Co.)

• Without Past Conduct: A party may not volunteer to confer benefit on another and then presume that his silent acceptance means he agrees to pay; the accepting party must have reason to believe the vendor expects payment. (Martin v. Little, Brown & Co.: free proofreading)

• Contract Implied in Fact: Where there is no express consent between the parties, yet their conduct suggests they intend there to be an exchange. Example: a doctor performs an operation on a conscious patient. There is no exchange of words, but the patient’s failure to refuse treatment suggests an intent to pay for the procedure. (Collins v. Lewis: Deputy took the cow, and owner knew about it; by doing nothing he implicitly assumed a duty to pay Deputy)

• Contract Implied in Law: Where the law creates the legal fiction of a contract in order to award a remedy. Example: a doctor performs an operation upon an unconscious patient. Though there is no mutual assent or conduct suggesting a contract, the law will treat it as if there is a contract. Related to unjust enrichment. (Seaview Ass’n of Fire Island v. Williams: express rejection of the contract, yet the court finds a contract since there is no way to avoid benefit)

  1. Consideration

Consideration began as a legal formality. In the past, a promise could be consecrated at law by the application of the seal. Common law courts sought evidence that the parties had engaged in a real bargain. Today, consideration serves three functions:

• As evidence of the bargain and to prevent parties from falsely claiming promises;

• As a cautionary, ritual step to signal to the parties that the law will enforce their agreement;

• As a channeling function, to signal to courts which promises the law should be interested in.

  1. Bargaining

One of the main functions of consideration is to evidence a bargained-for exchange. Where a bargained-for exchange is absent, there is generally not a contract.

• Rest. § 71: Requirement of Exchange; Types of Exchange

  • (1) To be consideration, a performance must be bargained for.

  • (2) It is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange.

  • (3) A performance may consist of:

    • (a) An act besides a promise;

    • (b) A forbearance;

    • (c) The creation, modification, or destruction of a legal relation.

  • (4) The consideration may be given to the promisor or some other person, to the promisee or some other person.

• Rest. § 74: Settlement of Claims

  • (1) Waiving a claim which turns out to be invalid is not consideration unless:

    • (a) The claim was asserted based on uncertainty as to the facts or law (objective uncertainty test); OR

    • (b) The forbearing party reasonably believed the claim would be found valid (subjective belief test).

  • (2) Executing a written instrument waiving a right is consideration even if the waiving party doesn’t believe the right to be valid.

• Generally, a promise to make a gift is not enforceable. (Congregation Kadima Toras-Moshe v. DeLeo). Exceptions:

  • PROMISSORY ESTOPPEL: Detrimental reliance on the promise (Hamer v. Sidway; Rest. § 90(1))

  • Charitable subscriptions. (Allegheny College; Rest. § 90(2))

• Courts will not enforce contracts grounded in “meretricious” consideration—i.e., sex. (Whitten v. Greely-Shaw)

• Nominal Consideration:

  • Courts will not inquire into the adequacy of consideration, but only the sufficiency of consideration.

  • Consideration which is found to be given as an empty gesture, i.e. which induces no action on the part of the other party, is not valid. (Fischer v. Union Trust: hand daddy a dollar)

    1. Promises Grounded in the Past

Even though an exchange takes place without a bargain, courts will recognize a party’s obligation to reciprocate for something done in the past when:

• A renews a promise to pay B for a debt on which the statute of limitations has run;

• A renews a promise to pay B for a debt when A is bankrupt;

• A renews a promise to pay B for an obligation...