Contracts: Offer, Acceptance, and Mutual Assent

Chapter 7 Contracts: Offer, Acceptance, and Mutual Assent 1 The Purposes of Contract Enforcement When people keep their business promises to one another, good things happen: buildings get built on time and on budget, cars get repaired on time and on budget, businesses get started, parts businesses ordered show up on time, and so on. The Purposes of Contract Enforcement So that people can rely on each other and accomplish difficult things together So that people can allocate the risks and rewards of endeavors in advance To incent people to try very, very hard to keep their business promises 1

There are Two Levels of Promises 1. Moral promises, also known as social promises, and 2. Legally-enforceable promises To be legally-enforceable, a promise must either be a contract, or qualify for legal enforcement under the doctrine of promissory estoppel. We Want People to Keep Their Moral Promises But we are only willing to spend taxpayers money to ensure that contractual promises* are kept. Society places special value on these promises. *And a few other promises under the doctrine of promissory estoppel. Freedom to Contract Doctrine The United States and England are somewhat unique in the degree to which they have embraced freedom to contract doctrine, a policy of government allowing individuals to decide, as much as possible, what promises to make to each other. Courts in the U.S. look for a short list of requirements to be met, then generally enforce the contract, even when the consequences of enforcement are harsh for one party. 2

Most Contracts are Enforced as Written For example, if a real estate developer contracts with a builder to build 10 expensive homes for him, but the housing market collapses before construction begins, the developer is still obligated to pay the builder for the houses, even though the expense will cause him devastating losses. Why Does the U.S. Do This? Because businesspeople find it useful to be able to decide for themselves who will bear the risk of a given business project. What the real estate developer should do if he is worried about this possibility is to get a clause added to the contract during negotiations in which the developer need pay only for completed work, and may cancel his order for the homes at any time. The Two Most Likely Outcomes Either: 1. Both parties keep their promises, or 2. The parties mutually agree to rescind their contract, and the developer pays the builder a fixed fee for the privilege of escaping his promise. 3

Damages that Flow From the Breach The most common consequence of breaking a contractual promise is the award of money damages to the nonbreaching party. More rarely, the court will order the breaching party to perform their promises. When this happens, we say the court has issued an order of specific performance. A Contract (defined) An agreement to do or not to do a certain thing, enforceable by the courts. Essential Elements of a Contract 1. All parties had contractual capacity 2. Mutual consent to formation 3. Lawful object 4. Each promise must be supported by consideration 12 4

Basic Contract Concepts and Types A. Express and Implied Contracts B. Quasi Contracts C. Executed and Executory Contracts D. Bilateral and Unilateral Contracts Express and Implied Contracts Express contract A contract all the essential terms of which are stated orally and/or in writing at the time of contract formation. Implied contract A contract the existence of which, or one or more important terms of which, are not express and are manifested by the conduct of the parties. 14 To Prove The Existence of an Implied-in-Fact Contract Plaintiff must prove: 1. That plaintiff did the work. 2. That plaintiff told or showed defendant the work was done, and offered it for sale. 3. That defendant received the knowledge that the work was done, and understood it was offered for sale. 4. The approximate value of the work. 15 5

Quasi-Contract Sometimes called a contract implied in law. But be careful, because it s not really a contract at all! Quasi means somewhat like a Occurs when A confers a benefit on B which, if not enforced as a quasicontract, would lead to inequity and unjust enrichment. Requirements for the Application of Quasi-Contract 1. The plaintiff gave some benefit to the defendant, and the defendant knowingly received that benefit. 2. The plaintiff reasonably expected to be paid for the benefit and the defendant knew (or should have known) this; and 3. The defendant would be unjustly enriched if he did not pay. Don Easterwood leased over 5,000 acres of farmland in Jackson County, Texas, from PIC Realty for one year. The next year, he obtained a second one-year lease. During each year, Easterwood farmed the land, harvested the crops, and prepared the land for the following year s planting. Toward the end of the second lease, after Easterwood had harvested his crop, he and PIC began discussing the terms of another lease. While they negotiated, Easterwood prepared the land for the following year, cutting, plowing, and disking the soil. But the negotiations for the new lease failed, and Easterwood moved off the land. He sued PIC Realty for the value of his work preparing the soil. Will he win? 6

John Stevens owned a dilapidated apartment that he rented to James and Cora Chesney for a low rent. The Chesneys began to remodel and rehabilitate the unit. Over a four-year period, they installed two new bathrooms, carpeted the floors, installed new septic and heating systems, and rewired, replumbed, and painted. Stevens periodically stopped by and saw the work in progress. The Chesneys transformed the unit into a respectable apartment. Three years after their work was done, Stevens served the Chesneys with an eviction notice. The Chesneys counterclaimed, seeking the value of the work they had done. Are they entitled to it? Novak v. Credit Bureau Collection Service David Novak suffered a brain aneurysm and was unconscious. An ambulance took him to Saint Regional Medical Center, where doctors successfully operated. Novak remained in the hospital for two months and then was discharged. Novak did not pay the Medical Center s bill, and the claim was assigned to a collection agency which sued Novak for the debt. The trial court found that Novak owed the debt under quasi-contract because Novak was unconscious and could not consent to the treatment, and the medical services were necessary to avoid serious bodily injury or death. Was the credit bureau entitled to damages based on quasicontract? The Doctrine of Quasi-Contract is an Extra-Contractual Remedy That means a court (a jury) is only permitted to recognize a quasi-contractual obligation if they conclude that the parties did not get themselves into a valid contract. The other extra-contractual remedy we will learn is promissory estoppel, and the same rule applies to it. A court can only apply a promissory estoppel remedy to a case if the parties are not in a contract governing the subject matter at issue. 7

Executed and Executory Contracts Executed contract A contract the object or purpose of which has been fully performed; a contract for which all parties have performed all their promises. Executory contract A contract for which at least one party has at least one as-yet-unperformed duty. 22 Bilateral and Unilateral Contracts In a bilateral contract, both parties make a promise. In a unilateral contract, one party makes a promise that the other party can only accept by doing something. 23 Legal Difference Between Bilateral and Unilateral Contracts If you as the offeror get yourself into a bilateral contract, then if the offeree fails to perform, you can sue him for damages. If instead you form a unilateral contract, you can t. 24 8

The Master of the Offer In general, the offeror is the master of the offer and therefore in control of whether a bilateral or unilateral contract is formed, among other things; it depends on the exact wording they use to make the offer. Thus they cannot complain later if they realize they would have been better protected by a bilateral contract. 25 Unilateral Contract Example You say If you mow my lawn by noon this Saturday, I will pay you $200. They say nothing. This is an offer for a unilateral contract. No contract will be formed until the last blade of grass falls. If they don t show, and you have to pay $300 to get someone else to mow your lawn, you can t sue for the $100. 26 Unilateral Contract Differences In a unilateral contract, the offeror offers a promise for an act. The promise does not become binding upon the offeror until the act is (fully) performed. The offeree makes no promise, therefore cannot be sued for breach. In a bilateral contract, the offeror offers a promise for a promise. 27 9

Unilateral Contract Differences In a unilateral contract, the offeror cannot revoke the offer until they give the offeree a reasonable opportunity to accept the offer, especially if they are aware the offeree has commenced acceptance. As we will learn, in a bilateral contract, in general the offeror may revoke an offer any time prior to acceptance. 28 Rewards For Return of Lost Items Posted signs offering a reward for the return of a lost or stolen item, such as a phone or pet, are legally-binding offers for unilateral contracts. 29 Essential Element 2: Mutual Assent Mutual assent occurs when one party, the offeror, makes an offer to another party, the offeree, and the offeree accepts the terms of the offer. Note that the roles of the parties are not equal. The offeror sets the terms. The offeree s only powers are to accept or reject the offer. 30 10

When is Mutual Assent present? (Also known as mutual consent.) A valid offer + a valid acceptance + a meeting of the minds + an absence of coercion or trickery = Mutual Assent/Consent 31 How Can We Tell if We Have a Valid Offer? 1. Offeror showed a present serious intention to enter into a contract, and 2. The terms of the offer were definite and certain, and 3. The offeror communicated this offer to the offeree. 32 1. Offeror Showed a Present Serious Intention to Enter Into a Contract 1. Statements made in anger or in jest does not demonstrate the necessary intent. 2. Invitations to bargain are not offers. 3. Subjective, undisclosed intentions of the offeror play no role in determining if the necessary present intention existed. 33 11

Lucy v. Zehmer Defendant husband wrote and signed a contract to sell his farm to plaintiffs and persuaded defendant wife to sign by telling her the contract was a joke on plaintiffs. When plaintiffs attempted to finalize sale, defendants attempted to deny contract on the grounds that defendant husband was drunk when making the contract and the contract was a joke on plaintiffs. Plaintiffs sued for specific performance. Lucy v. Zehmer The trial court found for defendants. On appeal, the Virginia Supreme Court reversed and remanded, arguing that defendants' true intent in agreeing to sell their farm was not determinative so long as their words and actions warranted a reasonable person's belief that a contract was intended. The Virginia Supreme Court ordered the Circuit Court to issue an order of specific performance, ordering Mr. Zehmer to sell Ferguson Farm at the agreed-upon price of $50,000. A Contract Is Formed Orally Even if the Parties State Their Intent to Draw Up and Sign a Writing As long as the negotiation does not leave any important terms open for future negotiations, a contract is formed the moment mutual agreement is reached. But not if it is a contract of a type that must be in writing to be enforced. 36 12

2. The Offer Must Be Definite and Certain in It s Terms At a minimum, the offer must contain 1. the identity of the parties 2. a complete description of the subject matter, the quantity if applicable, and 3. the price 37 Pair & Share 1. Is Hooter s in a contract? 2. What are its terms? 38 39 13

05/09/2002 - Updated 09:52 AM ET Former Hooters waitress settles toy Yoda suit PANAMA CITY, Fla. (AP) A former waitress has settled her lawsuit against Hooters, the restaurant that gave her a toy Yoda doll instead of the Toyota she thought she had won. Jodee Berry, 27, won a beer sales contest last May at the Panama City Beach Hooters. She believed she had won a new Toyota and happily was escorted to the restaurant's parking lot in a blindfold. But when the blindfold was removed, she found she had won a new toy Yoda the little pointy-eared character from the Star Wars movies. David Noll, her attorney, said Wednesday that he could not disclose the settlement's details, although he said Berry can now go to a local car dealership and "pick out whatever type of Toyota she wants." After the stunt, Berry quit the restaurant and filed a lawsuit against Gulf Coast Wings, the restaurant's corporate owner, alleging breach of contract and fraudulent misrepresentation. The restaurant's manager, Jared Blair, has said the whole contest was an April Fools' joke. 40 Missing Terms The rules regarding missing terms are different for contracts for the sale of goods than they are for all other types of contracts. Open or missing terms other than quantity are routinely supplied by the court in contracts for the sale of goods, less often in other types of contracts. 41 Contracts for the Sale of Goods Contracts for the sale of goods are governed by Article 2 of the California Commercial code. Goods are a thing which exists, and is moveable. A contract for electric service in your home is therefore governed by UCC Article 2, even though in other contexts, this would be a service. 42 14

CCC and Open Terms CCC Article 2 governs contracts for the sale of goods only. It contains many gap-filler provisions: Open price: A reasonable price Place of delivery: Seller s business Time for shipping: A reasonable time, based on the normal trade practice. Implied warranty of merchantability Implied warranty of fitness for a particular purpose Termination of Offers An offeree has the power to accept an offer and form a contract, unless the offer was terminated prior to acceptance. How are offers terminated? Answer: 1. by revocation, 2. by rejection, or 3. by operation of law 44 Termination of Offers By revocation: The general rule is that an offeror may revoke an offer any time prior to it being accepted.* This includes so-called firm offers. A revocation is legally effective when properly dispatched. *This rule applies to all common law offers, and most offers under the UCC (but not firm offers meeting all the requirements of UCC 2-205.) 15

Termination of Offers By Revocation First exception to the general rule: Option contracts When the subject matter of an option contract is an offer for another contract and the offeree pays a non-refundable fee in exchange for a promise to hold the offer open for a specified period CCC Article 2 and Firm Offers An offeror may not revoke a firm offer until the end of the time period offered, or a reasonable time if no time period is specified, if all of the following are true: 1. The offer is for the purchase or sale of goods 2. The offer is made by a merchant of such goods 3. The offer is made in writing 4. The writing is signed 5. The offer states that the offer will not be revoked (making it a firm offer). Termination of Offers By rejection: If an offeree rejects an offer, the rejection immediately terminates the offer, even if they would prefer it did not. Any so-called acceptance that adds to or changes any of the terms in the offer functions as a rejection and counteroffer. 16

49 Termination of Offers By operation of law: 1. Expiration When an offer specifies a time limit for acceptance, that period is binding. If the offer specifies no time limit, the offeree will have a reasonable period in which to accept. Termination of Offers By operation of law (cont.): 2. Death or mental incapacity of the offeror destroys an offer, but not most contracts. 3. Death or destruction of the subject matter likewise destroys an offer, but may or may not destroy a contract. 17

Termination of Offers By operation of law (cont.): 4. Subsequent illegality Example: You make an offer to hire someone as a blackjack dealer in your card room. Prior to acceptance, a law is passed making the playing of blackjack illegal in card rooms. The offer is terminated by subsequent illegality. How Can We Tell if We Have a Valid Acceptance? 1. Who may accept? 2. On what terms may they accept? 3. How may they accept? 4. By when must they accept? 1. Who may accept? Only the person the offeror designates as the offeree, or a person who is a member of the class of persons to whom the offer was made, can accept the offer. 18

2. On what terms may they accept? Offers for anything other than goods: the acceptance must be the mirror image of the offer. No additions or changes to terms are permitted. Any additions or changes will turn offeree s attempted acceptance into a rejection and counteroffer. 2. On what terms may they accept?: Sales of Goods Section 2207 of the California Uniform Commercial Code says for sales of goods: 1. Additional terms may become a part of the contract if both parties are merchants. (See next slide.) 2. However, if the offeror includes mirror image language in their offer, then additional or different terms in the acceptance will cause no contract to be formed. Section 2207 of the California Commercial Code Additional terms in the acceptance become part of the contract if both parties are merchants unless: 1. The offer expressly limits acceptance to the terms of the offer, or 2. The terms materially alter the offer, or 3. The offeror objects to the additional or different terms within a reasonable period of time after receiving the acceptance. 19

Section 2207 of the California Commercial Code In the absence of mirror image language in the offer, different terms in the acceptance will not prevent contract formation, but the different terms will cancel each other out and the now open term will be filled by the gap-filler provisions of the CCC. 3. How may they accept? The how question has three elements: 1. Is there a difference in how they may accept an offer for a unilateral contract? 2. Is a grumbling acceptance effective? 3. Is there any particular medium of communication the offeree must use? 3.1 Acceptance of Unilateral Contracts An offer for a unilateral contract can only be accepted by fully performing the act offeror described in his or her offer. In contrast, an offer for a bilateral contract is accepted by communicating to the offeror one s intention to be bound in a contract under the terms of the offer. 20

3.2 Grumbling Acceptances Grumbling acceptances create a contract, provided they do not add or change any terms in the offer. 3.3 Medium of Communication As the master of the offer, the offeror can specify the acceptable means of communicating one s acceptance. In the absence of such specification, any reasonable means can be used. What is reasonable will depend on the circumstances. Custom in the industry and region is one factor. Using the same medium by which the offer was communicated, or a faster medium, is usually considered reasonable. 4. By when must they accept? As the master of the offer, the offeror can specify the latest date for acceptance. If no time limit is given, the offer must be accepted within a reasonable time, which will vary. Since the acceptance is legally effective the moment it is properly dispatched (this is called the mailbox rule ); unless otherwise specified, the offeree shall have until the date specified by the offeror to dispatch their acceptance. If the offeror only wants to accept offers received by a given date and time, they must say so in their offer. 21

Promissory Estoppel is our other extra-contractual remedy (Along with quasi-contract) Requires: 1. The defendant made a promise knowing that the plaintiff would likely rely on it. 2. The plaintiff did rely on the promise (and that reliance was reasonable); and 3. The only way to avoid injustice is to enforce the promise. The Hoffmans owned and operated a successful small bakery and grocery store. They spoke with Lukowitz, an agent of Red Owl Stores, who told them that for $18,000 Red Owl would build a store and fully stock it for them. The Hoffmans sold their bakery and grocery store and purchased a lot on which Red Owl was to build the store. Lukowitz then told Hoffman that the price had gone up to $26,000. T he Hoffmans borrowed the extra money from relatives, but then Lukowitz informed them that the cost would be $34,000. Negotiations broke off and the Hoffmans sued. The court determined that there was no contract because too many details had not been worked out the size of the store, its design, and the cost of constructing it. Can the Hoffmans recover any money? Acceptance Special Topics: Silence Silence is rarely an effective acceptance of an offer, because of the general rule that acceptance must be communicated. For example, if you receive an unsolicited offer, there is no duty on your part to reject the offer, even if the offer states that your silence will be construed as your acceptance. However, if you have arranged for your silence to be your acceptance, then your silence will function as your acceptance. 22

Acceptance Special Topics: Silence Also, if you have done business previously with the offeror, and if you had mutually arranged for your silence to be your acceptance on that occasion, then your silence this time might function as your acceptance. Example: You own and operate a seafood restaurant. You have orally arranged that a certain seafood wholesaler will leave two boxes of fresh fish of various species, based on what he thinks you ll like and what s available, on your back doorstep packed in ice six days a week. Any fish you don t want, you have to return to his shop by 2PM that day. Not returning the fish is a form of silence, and will obligate you to pay market price for the fish not returned. Acceptance Special Topics: Unsolicited Merchandise Silence does not constitute acceptance for unsolicited merchandise sent by the offeror to the offeree. Such merchandise can be kept by the offeree without any obligation to pay for it. When is Mutual Assent present? (Also known as mutual consent.) A valid offer + a valid acceptance + a meeting of the minds + an absence of coercion or trickery = Mutual Assent/Consent 69 23

Meeting of the Minds A situation in which the words and deeds of each party would cause a reasonable person in the other s position to believe that they have made a contract consisting of definite terms, and to have perceived the same set of terms as the other. 70 There Will Be No Meeting of the Minds in These Cases Death or mental incapacity of the offeror before acceptance. A reasonable person observing their discussion would not have known what terms they agreed to. Two reasonable parties could and did perceive different terms. 71 Two Reasonable Parties Could and Did Perceive Different Terms Raffles v. Wichelhaus Wichelhaus purchased a shipment of cotton from Raffles to arrive on a ship called the Peerless from Bombay, India. Wichelhaus meant a ship called the Peerless sailing from Bombay in October. Raffles meant a different ship, also called the Peerless, and also leaving from Bombay, but in December. 72 24

Raffles v. Wichelhaus When the goods arrived on the December Peerless, Raffles delivered them to Wichelhaus. By that time, however, Wichelhaus was no longer willing to accept them. Raffles sued, seeking enforcement of the contract. Court ruled there was no meeting of the minds, and therefore no contract. 73 Raffles v. Wichelhaus: Lesson The meeting of the minds requirement is trying to ensure that the two parties perceived identical sets of terms and conditions at the time of the agreement. However, a court will not allow a party to escape a contract just because their actual understanding was different if a reasonable person would have perceived the same terms as the other. 74 FYI: I Will Not Test You on the Material in These Two Sections VII. E-Commerce VIII. One Click Online Contracts 75 25