FORMATION OF CONTRACTS: OFFER AND ACCEPTANCE Used by permission. For Educational purposes only.

2 The offer must have contractual intent. The offer must have contractual intent. This intent is lacking if the statement is merely an invitation to negotiate, a statement of intention, or an agreement to agree at a later date. This intent is lacking if the statement is merely an invitation to negotiate, a statement of intention, or an agreement to agree at a later date. Newspaper ads, price quotations, and catalog prices are ordinarily invitations to negotiate. Newspaper ads, price quotations, and catalog prices are ordinarily invitations to negotiate. Requirements of an Offer

3 An offer must be definite, with terms that are clear and spelled out. An offer must be definite, with terms that are 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 and output contracts. Exceptions: good faith performance, requirements and output contracts. Offer must be communicated to Offeree. Offer must be communicated to Offeree.

4 Termination of Offer Revocation. The ordinary offer may be revoked at any time by the offeror. All that is required is the showing of intent to revoke and the communication of that intent to the offeree. Revocation. The ordinary offer may be revoked at any time by the offeror. All that is required is the showing of intent to revoke and the communication of that intent to the offeree. By definition, an attempted acceptance made after the offer has been terminated has no effect. By definition, an attempted acceptance made after the offer has been terminated has no effect.

5 Termination of Offer An offer is also terminated by: An offer is also terminated by: Counteroffer is the express rejection of the offer with a new offer. Counteroffer is the express rejection of the offer with a new offer. Lapse of the time stated in the offer or of a reasonable time when none is stated. Lapse of the time stated in the offer or of a 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 on the particular offer. Change of law that makes illegal a contract based on the particular offer.

6 Termination 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 acceptance must be of the offer exactly as made without any qualification or change. Only the offeree can accept an offer, and the acceptance must be of the offer exactly as made without any qualification or change. The acceptance is any manifestation of intent to agree to the terms of the offer. The acceptance is any manifestation of intent to agree to the terms of the offer. Ordinarily, silence or failure to act does not constitute acceptance. Ordinarily, silence or failure to act does not constitute acceptance. Acceptance of Offer

8 Offeror makes an offer Offeree accepts offer unconditionally Offeree changes or adds terms Offeree rejects offer Contract Arises Counteroffer No contract exists Original offeror accepts counteroffer unconditionally Original offeror changes or adds terms Original offeror rejects counteroffer Counteroffer Acceptance of an Offer

9 An acceptance does not exist until the words or conduct demonstrating assent to the offer is communicated to the offeror. An acceptance does not exist until the words or conduct demonstrating assent to the offer is communicated to the offeror. Mailbox Rule: Acceptance by mail takes effect at the time and place when and where the letter is mailed or the fax is transmitted. Mailbox Rule: Acceptance by mail takes effect at the time and place when and where the letter is mailed or the fax is transmitted. RULE: Acceptance upon dispatch, revocation upon receipt.  RULE: Acceptance upon dispatch, revocation upon receipt. 

10 Mailbox Rule: Is There a Contract? FACTS: September 1, 1997Seller mails an offer to Buyer September 2, 1997Buyer receives offer Buyer mails acceptance September 3, 1997Seller calls to revoke offer Buyer says he has already accepted September 4, 1997The 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 Offer What method of acceptance is reasonable? Telephone and Electronic Acceptance. Telephone: acceptance upon phone call. ? Upon dispatch of (send).

12 Auctions In an auction sale, asking for bids is an invitation to negotiate. In an auction sale, asking for bids is an invitation to negotiate. A person making a bid is making an offer, and the acceptance of the highest bid by the auctioneer is an acceptance of that offer and gives rise to a contract. A person making a bid is making an offer, and the acceptance of the highest bid by the auctioneer is an acceptance of that offer and gives rise to a contract. When the auction sale is without reserve, the auctioneer must accept the highest bid. When the auction sale is without reserve, the auctioneer must accept the highest bid.