Tackling the most important topics of law school, Part 3a: The offer in contract formation

August 15, 2013

Law School 101a(Editor’s note: Over the next ten weeks, we’ll be covering some of the most prominent legal concepts taught in law school to help students faced with these topics, whether for the first time or as part of a review, better comprehend them.)

One of the first courses that nearly all law students will encounter is contracts.  With limited exception, all contracts are formed through the acceptance of an offer.

In its simplest form, such a contract looks something like this:

A offers to purchase B’s law school textbooks for $100.  B accepts A’s offer.

If only contract law were that easy, though; instead, the field is rife with complexities of not only contract formation, but also of issues like contract provisions, performance of the contract, breach, promissory estoppel, enforceability, option contracts, and the parol evidence rule.

Rather than trying to overexert myself, I’m just going to limit this post to “offer,” and the next post will be about “acceptance.”

First, the basics on what constitutes an “offer.”

An offer is:

  • The communication of a promise
  • that is conditional upon an act, forbearance, or return promise being given in exchange for the promise or its performance, and
  • made with the intent to incur a legal obligation.

Here’s a brief explanation of what that all means:

First, an offer has to be communicated.  It doesn’t have to be written down (but it’s generally a good idea to do so if you want to enforce it), and it doesn’t even have to use the word, “offer.”  It just has to be communicated in such a way that an objective observer would be able to tell that an offer was made.

Next, an offer is a promise to do or to not do something, which is conditional upon the offeree (the person receiving the offer) agreeing to another promise to do or not do something.

This can be a promise to make something, provide a service, to not do something that one would be otherwise legally entitled to, or to pay money in exchange for any of the former promises.

On a side note, I just described a “bilateral contract,” which is a contract in which the parties exchange promises.  This is distinguishable from a “unilateral contract,” in which one party makes a promise in exchange for another party’s performance.

The classic example of a unilateral contract is the owner of a missing dog offering a reward to whoever finds it. 

The dog owner has made a promise (to pay a reward) in exchange for the performance by another (finding the lost dog).  The offer is not accepted – and therefore, the contract has not been made – until someone finds the lost dog.

Another classic example, however, highlights the problems that unilateral contracts can create (and why modern courts generally disfavor them):

A homeowner offers a laborer $50 to mow his lawn.  The laborer begins to mow the lawn, and a little past halfway through, the homeowner revokes the offer, and tells the laborer that they get nothing because he didn’t complete his performance.

Under the classical understanding of unilateral contracts, the homeowner has no obligation to keep the offer open until the performance is complete, and since the laborer did not complete performance before the offer was revoked, no contract was formed.

Modern courts would generally convert the contract to a bilateral one once the laborer has begun performance (based on the premise that, once performance has begun, the offeree should be entitled to the opportunity to complete that performance).

Anyhow, the final element of an offer is that it must be made with the intent to be legally bound by a resulting contract.

In practice, this means that an offer can’t be wishy-washy about the material terms.  It has to be one that the offeree can either accept or reject.

For example, in 1989’s Empro Manufacturing v. Ball-Co Manufacturing out of the Seventh Circuit, both parties exchanged letters of intent for the sale of defendant’s assets to plaintiff, and both letters left out material terms, which were to be agreed upon in future negotiations (which broke down, leading to the suit to enforce the “contract”).

The court found that no contract existed because, since the material terms were not nailed down, the parties did not intend to be bound by the agreement to sell.

Here’s a much simpler example of an offer that fails to include an intent to incur a legal obligation:

A offers to buy B’s car for a price to be determined at a later date.

If B were to agree to sell her car to A, and then later change her mind, the sale would be unenforceable because a material term of the contract – the price – was never agreed upon by both parties.  Courts construe an offeror’s failure to clearly state all material terms in an offer as an intention to not be legally bound by the offer.

Speaking of revocation, an offer may be revoked by an offeror, but only before valid acceptance occurs.  Revocation, however, must be communicated to the offeree.  Nevertheless, as the “notorious English case” Dickinson v. Dodd establishes, notice of revocation does not need to come directly from the offeror; rather, “[i]t is enough that the offeree receives reliable information, even indirectly, that the offeror had taken definite action inconsistent with an intention to make the contract.”  This rule has been universally adopted by U.S. courts.

If an offer was made to the public at large (such as in the example of the lost dog), revocation must be in a similar form to the original offer.

On another side note, even though a party may communicate all of the material terms to a contract – such as an advertisement that states a specific item along with that item’s specific price – such a communication does not constitute an offer.

The only real reason for this is because courts have said so.  Thus, when you’re at the store and see something with a price tag on it, the store is not making an offer; it’s making what’s called an “invitation to treat” – or an invitation to make an offer.

This means that the store is under no obligation to sell any of its merchandise, at least from a contract law perspective, because there is no offer to accept (this obviously doesn’t take any statutory consumer protection laws into account).

And that about wraps up the basics on the “offer” portion of contract formation.  Stay tuned for part 2: acceptance!

If you have any additional questions about the offer or any other part of contract formation, feel free to post them in a comment below!