Chapter Six | The Agreement

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A contract is an agreement that consists of an offer and acceptance.

The Offer

An offer will be judged on the basis of three criteria:

  1. There must be serious intent on the part of the offeror to be bound by the terms of the offer;
  2. The terms of the offer must be definite or reasonably certain; and
  3. The offer must be communicated to the offeree.

Intention is measured by what is termed the “objective” or “reasonable man” test, which is exemplified in the classic English common law case, Carlill v. Carbolic Smoke Ball (holding that
an advertisement was considered as an offer for a unilateral contract that could be accepted by anyone who performed its terms). The objective test states that an offer will be judged by the objective or reasonable meaning of the words used—whether a “reasonable man would conclude that an offer had been made.” Under this criteria, the subjective intention of the parties is ordinarily irrelevant. However, an offer that is made in obvious anger, jest, or as the result of excitement will not generally meet the requirement of a serious offer. Likewise, an offer must be distinguished from mere statements of intention to be bound at a later date, preliminary negotiations or discussions, inquiries, or invitations (solicitations) to make an offer.
Let us consider a classic case that deals with the application of the “objective test.”

 

Case Summary

Lucy v. Zehmer

196 Va. 493 (1954)

BUCHANAN, Justice.

* * * The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

A. H. Zehmer admitted that * * * W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.
The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three beefers.

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.
The defendants insist that * * * the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

It is an unusual, if not bizarre, defense. * * *

In his testimony, Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. * * * The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. * * *

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’sobjectiontothefirstdraftbecauseit was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the complete- ness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and good faith sale and purchase of the farm.

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. (Emphasis added.) The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.

JUDGMENT AND REMEDY:

The Supreme Court of Virginia determined that the writing was an enforceable contract and reversed the decision of the lower court.

Mr. and Mrs. Zehmer were required by court order to carry through with the sale of the Ferguson Farm to W.O. Lucy. What remedy do you think would be appropriate in this case? Why?

Definiteness requires that the terms of an offer must be clear enough so that the offeree is able to make a decision whether to accept or reject the offer. In addition, if the terms of an agreement are indefinite, a court will not be able to enforce the contract or to determine what would be an appropriate remedy for its breach.

Generally, the common law required that an agreement should contain the following terms: (1) identification of the parties; (2) identification of the subject matter of the contract; (3) a quantity; (4) the consideration to be paid; and (5) the time for performance.

Media Offers And Advertisements

At common law, an advertisement, a circular or flier, or a radio or TV spot were not considered as offers; rather, these forms of communications were considered as statements of an intention to sell or a preliminary proposal inviting an offer to buy. Although most advertisements and the like were treated as invitations to negotiate and not offers, this does not mean that an advertisement could never be considered as an offer, binding a seller to a contract.

In the following case, the court had to decide whether a newspaper advertisement announcing a “special sale” in a department store should be construed as an offer, the acceptance of
which would complete a contract. Take special note of the test enunciated in Lefkowitz v. Great Minneapolis Surplus Store, Inc. It can be applied more broadly to decide if a party has truly made an offer to sell or buy. This test is also used to determine if a party has made an acceptance of an offer. It is an important formulation of the objective test.

 

Case Summary

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

251 Minn. 188, 86 N.W. 2d 689 (1957)

Background and Facts

Plaintiff Lefkowitz read a newspaper advertisement offering certain items of merchandise for sale on a first come first served basis. Plaintiff went to the store twice and was the first person to demand the merchandise and indicate a readiness to pay the sale price. On both occasions, the defendant department store refused to sell the merchandise to the plaintiff, saying that the offer was intended for women only, even though the advertisement was directed to the general public. The plaintiff sued the store for breach of contract, and the trial court awarded him damages.

MURPHY, Justice

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

On April 13, the defendant again published an advertisement in the same newspaper as follows:

The record supports the findings of the court that on each of the Saturdays following the publication of the above described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

* * * The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms.

*** [However] *** there are numerous authorities which hold that a particular advertisementinanewspaperorcircularletter relating to a sale of articles may be construed by the court as constituting an offer, accep- tance of which would complete a contract.

The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.”

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. * * *

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by thebadvertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.

JUDGMENT AND REMEDY

The Supreme Court affirmed the trial court’s judgment, awarding the plaintiff the sum of $138.50 ($139.50 for the Lapin stole less the $1 purchase price) in damages for breach of contract against the defendant department store.

Even under the common law, courts began to relax rigid standards relating to indefiniteness and would imply or insert reasonable terms in a contract wherever possible, especially where both parties had manifested a clear intention to enter into a contract.

Uniform Commercial Code

Under UCC §2-204, for example, a contract will not fail for indefiniteness if the parties clearly intend to enter into a contract and if a “reasonably certain basis” exists for granting an appropriate remedy by a court. What are some of the terms a court will imply in a contract?

Open price: If nothing is said as to price, or the price is left to be agreed by the parties and they fail to agree, or the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded, “the price is a reasonable price at the time for delivery” [§2-305].
If no place of delivery is specified, then delivery is to occur at the seller’s place of business [§2- 308(a)], thus obligating the buyer to pay for freight, insurance, and delivery charges.
If the time for shipment or delivery is not stated, then the time shall be a reasonable time after the contract is formed [§2-309].
If the time for payment is not specified, then payment is due at the time and place of delivery [§2-310 (a)] and no credit arrangements are implied. Payment of a reasonable charge for interest may be implied.

While these terms may be found in the UCC, and thus apply to contracts involving the sale of goods (“movable and tangible” items), their application is equally important in many other types of contracts.

In addition, terms that are omitted or unclear may be supplied by custom and usage of trade or by prior or contemporaneous dealings between the parties, subject to the parol evidence which will be discussed in the materials on the “writing and form” of contracts.

Under the third criteria, the offer must be communicated to the offeree so that the offeree knows of the terms of the offer. An offer cannot be accepted by an offeree who is unaware of the offer or who has not become apprised of it.

Termination Of An Offer

It should be recognized that an offer creates a power or right in the offeree to transform the offer into a binding contract through an acceptance. However, an offer will not remain in existence indefinitely. The offer can be terminated through the operation of law, actions of the parties, the occurrence of a stated condition, or by its own terms, normally through the lapse of a period of time stipulated in the contract.

Lapse Of Time

Where the time specified in the contract for an acceptance to be made has passed or an event or condition stipulated in the contract which would terminate an offer has occurred, the offer is terminated. For example, Freddy agrees to sell his stamp collection to Franky if Franky accepts by a certain date. Franky must accept this offer within the period stated. If he does not do so, the offer will have lapsed.

Should no time be specified in the offer itself, the offer will terminate at the end of a reasonable time, determined by such factors as the subject matter of the contract (an offer to buy or sell perishable goods would involve a relatively short period of time) and other relevant market and business conditions and circumstances.

Operation Of Law

An offer may also be terminated through operation of law. For example, the destruction of the subject matter of the contract through no fault of the party will terminate an offer.

The death or incompetency of the offeror or offeree in a personal service contract also terminates an offer. Since an offer is considered personal to both the offeror and the offeree, an offer will be automatically terminated if the offeror or offeree dies, becomes incapacitated, or is ruled incompetent by a court of law.

Where a statute or court decision makes an offer illegal, the offer will be terminated. These circumstances—destruction of the subject matter of the contract, death or incompetency of a contracting party, or the operation of a statute—are sometimes viewed under the doctrine of “objective impossibility” and may also be used as a defense to a claim of breach of contract or as an excuse for non-performance on the part of a party.

Action Of The Parties

An offer may also be terminated by actions of the parties.

Revocation of the offer by the offeror is a withdrawal of the offer by the offeror before the offeree accepts the offer. A revocation is not generally effective until it is actually received by the offeree or by the offeree’s agent. Generally speaking, an offer made to the general public or to a number of persons whose specific identity is unknown to the offeror (for example, an offer made in newspaper advertisement or in a TV or radio ad), may be revoked only by using the same medium or at least by using “the best means of notice reasonably available under the circumstances” that would give equal publicity to the communication of the revocation as the communication of the original offer. Certain types of offers, called “firm offers,” may not be revoked by the offeror under certain circumstances – one of these circumstances being where the offeree has paid consideration for an option or where the promise has been made in a “signed writing” under UCC §2-204 (the “Firm Offer Rule”).

An offer is terminated if the offeree rejects it or if the offeree makes a counter offer.

Example

Suppose that Berra offers to sell his new speedboat to Rizzuto for $10,000. Rizzuto responds, “$10,000 is too high; I’ll give you $8,500.” What is the legal effect of Rizzuto’s com- munication? First, it is clearly not an acceptance. Secondly, it is a rejec- tion of Berra’s offer to sell the boat for $10,000 and a counteroffer by Rizzu- to to buy the boat for $8,500. Now, if Berra agrees on $8,500, a contract will be formed based on this agreement. However, what happens if Berra re- jects the offer to purchase the boat at $8,500 and the price of such speed- boats skyrockets to $15,000? Can Rizzuto compel Berra to sell the boat to him at the original $10,000 price?

The answer is “no” because Rizzuto’s counteroffer legally termi- nated the original offer. Berra’s offer is no longer “on the table.”

Rejection by the offeree terminates an offer. There may be a very fine line between a rejection of an offer and an inquiry about trading on different terms than those contained in the original offer. Suppose that Freddy were to respond to a friend’s offer to buy his antique car: “That seems a bit low; I’ll just bet that you can do a lot better than that.” Is this communication a rejection of his friend’s offer or a mere inquiry which will not terminate (destroy) his friend’s offer?

A counteroffer by the offeree also terminates the original offer. Generally, a counteroffer is a rejection of the original offer and the making of a new offer by the offeree.

The Acceptance

An acceptance is an unconditional assent by either words or conduct by an offeree that manifests agreement to the terms of the offer. The acceptance is usually made in the manner requested in the offer where the offeror has stipulated an express, authorized means of acceptance. The acceptance must be unequivocal—that is, it may not impose or add new terms or conditions or tamper with the terms of the offer or (as we have seen) a court might conclude that a rejection and a counter offer has taken place. A unilateral contract can only be accepted by the offeree’s performance of the required act. A bilateral contract can be accepted by an offeree who promises to perform the act or the actual performance of the requested act.

Example

Igor Wells joins the “fruit of the month club.” Because he is on vacation during the month of May, Igor neglects to return the card for May’s fruit—the guava. Igor must now pay for the (spoiled) guava because his failure to return the card (silence) amounted to an acceptance of the offer to ship based on the express terms of the membership agreement.

A second circumstance where silence may amount to an acceptance occurs where prior dealings between the parties give the reasonable expectation of a reply.

Generally speaking, silence is not considered as acceptance of an offer even if the offeror has stated “your silence indicates your acceptance of this offer.” There are, however, circumstances where an offeree’s silence may constitute acceptance of an offer. Such situations arise where there is an affirmative “duty to speak” on the part of the offeree. A court might impose a duty to speak where a duty arises out of a contract itself (i.e., record or book club contracts frequently require that a member send back a card with a rejection of the month’s selection or the selection will be automatically shipped and an obligation to pay will arise).

Example

Berman, a retailer, has ordered snowshoes from Trotsky, the manufacturer, on numerous occasions and paid for them when they arrived. Out of convenience, Trotsky then began to ship snowshoes on a recurring basis, simply sending Berman a “confirmatory invoice,” noting that the snowshoes would be shipped on the eighth of each month. Whenever Berman received a shipment of the goods from Trotsky, he would simply sell them at retail and send a check to Trotsky for the amount due. Trotsky would only hear from Berman if Berman did not wish to place an order for that month. The last shipment of snowshoes (of course) is the subject of controversy as Berman now refuses to pay for them, claiming that his “silence” on the matter cannot create a contract. Because of the prior dealings between the parties, Berman’s silence (failure to notify Trotsky) will be construed as an acceptance of Trotsky’s offer to ship. Berman will be bound by contract and must pay for the last shipment of snowshoes.

Acceptance-Upon-Dispatch Rule

Read Morrison v. Thoelke and notice the application of the deposited acceptance or “mail box” rule which states that an acceptance is effective when it is dispatched (mailed) even if it is lost in transmission.

The problem of a “lost transmission” can be minimized by the parties by expressly altering the mailbox rule by stating that an acceptance is effective only upon actual receipt of the acceptance.

 

Case Summary

Morrison v. Thoelke

155 So. 2d 889 (Fla. 1963)

BACKGROUND AND FACTS

Defendants (Morrison) made an offer to buy real property owned by the plaintiffs, Thoelkes. They executed a contract for sale and purchase and mailed it to the plaintiffs for their acceptance and signature. The latter signed the contract and mailed it to the defendants. Before it was received by the defendants, the plaintiffs repudiated the contract by telephone. Nonetheless, when defendants received the contract they recorded it, thereby establishing their interest in the property as a matter of public record. Claiming that no contract existed, plaintiffs brought this suit to “quiet title” to the property – to remove the defendants’ claim of an interest in it from the record. Defendants counterclaimed, seeking specific performance of the contract. The lower court entered a summary decree for the plaintiffs and defendants appealed.

Allen, J.

* * * The question is whether the contract is complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror, or when the letter of acceptance is received, thus permitting repudiation prior to receipt. Appellants argue that posting the acceptance creates the contract; appellees contend that only receipt of the acceptance bars repudiation.

* * * In short, both advocates and critics muster persuasive arguments. As indicated, there must be a choice made (by the legal system) and such choice may, by the nature of things, seem unjust in some cases. Weighing arguments with reference not to specific cases but toward a rule of general application and recognizing the general and traditional acceptance of the rule as well as the modern changes in effective long- distance communication, it would seem that the balance tips towards accepting the notion that this case is controlled by the general rule that insofar as the mail is an acceptable medium of communication, a contract is complete and binding upon posting of the letter of acceptance.

The rule that a contract is complete upon mailing or the deposit of the acceptance in the mails, hereinbefore referred to as the “deposited acceptance rule.” * * * This rule, although not entirely compatible with ordered, consistent and sometime artificial principles of contract advanced by some theorists, is in our view, in accord with the practical considerations and essential concepts of contract law. Outmoded precedents may on occasion be discarded and the function of law should not be the perpetuation of error, but by the same token, traditional rules and concepts should not be abandoned save on compelling ground.

* * * We are constrained by factors hereinbefore discussed to hold that an acceptance is effective upon mailing and not upon receipt. Necessarily, this decision
is limited to circumstances involving the mails and does not purport to determine the rule possibly applicable to cases involving other modern means of communication.

* * * However, adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails, the repudiation was equally invalid…

Summary decree is reversed and the case remanded for further proceedings.

 

Ethical Considerations

Warren Boat Works v. Weaver

Fritz Weaver entered into a verbal contract with the Warren Boat Works whereby Fritz would assume the payments on a boat lease that had originally been entered into by Fritz’s neighbor, Jackson Limus with Warren. Unfortunately, the Boat Works burns down and Fritz’s boat is destroyed. To his surprise, Fritz is now being sued because he has now refused to continue to make the monthly payment on the boat which had been destroyed. Should Fritz be required to continue to make the payments under these circumstances?

 

Questions

Lucy v. Zehmer

  1. What remedy was Lucy seeking? Why?
  2. What was the defense raised by the defendants? Was it credible?
  3. When might the defense of intoxication be valid?
  4. What test did the court apply? Why couldn’t this court, or for that matter any court, apply the subjective test to contracts?
  5. Explain the objective test. Which test do you support? Why?

Lefkowitz v. Great Minneapolis Surplus Store

  1. What test did the court apply here to this “media offer?”
  2. How did the facts fit this test?
  3. What about the defendant’s “house rule?” What was the legal effect of the “house rule?”

Morrison v. Thoelke

  1. What is recording? What is the effect of recording?
  2. What is the purpose of a suit to “quiet title?”
  3. What remedy did the plaintiffs seek? Why?
  4. What rule did the court cite?
  5. According to the court, what is the role of precedents? When can or should a prece- dent be changed?
  6. What is a summary decree?
  7. What case did the court cite in support of its decision?
  8. What is the basis for holding that an acceptance is valid once it has been posted even if it has been lost in the mail?

 

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